Stockmarket Update 10 August 2013

We have now entered the "dog days of summer" where the majority of market players are now on holidays until the beginning of September.  Volume is down and the markets have drifted the past 4 weeks (since mid-July) in a narrow consolidation range.

Year-to-date world stock markets (as measured by the iShares MSCI ACWI Index Fund) have gained +11.6%  This contrasts sharply with the returns on the S&P 500 Index's return of +18.6% YTD and clearly shows the US has outperformed the rest of the world this year.

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Having spoken to and read updates from numerous asset managers recently, I have to say 2013 goes down as one of the most hated, misunderstood and non-participated rallies in years.  Given it appears we may be in a transition period towards weaker prices into the fall, I thought it would be interesting to look at some of the cycle charts to give us some clues as to what to expect historically.  In order to keep the charts equivalent, I will use the Dow Jones Industrial Average as my benchmark.


Annual Seasonal Cycle:

The 1st chart is the yearly seasonal chart of the DOW for the past 30 years:

As can be seen, seasonally over the past 30 years the DOW has entered a consolidation phase in April with a tendency to peak in price during the month of August and then fall back in Sept/Oct to a low below its April/June lows.  Near the end of October it resumes its uptrend into year end.

Contrast that with the below daily chart of the DOW as of today:

As can be seen, the DOW appears to have entered its yearly consolidation phase in mid-April as predicted, peaked at the beginning of August, and has signaled a daily sell signal as of Wednesday, 07 Aug.

Should history continue to show the way, it could be expected price will decline below the June lows (14551 inter-day/14659 daily close) between now and October.  This would be a decline of approximately 5% from current prices.


4 Year Presidential Cycle:

The second cycle chart is the post election year chart of the 4 year US Presidential Cycle (2013 is the post election year of Obama):

Once again it can be seen historically since 1897 markets in post election years tend to rise into August, consolidate, and then decline into October/November.  This is followed by a rise into year end.

Following that rise, 2014 will be the mid-term election year.  Historically since 1898 mid-terms have proceeded as follows:

It is interesting to note as we enter 2014 the DOW is not historically forecast to bottom until the end of Sept 2014 (choppy downward market action to Sept 2014).  As such, the weakest period of the 4 year Presidential Cycle is from Aug 2013-Sept 2014.

Putting the whole 4 year Presidential Cycle into perspective since 1896, we can see "historically" the average date of the market top in the post-election year is August 04 (i.e. 3 days ago) with a decline into September 30 of the mid-term year (averaging -4.1% historically).  This is followed by the strongest period of the cycle from Sept of the Mid-Term year (Sept 2014) into the  Pre-Election year (Sept 2015).

We have now entered the "window" of the weakest period of the 4 year cycle.  While I do not use this as a market timing signal; I am cognizant of the historical period we are within when making asset allocation decisions.


10 Year Decennial Cycle:

Since 1897 there has been a historical pattern of stock market performance associated with the year/decade.  As can be seen, historically the first 4 years of each decade are quite weak with price at the end of years ending in "4" returning to the same level as years ending in "0" with years 5-9 producing the bulk of the gains.

However, this current decade has been very much the opposite with a total return of +45% since Jan 2010.

This begs the question as to whether "this time is different" or whether it is possible historically we will maintain this well defined pattern.  If so, then we would expect a -45% decline from current levels by the end of 2014 to bring us back to the same level we started with in 2010.  Food for thought?


Ned Davis Research Cycle Composite:

Putting all the cycles together, the above is a composite cycle for 2013 composed of equal weightings of the yearly seasonal cycle, the 2nd year of the 4 year Presidential cycle, and the 10 year Decennial cycle.

Clearly this amalgamation indicates cyclically we could historically expect a top in the markets in July 2013 with a decline into Nov 2013.


Bottom Line:

It is clear my cautious approach to 2013 has thus far proved unfounded.  However, on a risk-reward basis I feel very comfortable having maintained a strategic 50% equity/50% USD cash position in my A/B accounts.  Ongoing monthly purchases of equities through dollar cost averaging has somewhat alleviated the loss of potential gains and I am pleased I was able to book some positive capital gains during this advance.

I still believe we are within the last part of a cyclical bull market (within a secular bear market).  As such, I am not inclined to call a market top at this point.  However, fundamentally we are approaching "expensive" valuations on stocks (depending upon which metric you use), we have entered the weakest period of the 4 year cycle, and we are within the weak period of the seasonal cycle.  As such, I see little reason to increase my equity exposure at this time as I see another bear market decline yet to come to end this secular bear market (my anticipation is a 50% decline from what ultimately is the cyclical bull market top).

My current exposure within the A+B accounts remains at a tactical 50% equity/50% USD cash position as follows:


-Russell Global 90 Fund: 40%

-Fidelity International Fund: 10%

-Russell USD Liquidity II Fund: 50%


(Obviously actual percentage allocations will fluctuate based upon daily/weekly/monthly based price movements and ongoing monthly A+B account systematic equity purchases).




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