The Coming Resolution Of The
Stock Market’s TY-1 Cycle

The January 2022 market top is finally going to get some resolution in the next few months. This cycle set right after the first of the year in 2022 and led to a nasty downtrend through much of 2022 which it began to come out of somewhat in the fourth quarter of 2022 but has maintained some pretty harsh resistance at /ES 4200.

Cycle-wise we are looking at the possibly of a CH-3 channel set (this is the north side of a cycle-based channel in a downtrend) potentially near 4300 (trendline off of the December and February peaks). That’s not as concerning as where the south side of this channel lies.

Let’s take a look:

All the way down at 2400…wow…could it make it down that far? Anything is possible but there is a huge PPP Zone (Psychological Price Point) above it. Mid-X channel is near 3,000 and that could very well be a target…or not. The sluggish trend towards the CH-3 Cycle Zone makes me think a significant pullback is likely. We are also going into May: “Sell in May and Go Away.” If any year would fit well with that idea this would be one.

With several geo-political and macro-economic (Ukraine war, bank failures the worst we’ve seen since 2008, and supposedly transitory inflation morphing into something more stubborn, debt ceiling negotiations, etc.) it’s hard to see how the market gets more juice going into the end of the year. However, we should never underestimate the ability of Fed money printing to inflate asset classes.

Many traders I know have been SUPER frustrated at the lame leadership in Washington, on both sides of the political aisle. Conservatives are almost as frustrated with the meek Republican leadership as they are at the “Money Grows On Trees” attitude seemingly shared by most of the Democrat party which seldom sees a spending bill worthy of any cuts.

An inevitable debt ceiling standoff between Biden and McCarthy will most likely go down to the wire so that the Dems can use the Republican “reticence” as “MAGA Republicans Are Extreme” battering ram in future elections. They will predictably claim that the GOP is intent on collapsing the economy by not signing off on a “no contingencies” increase in the debt ceiling. Never mind that NO political party has earned the right to a blank check with the irresponsible spending levels they have both signed off on which has led to the increased inflation rate and subsequent increase in the prime lending rate which has put a damper on corporate earnings growth and thus the stock trading environment.

Am I hot under the collar about this!? You bet!!

We send politicians to Washington with ONE job. Run the country in a responsible efficient manner so that we can continue to exist as a country. Most of these politicians are more concerned with maintaining power and catering to K-Street lobbyists than doing that which benefits the country in the long-term.

So, how did we get from breaking down market cycles to “critiquing” politicians in Washington?

The Country Is Being Run By Stupid People And It’s F*cking Up The Stock Market

To be more accurate: the country is being run by stupid “smart” people. These are people often with advanced Ivy League degrees who have lost any real grasp on commonsense and the ability to discern fact from fiction.

If you have been investing or trading for any length of time, despite some bumps in the road, with the right trading system, it was possible to make money in any market. Extended swing trades, which were commonplace for much of the past decade, despite the harsh pandemic shakeout in 2020, have been hard to come by in this new market environment. Many traders have shifted to shorter-term trading strategies, even day trading to weather the storm.

Signs of impending challenges in the market came during the pandemic as the DJ-30 shook out to a 3-year low. Much of the price advance towards the tail end of the bounce off of the 2020 lows and through 2021 came off of the backs of tech stalwarts like AAPL, MSFT, FB (Now META), AMZN & GOOGL.

In the latter half of the year, small cap stocks faced increased volatility as concerns about rising inflation and the potential for higher interest rates weighed on investor sentiment. Additionally, small cap stocks tend to be more sensitive to changes in market conditions. They faced challenges with supply chain disruptions and labor shortages which impacted their earnings growth potential.

The TB-3 (Quarterly) Cycle coming off of the 2020 pandemic lows (TSS Cycles and Lemal Lines are driven by “cause and effect” events, the 11,000+ point drop in the index in the first quarter of 2020 was surely one of those) was broken out of in early 2022 and the bounce off of that in late 2022 going into 2023 is where are now.

So, what are the chances we pull out of the muck and head back up?

That depends a lot on how the market handles the TY-1 cycle. Of the three key long-term cycles driving stocks, this is one of the most important.

Of course, positive changes to the macro-economic and geo-political environment would surely help, but there doesn’t seem to be any serious solutions on the table. Just more spending, more debt and more regulations. The macroeconomic headwinds began due to a bloated federal debt driven by a puzzling pandemic response. Policymakers thought it was a good idea to shutter the economy in pursuit of some nonsensical policy: “let’s put people in bubbles” without any clear evidence that that was the best way out of the pandemic morass.

In hindsight, the draconian 'hard lockdown' state’s approach to the pandemic showed little or no advantage over, states with fewer restrictions…from AP (March 3, 2021):

“Though research has found that mask mandates and limits on group activities such as indoor dining can help slow the spread of the coronavirus, states with greater government-imposed restrictions have not always fared better than those without them.

California and Florida both have a COVID-19 case rate of around 8,900 per 100,000 residents since the pandemic began, according to the federal Centers for Disease Control and Prevention. And both rank in the middle among states for COVID-19 death rates — Florida was 27th as of Friday; California was 28th.

The cynic in me thinks that a lot of the Covid theater was done by politicians (surprisingly from both sides of the political aisle) to damage Trump’s chances of getting re-elected. Apparently it (among other things) worked.

Getting back to why this matters to stock traders, the market is in a precarious state. The high inflation rate along with the Fed raising interest rates naturally drags down the market as the high cost of borrowing puts a damper on investment and business expansion.

The stock market is teetering on the brink of confirming the completion of an eleven-year bullish super-cycle and potentially the beginning of an extended sideways or bear market. Depending on how the price action unfolds at the end of the second quarter of 2023, it will give us significant clues on whether we continue to chop sideways going into the end of the year. A potentially bullish case could be made among the Big Tech stocks that were hammered for much of 2021 and are in somewhat of a ‘relief rally’ though even that is suspect since many of these stocks’ ‘shakeout cycles’ still have not fully played out.

I will give updates as time goes on but beware of the potential for a strong shakeout in the second quarter and going into the third quarter of 2023. More concerning is the potential for the kind of technical damage that puts many more traders on the sidelines if a significant shakeout occurs. Multi-year bear markets are not a recipe for confidence-building among retail traders, who currently represent twenty-three percent of the market and have been growing due, in large part, to the ease of online trading.

The overall chart of the DJ-30 is not terribly bad, with a strong move off of the retest of the 2020 highs seemingly suggesting that an upwards move would continue. Yet, when you look at the trading action for the past six months, the market hasn’t been able to move outside of the 34,000 zone. This also coincides with the TM-6 cycle (which is equivalent to the quarterly TB-3 cycle) coming into play.   

We’ll have to wait and see. This wouldn’t seem so ominous if it weren’t for a lot of the macro-economic issues rearing their ugly head. Seemingly, more bank failures are on the way. This according to AP: ‘The 2023 banking crisis was the worst crisis in the US and Europe since the 2007-2008 global financial crisis. This banking crisis was caused by aggressive interest rate hikes by the US Federal Reserve. The increase in interest rates led to huge losses on the portfolios of government bonds held by US banks.’

Again, this was totally avoidable with a different decision process during the pandemic by the eggheads in Washington. Now we are beginning to reap what we sowed back then.

Be careful out there!! 

Paul Lemal
Big Kahuna Trading Club