Before embarking on a study of stock market cycles, let’s be clear about a few things. First, cycles are a confirmation tool, and not a stand alone indicator. Cycle studies are best used in conjunction with other indicators. Most importantly, cycles are a confirmation study to around signature or key dates. When one cycle or a series of cycle studies coincide with either extreme optimism or excessive pessimism in the stock market, the more likely a significant turning point is at hand. Second, turning points are often times short term highs and lows, not necessarily intermediate or primary changes in trend.

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The Quarterly Cycle Orb

There are 63 trading days in a quarter, and there are 252 trading days in a year. Earnings come out quarterly, so cycles found around 63 trading days are noteworthy. There are also multiples and divisions of cycles to consider, and there are margins of errors or “orbs” around cycles. This study of stock market cycles is not intended to be comprehensive, but to show indications. The chart above shows a 250 high to low cycle, a 262 high to low and a 265 day low to high cycle. These are 54-55 week cycles that are approximate to the annual cycle. There is also 292 high to high and 292 high to low cycle. These are annual cycles with about a 6 week extension.

There is also a 55 day low to low cycle on the chart above. The 55 day cycle falls a bit shy of a quarterly cycle, and a 112 day high to high cycle ( a close multiple of the 55 day or 11 week cycle).

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As the stock market bottomed in 2002-03, we find a 55 day and a 104 day low to low cycle. After the March 2003 year low, there were three rallies of 67, 66, and 70 trading days from low to high. These rallies took 14 weeks, just a week more than one quarter). After the third step up, a 112 day or almost two quarter correction ensued (a multiple of the 55 day cycle with an orb of plus one day ~ 55 x 2).

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In 2004-2006 we find the March 2004 high was reached on 248 days off the March 2003 yr low. The next high to high cycle was reached 252 trading days later, a one year cycle. After a 29 day or 6 week (mid-cycle) stock market correction in 2005, the stock market traded higher in another series of three steps into May of the following year. Note how I have labeled the mid-cycle low in April 2005 a “point 10” low, in consideration of George Lindsay’s Three Peak and a Domed House configuration model. These three steps up into the May 5 2006 high was 70-72, 62, and 6o trading days. The entire cycle from the April 2005 yr low to the May 2006 high was 265 days low to high. This was a 54-55 week cycle, a cycle we saw a few times in the 2000-2002 bear market. The 54-55 week cycle is just a few weeks orb beyond the one year 252 day cycle. Note that there is not only a 55 day cycle but a 55 week cycle in the stock market.

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Note that there was another 27 day 6 week (mid-cycle) stock market correction following the May 2006 year high. 27 is a half cycle to the 54-55 day cycle.

In George Lindsay’s Three Peaks and a Dome jargon, the April 2005 and May 2006 mid-cycle stock market corrections are labeled point 10 and point 20 lows. The three peak and a domed house pattern completes on the 23rd point. The domed house could and should have completed in Feb 2007 or July 2007, however the unprecedented credit cycle boom distorted the pattern and pushed the final advance beyond the March 2007 high into the July 2007 high. Funny enough, monetary authorities helped distort the three peak and a domed house configuration to one final high after the credit cycle peaked in July 2007. The final high was set in October, when investors realized that no matter what the hell the authorities did with their accommodative policies, they could neither prevent the financial sector from sliding into an earnings recession, nor fully imploding over the course of the next few years.

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Note again the 108 day low to low to low cycles between Marcy 14 2007, Aug 16 2007 and Jan 22 2008. Once again, when multiplied or amplified by 2, we find the reappearance of the 54-55 day cycle.

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The 2009-2010 chart shows us that the Feb 5 rally into April 23 was 55 days. The Nov 2 rally into Jan 19 was 54 days. The Nov 2 low to Feb 5 low was 68 days. The Jan 19 high to the April 23 high is 68 days. The cycle symmetry is strong. The April 23 high comes at the peak of the Q 1 earnings season, just as the Oct 21 high came at the peak of the Q3 2009 earnings season.

The quarterly cycle is roughly 13 weeks. There is about a two week orb around the quarterly 13 week stock market cycle for investors and traders to consider. That is, in the 11 to 15 week time cycle window of 51 to 75 trading days some sort of low to low, low to high or high to high cycle is apt to complete or resolve itself. This has been a consistent cyclic rhythm of the stock market over the past decade. Within that 11-15 week cycle, we can refine that in trading days to be roughly 54 to 72 trading days.

Can the current cycle off the Feb 5 low continue further in time? Yes, of course it can. But that misses the point of whether the upside risks outweigh the downside risks right now. While the primary trend is still unambiguously bullish, corrections to the primary trend are most apt to occur on extreme optimism. Friday April 23rd ended a week of extreme optimism where Q1 2010 earnings trumped all other inputs, many of which are not friendly at all.

Summary

The bottom line is this: a stock market correction is more or less imminent. If it starts on Monday, the first leg down should persist into Friday April 30 or Monday May 3. A May rally into May 20-24 should ensue. This rally should be followed by a June swoon before Q2 earnings in July. We should expect a mid-cycle correction consistent with following considerations: the seasonal June Swoon, the Walk Away in May axiom, and the Point 10 flush in George Lindsay’s Three Peak and a Domed House configuration.

The reason the market will rally in the first three weeks of May is because the structural drivers of the economy are positive and this will be reflected in the April economic data as and when it is reported in May 2010. The third week of May will likely be a secondary high, consistent with points 8-9-10 in the Lindsay configuration.

Wed May 19: FOMC minutes
Thurs May 20: Jobless and Philly Fed
Monday May 24: April Existing Home Sales

May 20-23 is often a stock mkt cyle peak, see 1996, 1998, 2001, 2008
The Home tax credit expires on April 30th. So, when April existing home sales are reported on May 24, that should be day the mkt heads south for a June swoon which may not bottom until the June 22 existing home sales for May and the June 23 FOMC meeting.

We will examine June swoon considerations in May

For more from John Bougearel, visit Structural Logic