Another Long Term Look

Dick Arms has spent nearly half a century following, trading and writing about Stock Markets. Best known for his Arms Index, or TRIN, his other major contributions to Wall Street methodology include Equivolume Charting, Ease of Movement, Volume Adjusted moving averages, Volume Cyclicality, and a number of volume based indicators. These tools are revealed and explained in his six books, the most recent titled Stop and Make Money.

Dick has received many of the highest awards in Technical Analysis, including the Market Technicians Association award for lifetime achievement. He has been inducted into the Traders Hall of Fame. Located in Albuquerque, New Mexico, Dick advises a select group of institutions with his weekly letter and personal consultation package, priced at $8000 per year.

(reproduced here with permission of author)

rarms -at- swcp -dot- com


In the last few days I have become aware of a couple of different commentaries in the media dealing with the long term sixteen-to-seventeen year cycles that I have written about many many times ever since the early 1980’s. I was somewhat bothered by the fact that neither of the two gurus gave any attribution, while I felt I had originated the concept. I happened to comment on this to my good friend Charlie Kirkpatrick.

Charlie, whom you probably all know, is expert on all manner of technical analysis, and is a great market historian. His books trace technical analysis all the way back, I believe, to the Garden of Eden, where Adam, to his delight, first identified the “Rib Formation” which far predated the “Head-and-Shoulders”. Charlie informed me that I was actually a Johnny-come-lately, and that the sixteen-year cycle I had been writing about and claiming for my own was previously recognized by Edgar Lawrence Smith in his book Common Stocks as Long Term Investments in 1928! So, I apologize to Mr Smith. I evidently merely reinvented it.

But then I got to wondering why I was just now seeing these commentaries. After all, it looks as though we are already ten years into this cycle. Where were they in 1999? But then I looked back in history and into my memory, and found some interesting parallels Perhaps the fact we are now reading and hearing these thoughts is in itself an indictor of where we are in the market, and perhaps we can learn from it.

Lets first go back and look at the cycles. The concept is that the markets have, at least for the last century, traced a pattern that looks very repetitive. We have had periods of consolidation, lasting about sixteen or seventeen years each, followed by periods of rapid and consistent movement, lasting a similar amount of time. Markets were flat between 1934 and 1950. Then in 1950 they took off in a long and steady advance until 1966. From 1966 until 1984 they were in a new consolidation. The breakout in 1984 led to the spectacular bull market that carried until late 1999. Since then we have been in another flat period, which is now ten years old. That means, if the pattern continues to hold true, the sideways markets have another six years or so to go. The last part of the data is shown on the chart below of the Dow Industrials going back to 1970. The vertical scale is a log scale.


Dow Jones Industrial Average 1970-2010

click for larger chart


The consolidation we are in has its highs around 11,500 and its lows around 7,500. But it also has the ominous appearance of a very long-term head and shoulders, with the left shoulder in the year 2000, the head in 2007 and the right shoulder just a few months ago.

That would suggest that the next really major move is likely to be downward toward that neckline. That would, of course, take a long time, probably a number of years. We are now near the top of the probable trading range, so the path of easier movement would seem to be downward. I have been saying, ever since the high point in April and the subsequent breaking of the uptrend line, that the bull market that began in March of 2008 had been stopped. So we are now in a small consolidation within the much larger consolidation. And that smaller consolidation also has the look of a head and shoulders. The critical level is around 9800, which must hold in order to not turn the consolidation into a bear market. Such a break could easily, it appears, lead to a bear move taking us to, or at least a long way toward, that neckline in the very long-term pattern. It would be a bear move similar to that seen between 2001 and 2003. So, that is my thinking behind the current consolidation. But the question arises, “Why do we seem to have these long term sixteen year moves?” My cynical response is that it takes about sixteen years to train a whole new group of investors as to what is obviously the true nature of the stock market, at which time we change the rules.


Dow Jones Consolidation

click for larger chart


So, that is my thinking behind the current consolidation. But the question arises, “Why do we seem to have these long term sixteen year moves?” My cynical response is that it takes about sixteen years to train a whole new group of investors as to what is obviously the true nature of the stock market, at which time we change the rules.

During a rising market such as we saw between 1984 and 1999 it became increasingly more obvious that markets always went up. At first those who had weathered the 1966 to 1984 period stuck by what they had learned, that markets went up and down and there were times when it was worthwhile to be in cash. But as the advance continued, and new participants joined the ranks, the new mantra became that Cash is your enemy. Success goes to the fully invested at all times. We can all recall being told, in deep and knowing voices, that nobody can time the market, and that the only way to go is to buy and hold stocks for the long run . . .  because stocks always go up.

Looking back at history, there was a flattish period in the markets in the early 1990s. But then the very steep move toward the top started in 1995. That cinched the argument. Timers were idiots and long term buying, even buying blindly by indexing, was the gospel. Interestingly that phase came in about five years before the end of the secular bull market. Which brings us back to what we started looking for. Now everyone seems to be getting on the bandwagon, that we are in a sideways market. Hence the comments that I remarked upon, and took undue umbrage with. Now that the consolidation has gone on for ten years perhaps it is becoming the new “truth”. Maybe it is a sign that we are getting toward the next shift. Then after another few years the rules will change as they did in in 2000, just as they did in 1950, 1966 and 1984.

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