To OTC Journal Members:
 

What Next? Completing the Four Year Cycle

We are nearing the end of a 4 year cycle- one that many market watchers believe will set the course for the future. Adam Olensis, publisher of the Agile Trader (www.agiletrader.com) gives me the best look at the potential transition. If you are looking for a market timing service for trading short term swings, Adam's model is second to none. I suggest you check out his web site.

Here's a look at how 4 year cycles have ended in the past. These most closely resemble today's market environment. I know this is a busy chart, but it has some information worth reviewing.

Covered on the chart are the following 4 year cycles: '62 to '66,'74 to '78, '86 to '90, and '90 to '94. The big red line you see in the middle of the chart represents '02 to '06. As you can easily, all the lines have converged to bring us to exactly the same maturity in the bull market. If you believe history repeats itself, you have to pay attention to this recurring phenomenon.

So where to from here? As we turn the corner to August, the end of this cycle is either going to be friendly like '78 and '94, or painful like '66 and '90?

Once the 4 year cycle completes, another will begin. Another 4 years of a healthy bull market is just around the corner. The one big difference- there will be different leadership in the next bull market. The commodity driven sector will have run its course, and Wall Street will focus its attention elsewhere.

So- are we in for more massive declines before we hit bottom, or are we just going to tough it out through a boring, low volume summer, and watch stock values come back to life in October? 

While no one can say for sure, I like our chances for the more benign scenario. Two main reasons: 1. Earnings. The current forward looking estimate for the collective earnings of the S&P 500 over the next year is $90.44. That is a new all time high by a wide margin. The current PE of the S&P 500 is 13.7- the lowest it has been since 1994. Post 1994 we had the biggest bull market in history. 2. Whether there are 1, 2, or 3 more 1/4 point tightenings to go, the FED is close to the end of the tightening cycle, which is good for stocks.

Over the last 2 years, energy stocks have represented 41.5% of the earnings growth in the S&P. That is a whopping number. It helps explain why PE ratios are so low. Rising commodity prices may be good for energy companies, but they are bad for the rest of the economy.

However, the leadership on the earnings front is going to change. Here's a bar graph, again from Agiletrader.com, that provides a look at the consensus EPS growth for the coming year.

Note that energy, which represented 41.5% of the earnings growth over the past 52 weeks, now only represents 3.6% of the earnings growth for the next 52 weeks. Why? because analysts understand that the majority of the skyrocketing oil prices have run their course. The price of oil has quadrupled in the past four years, and doubled in the past year. Can we go to $100?- sure. On the other hand, most analysts estimate there is about a $20 risk premium built into the price of oil. If global tensions subside, oil could just as easily come back down to normal supply/demand price fluctuations. 

Does this mean we should be looking at telecom services to lead the next bull market? Maybe. Analysts project telecom will deliver 26.8% earnings growth over the next 52 weeks, a full 9 percentage points higher than the closest rival. In our little world, this would suggest Network Installation (OTC BB: NWKI) and Teleplus (OTC BB: TLPE) could be candidates for big comebacks later in the year.

There are other groups not included on the list I would be looking at as well. For example- Biotech- Biotech is not on the list because most biotech companies don't have earnings. Another sector to watch- semi conductors- I'm not sure where the semis fit into the earnings growth picture, but I know there won't be a new bull market without the semis participating. They have been getting clobbered of late.

I hope you find this information useful. Just a month or two more, and the 4 year cycle will be complete. Then, we will be able to start all over again.
 

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