While market cycles aren’t one of the primary tools I use when applying technical analysis to the market, cycle work is still a useful tool nonetheless. Some traders believe that market trends move in cycles. It’s well accepted that there are ‘phases’ of a market, the two major phases being ‘accumulation’ and ‘distribution’. What causes price to move from one phase to another is up for debate while many traders (myself included) are not concerned with the “why” a market does something. But many accept that sentiment drives price as markets go through boom and bust cycles.
One of the most well-known market cycles is the Presidential Cycle – in which the market has historically performed differently during the four years of a presidency. There are other market cycles that traders follow such as the Kondratiev wave which can last between 45 and 60 years.
Below is a chart of the S&P 500 (SPX) going back to 1999. The red marker on the bottom shows a defined cycle with the same period between each peak and valley. I’ve marked blue dotted lines to show the bottom of the cycles. You’ll notice that the bottoms of many of these defined period cycles have marked important turning points in the market. Now, not every trough was deemed to highlight a peak or bottom in the S&P 500 but I find it interesting that many of them do. The last three cycle bottoms coincided with the 2011 high, near the 2012 low, and a short-term low after a few percentage points of selling in 2014. The lows also seemed to have marked the 2000 and 2007 peak in the equity index.
S&P 500 Chart 1999-2015 – with market cycles overlay
I write about this cycle because the next low is coming up, right around May 11th which notably marks the start to what has historically been a rough six months for equities as the often-quoted “Sell in May and Go Away” has described it. I’ll be interested to see if this low point in the market cycle turns out to have foreshadowed an important turning point in the market. Time shall tell!
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