interactive.wsj.com
July 23, 2001
Barron's Features
Fire or Ice
The bull is doomed, a technician says, but how will it perish?
By P.Q. WALL
How will this 19-year bull market end? With a bang, or a whimper? With a volcanic blowoff, as in 1987 and 1929? Or a steepening downcurve as in the 1973-74 decline? This month and August will tell the tale.
Either way, my technical analysis suggests that the final low of this current three-to-four-year Kitchin cycle -- one of the simplest but most important historical/economic cycles -- should come next spring. A final climb to glory, if it's coming at all, should be evident by August's end.
If the market behaves as it did in 1987 and in '29, a final, dizzying blowoff should be seen at the climax of the four-month Wall Nine Cycle. Wall Eight began this month, at the summer low on July 8. (The Wall cycles were named in my honor by other technicians.)
This year, from March 22 to May 22, during Wall Seven, the DJIA rose 2,243 points. A corresponding gain from the 10,121 low on July 11, would take Wall Eight -- and the Dow -- to 12,364 in September. And 13,910 could easily follow in January, just before the elephant herd hits the trip wire. Unless, that is, as in 1973-74, the final highs were in long before the Third Kitchin Third (Walls 7, 8, and 9) had begun.
Unfortunately, the odds have shifted further toward the scenario in which the bull market expires with a whimper, as it did in the Kitchin rise and fall of May 26, 1970, to December 9, 1974.
Why? Both the size and duration of the decline from May 22 bespeak a cooling market. The wild boom from the March 22 low carried the Dow 2,243 points upward in exactly two months, or 61 days. But as of July 11, the Dow had retraced 55% of that in a surprisingly long 50 days, an ending decline that took almost as long as the rise. (Cycles normally begin and end at lows.)
The two charts above, which were first published in my P.Q Wall Forecast newsletter on July 3, show a startling similarity between the market's movements from 1970 to '74 and its course from 1998 to the present, along with my projection of how the current trend probably will bottom out in 2002.
The charts, which show clear, domelike patterns, can be compared with photographs of something the academic world denies exists, like Bigfoot or the Abominable Snowman. Yet whatever your reluctance to consider men as chess pieces, moved by forces they don't understand, pray gaze at these graphs, which show the simplest, most obvious, most fundamental of all business cycles -- the Kitchin -- in action. This cycle is named after Joseph Kitchin, who in 1923 wrote an article outlining his discovery of a 40-month cycle resulting from a study of U.S. and U.K. statistics from 1890 to 1922.
While Kitchin was carrying out his investigation, a fellow Harvard professor, W.L. Crum, found a cycle of 39-41 months in commercial paper rates in New York. Subsequent studies show that both men's findings were valid. In fact, the Kitchin cycle has been traced back 200 years -- as far back as we have reliable records. And, as you can see, it currently points to the bull's demise next year.
Why put your faith in a cyclical theory? Simply put, historical/economic cycles are waves of emotion, equilibrium disturbances in humanity's collective unconscious. And history shows that they are real. If this sounds fairytale-ish, consider:
1. How much stoical acceptance of what you see can diminish emotional stress, especially when others tend to blame the government/the Fed/IMF, etc., for market and economic downswings.
2. How the Kitchin/Crum discoveries reappear in Economics 101 as the "basic business cycle" with no explanation except sometimes the lame "election cycle."
For purposes of our current discussion, it's important to note that the Kitchin is one of four basic kinds of cycles, each of which reappears in larger or smaller multiples. Two of them subdivide by four; two subdivide by three. The three-to-four-year Kitchin cycle subdivides into three Kitchin thirds and these, in turn, into three Wall cycles each.
Ever wonder why college kids are such radicals? Because the rose-colored glasses of romanticism are the only lenses through which the unevolved can see the world. Only the grownups, or as I call them, the Strong Originals, can take a classical, top-down, pattern-recognizing market view.
The unevolved of any species can only emit strident alarm cries at each new setback. In modern terms, this becomes: "What is the government doing about this?" In primitive societies, the king and the witch doctor are expected to control the weather, perhaps the sole responsibility their modern-day equivalents are no longer given.
Those who doubt the power of cycles should read Market Wizards and The New Market Wizards, by Jack Schwager, to find men gaining hundreds of millions by following trends.
All the contortions of humans and their policy decisions don't perturb these symmetrical Kitchin domes, which, by the way, are but harmonics of far longer cycles. And they point to another truth: Unexpected order and balance are everywhere. The romantic view of the world as a random, terrifying hell is disintegrating in the calm light of science, but scientists would be the last to admit it.
If these two charts don't deceive -- and they don't -- trends alone rule and planners are a joke, and any interference with a free market merely brings inefficiency.
And, to the immediate point, the bull is fated to die next year, with either a bang, or, more likely, a whimper. |
