Four-Year Stock Cycle to Bode New Low?
February 16, 2002 05:19 PM ET
By Haitham Haddadin
NEW YORK (Reuters) - It takes place every four years, but it's not the Olympics, World Cup soccer championship or even a leap year. It's the Four-Year Stock Market Cycle, and some of Wall Street's top technical analysts swear by it.
The year 2002 could see Wall Street put in a final low for the nasty bear market clawing at stocks for two years now, according to this esoteric gauge.
Why?
"It (the cycle) has been visible," says Louise Yamada, head of technical research at Salomon Smith Barney. "It's a pattern that has been historically valid whether it relates to election years or to business cycles, or whether it relates to any number of things."
Yamada and a host of other top-tier Wall Street technicians -- who focus on stock price action rather than economic fundamentals -- believe 2002 could see the cycle play out again.
"1998 was the last bear market low; 1994 was a low, 1990 was the bear market low before that, and in 1987 you sort of clipped it (eliminated extremes in the averaging) a little, and also 1980 and 1984 (were lows)," said Yamada.
Stocks have been mauled in the bear market that began early in 2000. The tech-laden Nasdaq Composite index .IXIC has fallen a mind-numbing 72 percent from its all-time closing high of 5,048.62 points to a closing low of 1,423.19 on Sept. 21 in the wake of the Sept. 11 attacks.
Nasdaq and other key gauges rallied sharply up until early January. But the indexes have given back a big chunk of the advance, and the question is whether they will revisit the September lows.
The chart-gazers are divided. Some argue that the market has not hit a bottom yet, at least judging by the cycle theory.
MESSAGE FROM MARKET
If history is any guide, this year stocks will hit another bottom, the theory's boosters argue.
"When you see a low occur every four years, you begin to say 'Well, maybe that's a message from the market'," said Jim Tillman, an independent technical analyst who publishes Cycle Trend newsletter in North Carolina.
"The last time we reached certain oversold levels was in October of '98. So it does not take a rocket scientist to figure that 'Well, if we plan on a four-year cycle, then that might be around October of 2002," Tillman said.
From 1970 to 1974, it was a perfect four-year cycle bottom, Tillman said. "That was the last major bear market. In 1974, you reached levels that you had not seen in 30 years," he added.
LOOKING FOR BOTTOM
Ralph Acampora, Prudential Securities' star technical analyst has used up much ink to tell clients that 2002 could indeed be the year when Wall Street finally exits the bear market .
The year 2002 "plays an important role in the 'Four-Year Cycle Theory'," Acampora said in a forecast penned earlier this year. "Hence, sometime this year a very important low will be registered. It could confirm the low made in September 2001."
That market low as of now is "a bottom" and not "the bottom," he argues.
The latest sell-off has left the major gauges hovering dangerously above key technical "support" levels. These charts areas have to hold to bar serious damage, the pundits say. At the moment they are set at 1,055, 1,750 and 9,500 points for the S&P, Nasdaq and Dow, respectively.
"A breach of that is going wipe out the September lows," says Holly Liss, chief technical analyst at Fuji Securities.
But she is not overly bearish just yet, arguing she sees firm support at those price levels as buyers have emerged there en masse in late October 2001 after a market pullback. The September lows came in at 965.80, 1,423.19 and 8,235.81, for the S&P, Nasdaq and Dow, respectively.
SEPT 11 HASTENED FINAL LOW?
Others say that even if a cycle came into play in 2002, the indexes don't necessarily have to sink below the autumn nadir.
"It may hold above the (September) low," said Jonathan Dodd of Morgan Stanley, who also follows cycle theory.
The sharp sell-off in the wake of the Sept. 11 attacks on the United States could have set the ultimate low. The tragic events and their severe negative impact on the financial markets could have hastened the cycle low's arrival, they say.
"Maybe September was the low," Dodd argues. "Sometimes they (cycle lows) come earlier, sometimes later, this is something you don't look for, it's just a guide."
Indeed, the cycle trough was not on schedule in 1987, when the market crashed in October of that year.
"That's where variations occur and that's the reason it keeps us on our toes to do the analysis," Tillman said. He also names 1978 as an example when the market should have put in its final low but instead did so early the following year.
Some analysts don't dismiss the theory altogether, but take its tenets with a grain of salt.
The theory could turn into a self-fulfilling prophecy, Liss says -- one of those things the more people believe in, the more they tend to happen.
"We all think it's the low and therefore we are all buying it," Liss said. "That, in itself, can rally the market and may be the fundamental factors for why we all just bought might come into place a little bit later."
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