What Do The Cycles Say For March?March 1, 2013 @ 8:09 AM EST
Here's something you probably won't hear on television or on the popular financial websites very often: I don't know exactly what caused yesterday's late-day dive, which took the DJIA from being up 75 points and a mere 15 points away from a new all-time high to down 20. I don't know why the algo's tanked the indices in the final 15 minutes. Some suggest that a failed Senate vote which triggered the sequester was the catalyst, but frankly that seems almost silly. And while I assume that there were some end of the month shenanigans/reallocations going on, I'm not completely clear on why the ETFs that are designed to mirror the S&P 500 got screwed up in the final minute or two yesterday afternoon.
Some readers may be shocked to find that although I am a professional manager of other people's money and I've been at this game for more than 25 years, I don't have all the answers. But here's a tip; nobody does. No, I think it is important to recognize that the stock market is a tough game and getting tougher all the time. And I think we all need to recognize that the best we can do in this business is, well, to do the best we can.
So no, I don't know exactly why the masters of the universe slammed the market yesterday afternoon. As I tweeted Thursday after lunch, my guess is that there was a big batch of sell algos perched at or near the Dow's 2007 all-time high of 14,164.53. So, when the DJIA got close and then started to fail, I'd be willing to bet that the trend-following algos (that deal with the trend of the market on a millisecond basis - and yes, I AM jealous that I can't play that game!) jumped on the sell side in a big hurry.
In short, I think we have to recognize that nobody has this game wired. Well, with the exception of the big Wall Street banks and a handful of big hedge funds who have the technology and the firepower to play the HFT game at full speed, that is. As such, there are times where we have to shrug our shoulders, shake our head and move on. So be it. Remember, we have to play the hand that has been dealt - not the one we want.
So, instead of me trying to rationalize what I think the big dive meant, which, as I've stated, would be nothing more than speculation, I'd like to spend my pixels this morning trying to be helpful by looking at what our cycle work says for the month of March.
To review, a composite of three historical cycles is one of the ten inputs in both our daily and weekly Market Environment Models. While I don't believe in predictions, the cycle composite is based on historical trends and has a tendency to get the big picture trends right more often that not. And as I've mentioned, when the composite is "on" it tends to be eerily accurate for months on end. So, while I would never trade based solely on historical trends or patterns, the cycle work is, in my opinion, worth our time.
In case you've missed any of my previous ramblings on the subject, the cycle composite is made up of the one-year calendar cycle, the four-year Presidential cycle, and the 10-year decennial cycle.
So far this year, the market (S&P 500) has performed better than any of the individual cycles or the composite itself. However, it does appear that the market action is closer to the one-year cycle at this time. And the good news is that the one-year cycle has the best projection for the month of March.
Looking at the cycles, the month of March could be another volatile month. The cycle composite calls for a handful of strong days at the beginning of the month and then a long slow fade that could cause the S&P to give back about half of the early gains.
However, the one-year cycle looks to be a bit tamer. This cycle suggests a steady uptrend for about three weeks and then a moderate selloff into the end of the month.
I guess the key takeaway here is to recognize that all four of the cycles suggest to avoid being overly invested/aggressive at the end of March.
So, if history is to be any kind of guide, it looks like things could continue to be volatile/difficult this month. As such, this might be a good month to play the game a bit more cautiously. But the good news is that April looks to be strong across the board. Thus, our goal should be to "survive" March and then enjoy the ride in April.
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blindsided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
2. The State of Fed Policy
3. The State of European Debt Crisis (I.E. Italy)
4. The State of the "Sequester"
The State of the Charts
Although the algos did manager to turn yesterday's run at new highs into red ink by the time the closing bell rang, the DJIA remains above the old resistance zone, which is a positive. However, the rest of the indices are not in strong positions. As such, we'll suggest that a trading range is likely to develop.
Current Support Zone(s) for S&P 500: 1500, 1487ish
- Current Resistance Zone(s): 1515, 1535
S&P 500 - Last 3 Months
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Neutral
Intermediate-Term Trend: Positive
- Long-Term Trend: Positive
S&P 500 - Last 12 Months
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the