A Short Word on Cycles Part 2 — The Kitchin Supremacy: Monday 4 July 2022
One year ago in this note, A Short Word on Cycles: Sunday 11 July 2021 | by Kudakwashe Chinhara | Medium, the Kitchin Cycle warned of two periods to watch for potential market weakness. The first was September 2021 and the second was June 2022.
So what transpired? Essentially, these:
…became these:
The billion-dollar question posed at the end of the note is now more important than ever. Are we experiencing a large dip within a secular bull market or are we in the early stages of crash?
Running the same exercise from a year ago, with the same train-test data split, reveals the next windows to pay attention to. A first cycle beat falls in the Dec22 — Apr23 window, and a second in the Sep — Nov23 window. Keep those in mind…
In thinking about said billion-dollar question, it behoves us to pay attention to the longer-term cycles. A spectral analysis of the DJIA price history from 1790 reveals a potential periodicity that can only be called “America’s Panic Clock”. Roughly every 18.7 years, a sharp correction of a previous uptrend in the economy/market occurs. The hit ratio on this has been 10–12 out of 12, depending on how picky you want to be, but of course we cannot even begin to speak of statistical significance…
Below is a semi-log chart of the DJIA with an overlay showing the major swings in the 18.7-year cycle. The primary down-swing of interest is highlighted in red.
· What follows is a list of the interesting developments that happened within those red zones starting from the most recent complete down-swing. All bar two of the zones saw a >33% drawdown in the DJIA.
1. Early 2000s recession — Wikipedia
2. Black Monday (1987) — Wikipedia
3. Recession of 1969–1970 — Wikipedia
4. Recession of 1949 — Wikipedia (max drawdown of 25% in the DJIA)
5. Great Depression — Wikipedia
6. Panic of 1907 — Wikipedia, Panic of 1910–1911 — Wikipedia and one of the greatest crimes of the 20th century Federal Reserve Act — Wikipedia
8. Panic of 1873 — Wikipedia and Long Depression — Wikipedia (the OG Great Depression).
11.Panic of 1819 — Wikipedia and Post-Napoleonic depression — Wikipedia (max drawdown of 13%).
12.Panic of 1796–1797 — Wikipedia
The current red zone runs for another 3 years or so. Perhaps the COVID-19 recession — Wikipedia marked the defining event for the window or perhaps recent developments show that even bigger challenges for the markets/economy lie ahead of us.
With this in mind, I am viewing the red zones in the Kitchin cycles as periods for potential violent declines given the larger backdrop just described, while the up-swings may point to only brief bear-market rallies.
Bottom Line: ‘Sell-the-rip’ may be the mantra for a while.
