Stock-Market-Observations

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JEFFREY SAUT

07-27-12 Jeff Saut Verbal Comments

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Jeffrey Saut of Raymond James is a very savvy guy and one of the few people that I follow.   Years ago, I found Jeff among the talking heads on CNBC.  He was  telling the audience different ideas than what everyone else was regurgitating.  Immediately this catches my attention because I’m ALWAYS interested in anyone that has a mind apart from Wall Street.  After following him for some time, I realized this guy is smart, insightful and normally right on the mark.  I find people like this infrequently.

Jeff reminds me of Robert Farrell of Merrill Lynch (1970s and 80s), who achieved a large following (including me) by being right on target.  Jeff Saut is an acknowledged student of Bob Farrell.

Link for Raymond James Investment Planning

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HURST CYCLES

All of the following cycle charts are different views of the same long term chart.  The different views stretch further and further out into the future.  The data used for this cycle is the SP 500 from 1950 to the present, creating long term cycle averages.

The first chart is the close up view and notice there is some difficulty determining the precise location of the longer term cycle shown bottoming in May.  The long term cycle bottomed in late May and some shorter cycles bottomed in early June.  Hurst’s Principle of Synchronicity states – “Waves in price movement are phased so as to cause simultaneous troughs wherever possible”.  Synchronicity means this variation on the cycle bottoms can’t take place in May and June.  The software obviously needs more data (future data) before it can reach a decision on the common cycle bottom.

Also note the cycle bottoms slated for early November 2012 and the longer term cycle projected for late November 2012.  Isn’t it funny that we are having an election in early November???  The computer doesn’t know we’re having an important election but it thinks something will happen during that time frame.  Interesting.

The longer term cycle shown bottoming in late November has a long period and the actual cycle bottom could be stretched months out into the future.  A January+ bottom could easily take place.

07-27-12 SHORT TERM VIEW

Next is the longest term view of the current cycles.  Note the interpretation of the cycles on the far left.  I normally edit this out to get the maximum size chart.

Looking far out you can see an important long term cycle bottom taking place around 2028.  That makes me wonder about the validity of my 2018 predicted bottom for the 3rd step down since 2000.  One interpretation could be the similarity to 1974 and 1982.  The bear market ended in 1974 but the final gasp before the great bull market began was 1982.  We could do the same thing in 2018 and 2028, 2018 could be the approximate bear market bottom and 2028 would be the last gasp before the next bull market takes off.  If I’m still here in 2028, don’t expect any blog updates because I’ll probably be a slobbering old fool in a wheelchair with diapers.

07-27-12 LONG TERM VIEW #1

07-27-12 LONG TERM VIEW #2

07-27-12 INTERMEDIATE TERM VIEW

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PRINCIPLES OF HURST’S CYCLIC THEORY

The Principle of Commonality – All equity (or forex or commodity) price movements have many elements in common (in other words similar classes of tradable instruments have price movements with much in common)

The Principle of Cyclicality – Price movements consist of a combination of specific waves and therefore exhibit cyclic characteristics.

The Principle of Summation – Price waves which combine to produce the price movement do so by a process of simple addition.

The Principle of Harmonicity – The wavelengths of neighboring waves in the collection of cycles contributing to price movement are related by a small integer value.

The Principle of Synchronicity – Waves in price movement are phased so as to cause simultaneous troughs wherever possible

The Principle of Proportionality – Waves in price movement have an amplitude that is proportional to their wavelength.

The Principle of Nominality – A specific, nominal collection of harmonically related waves is common to all price movements.

The Principle of Variation – The previous four principles represent strong tendencies, from which variation is to be expected.

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HURST CYCLE SOFTWARE

You can find further information about Hurst’s Cyclic Principles here.  Lots of good Hurst info at this link.

For anyone interested in keeping Hurst Cycles by hand . . . it’s a LOT of work.

The Hurst cycles course is about $500 (Hurst Cycle Course), which you will definitely need to chart by hand  Been there, done that – and wound up not keeping the cycles up to date.  You fall behind and miss important turns.  Incidentally, there is a LOT more to Hurst cycles than what I show in my blog charts.

The software to generate the cycles is excellent and highly recommended (Sentient Trader).  It automatically generates all of the bells and whistles that Hurst developed and does it accurately.  But if all you want is the Cliff Notes version of the cycles, try Hurst Signals.  It’s consists of a concise update of the different cycles and no work is involved.

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I just received this email from David Hickson of Sentient Trader software and I thought you might like to read some of his comments.

There are only eight Hurst Cyclic Principles that define the way in which financial markets are influenced by cycles. Each one of these principles is important in defining the Hurst Cycle approach to analyzing a market, but one of the principles always strikes me as more important than the others, and that is the Principle of Variation.

The Principle of Variation states that the cycles that influence financial markets have expected average wavelengths (and amplitude and other characteristics), and that actual instances of those cycles will tend to vary from the average. In simple terms this means that a 40-day cycle in the market will have a wavelength that is not exactly the average wavelength of that cycle.

The Principle of Variation is “more important” than the others I believe because it is not a simple black-and-white principle. It is sometimes mistakenly viewed as the “cop-out” principle because it used to mitigate analysis statements. It should not be dismissed because of this, but should instead be focussed upon so that we understand the implications of the principle correctly.

Hurst never answered the question: “how much variation is too much?”, but when developing Sentient Trader I had to answer that question because computers do like things to be black-and white (or 0 or 1)!

For instance we know that a 40-day cycle has an average wavelength of 34 days (we call it the 40-day cycle because that is easier than saying “the 34-day cycle” – OK, this is a bad example, but 5-day cycle is easier than saying 4.3-day cycle … well, let’s move on). And so we expect the actual wavelength of the cycle to vary from the average length of 34 days. But how much variation is acceptable and how much is too much? Clearly if a cycle is 60 days long it is more likely to be an instance of the longer 80-day cycle (which has an average wavelength of 68 days).

Sentient Trader resolves this issue by using a range of 65%-150% of the average wavelength as a suitable variation. When it comes to the 40-day cycle that means that a cycle which has a wavelength of 22 – 51 days is considered valid.

That is all very well, but what if you have a cycle that is 51 days long and another cycle that is 52 days long? Is the former a 40-day cycle, and the latter an 80-day cycle? There is only a one day difference between them, and so it is surely absurd to be so “black-and-white” about it! Yes indeed, and Sentient Trader isn’t so “black-and-white” about it, it uses a form of fuzzy logic to resolve these situations, which includes looking at the shorter cycles and how they have formed.

Why am I going on about this? Because the markets (which given the opportunity to entertain us with an analytical puzzle will always do so) are currently presenting us with exactly this situation: a 40-day cycle that is 51, 52 or 53 days long (depending on the market). There are several ways of resolving this situation in terms of one’s analysis, and in today’s ST Outlook I will present the various options that I think are most likely.

S&P 500

As discussed last week it seems likely that the first 40-day cycle since the 4 June 2012 40-week cycle trough occurred on 12 July 2012. However Wednesday’s trough occurred exactly 51 days after 4 June 2012 and so it is possible that is the correct position for the trough. If we position the 40-day cycle trough on 12 July 2012, as shown in the chart below, then there is a further puzzle to resolve: is the trough on Wednesday 25 July 2012 of 10-day or 20-day magnitude? At 13 days in length either option is possible.

I have been discussing for a few weeks the fact that I expect an early peak in the current 40-week cycle, and an email this week prompts me to mention just “how early” I expect the peak. Here is the longer term picture again:

The buy and sell turning zones show graphically what I mean by “an early peak”, but here is the logic:

• The current 40-week cycle should have a lower peak than the previous 40-week cycle (lower than 1420 in the S&P 500), and it should occur in the first 20-week sub-cycle. The reasons for this have been discussed previously.
• The first 20-week sub-cycle mentioned above is the current 20-week cycle of course, and so where do we expect the peak of this cycle to occur? The underlying trend of this cycle is neutral to slightly bearish and so the peak is expected in the first 80-day sub-cycle (or it could occur early in the second 80-day sub cycle).
• The underlying trend of the first 80-day cycle (which is playing out now) is bullish, and so we expect the peak of this 80-day cycle in the second 40-day sub-cycle.

Nasdaq

The situation is the same in the Nasdaq, and so let’s take a look at something else of interest: the interplay between price and the 20-week FLD. I mention above that the peak of the current 40-week cycle in US markets is expected in the first 20-week cycle, and we will know that peak has occurred when price crosses below the 20-week FLD. Here is that FLD. Note how price traveled along the FLD in early July, and then bounced off the FLD this week on Wednesday.

And then David goes on to discuss:

• Euro/US Dollar

• Gold

• 30 Year US Bonds

• Crude Oil

• US Dollar Index

With the software, if you have the data, you can input it into the Sentient Trader software and view the cycles.

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