Avoid Market Cycle Confusion

If the mere mention of a market cycle puts a shellac-like gloss over your eyes…

Today’s piece is for YOU!

Now, I’ll be the first to admit that the subject of cycles is a complex one. In fact, I cynically suspect some market analysts prefer to keep it that way. This allows them to make smart-sounding proclamations, like: “A confluence of cyclical decelerations are yada yada.”

Intricate discussions on any given market cycle no doubt leaves practitioners excited while the average retail investor is left lost and confused.

Yet, my investment research service, which bears the name Cycle 9 Alert, is anything but complex or confusing. And I promise, it will NOT leave you feeling lost!

That’s why, today, I want to give you a peek into how I view cycles, as they relate to Cycle 9 Alert.

A few pictures should help make it “click”…

Market Cycle Simplified

 Here’s an illustration of a hypothetical “cycle”:

See larger image

Pretty simple, right?

Think of that cycle plot as a measure of the temperature in your house when closely controlled by your thermostat. When the actual room temperature gets too hot (a cycle peak), the air kicks on and cools the room… until the room gets too cold (a cycle trough), which then prompts the heat to kick on. This cyclical rhythm repeats indefinitely and with precision.

Great! Now put that image aside because I’ve never seen a single market/stock trade follow this perfect, pretty cycle. (C’mon! Common sense tells us it can’t be that easy, right!?)

Moving on…

You can manipulate the perfect cycle — stretching and contracting it, like a slinky — to get a bunch of different cycles. They might look like this…

See larger image

These are all cycles, but since they peak at different times, they’re uncoordinated. They’re NOT in sync.

And they’re a great representation of what goes on in the stock market. We see a slew of uncoordinated cycles move stock prices up and down. But, instead of five different cycles (shown above), I’d say there are more like five hundred cycles operating all at once.

The fact that so many uncoordinated cycles are operating simultaneously, and independently, makes it extraordinarily difficult to pinpoint turns in the market.

This view of cycles, too, is NOT what Cycle 9 Alert is all about… so forget it as well.

Here’s what you really need to know…

You should be familiar with the next graphic I’ll show you. It’s a standard fixture here at Dent Research…

See larger image

The S-Curve is a cycle of sorts. Half a cycle to be exact. It describes the portion of a cycle where, after bottoming, a rapidly accelerating upswing takes the plot to a new peak.

When an S-Curve is plotted to describe the emergence of a new technology, that rapid upswing portion of the cycle is when the technology becomes widespread. And that’s the time during which you want to have an investment in that company.

But I also think of the S-Curve in terms of sector cycles, which I explain in more detail here.That’s because each of the nine market sectors go through periods when they underperform the market… and then periods when they outperform the market.

So think of one full market cycle as one period of underperformance and one subsequent period of outperformance.

The outperformance period is precisely the S-Curve. That’s when the sector has built up so much bullish momentum that it quickly accelerates, blasting past the performance of the S&P 500. That’s “the power of the S-Curve,” as Harry Dent so passionately exclaims .

And that’s exactly what my algorithm is designed to detect — that point in time, at the bottom of the S-Curve, when the sector is poised to take off like a rocket ship toward the cycle peak.

OK, if you’ve stayed with me this far, the rest is a piece of cake…

Here’s the last graphic that describes how Cycle 9 Alert harnesses the power of cycles…

See lager image

This graphic simply shows three S-Curves linked to one another. Let’s start with the orange one.

Imagine the orange plot represents the energy sector. The aim of Cycle 9 Alert is to determine when the energy sector is poised to outperform the market. That point is indicated by the first orange arrow, just before the S-Curve turns up quickly.

When my Cycle 9 Alert algorithm determines the sector is at this “prime” spot, I recommend a bullish play in the energy sector.

After a couple of months, the energy sector will start to lose some of its market-beating strength. That point in time is represented by the second, uppermost orange arrow.

Past that point, the energy sector is not likely to beat the market averages. As such, it’s time to move on to a different sector. But we don’t just move on to any sector. We turn our attention to a sector that is newly entering that prime spot at the bottom of the S-Curve.

On the graphic above, we basically jump from the top of the orange curve to the bottom of the dark blue curve, which represents the technology sector, for instance. Then we ride the technology sector up the S-Curve, as its positive momentum propels it higher and faster than the broad market averages.

And that’s it!

We do this over and over in “rinse and repeat” fashion.

And when the broad market is declining, we follow the same procedure… only we look for sectors that have already peaked, or reached the top portion of the S-Curve. These sectors, since they’re “past their prime,” drop harder and faster than average during bear markets.

You don’t have to be a rocket scientist, nor a “cycles expert,” to understand why this method works so well.


Adam

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.