Market Turbulence

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News Buzz

• Why is the stock market down? Factory data reminds investors that bad news is bad.

• Semiconductor ETFs had their worst day in 4 years.

• A weak ISM Manufacturing report sent stocks reeling, with semiconductors plunging and volatility up more than 30%. Today underscores sensitivity to any signs of a softer economy.

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Lesson – How to Interpret a Cycle Composite

• Example: Semiconductor index (SOX)

  We often post cycle composite charts in both Free and Premium newsletters. 

  Before we discuss some guidelines, let’s examine the latest cycle charts for SOX, as the semiconductor index is likely the critical index for NDX. It was one of the leading sectors on the way up and may be one of the leaders on the way down.

  • The daily chart cycle composite suggests that the bounce from early August may continue until October.

  • Then another drop into November and yet another bounce into late 2024.

  • The weekly cycle composite further below suggests that the dominant 3.5Y cycle is in the peak area and may roll over soon, with the next trough expected in the first half of 2026.

Now, let us discuss some guidelines on how to “read” cycle composite charts.

1. Consider cycle peaks and troughs strictly as approximate turning points in time.

2. Cycle composite is approximate because a) cycles are constantly varying, b) there are always measurement errors, c) the price may also be affected by other cycles that the cycle composite may not capture (see the left and right translation further below), and d) market “noise” such as news events or fundamental developments that may affect some cycles.

3. Do not correlate amplitude swings in the cycle composite with price swings, 

In the cycle literature and my posts, left and right translations are often mentioned. What are these?

• The right translation occurs when considered cycles do not include a longer cycle, which causes the cycle peak to occur later than estimated by the considered cycles.

• An excellent example of right translation is shown in the daily cycle composite of SOX. You can see that the cycle peaks in the uptrend from Oct’22 until July’24 occurred with some delay after the cycle composite peaks. The reason is that the 3.5Y cycle shown on the weekly chart was not included in the cycle composite obtained from the daily chart. This strong multi-year cycle was driving the uptrend and causing price peaks to occur later than predicted by shorter cycles.

• Similarly, in a downtrend under the influence of a strong long cycle, the price peaks corresponding to the shorter cycles will occur earlier than predicted by these shorter cycles, referred to as a left translation.

• Price troughs can also be left- and right-translated. For example, in a downtrend under the influence of a long cycle, price troughs can occur later than predicted by shorter cycles, which is referred to as a right translation of troughs. Similarly, in uptrends, price troughs could be left translated. 

• One should always try to identify the potential for peak/trough translations by examining cycles on longer time scales.

While cycle analysis is extremely useful for approximate market timing, as discussed above, it cannot be used alone for accurate market timing. Other methods can be used to determine more precise timing of price reversals. Toward that end, we also employ price projection methods using cycle and Fibonacci methods, Elliott Wave analysis, and various technical methods. Even with all these methods, it is still challenging, but most of the time, we can pinpoint reversal points in time.

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SOX Head & Shoulders

• That outside reversal in SOX led to a bearish drop indeed.

• SOX found support at 200D MA and may attempt to bounce from not much lower.

• However, notice the potential H&S pattern. It will be confirmed below the neckline at approximately 4300. If so, it will target approximately 2700.

Market Summary

As of close on 3 September, 2024

What Has Been

• Due to bad ISM news, the 1^st trading day in September was negative, contrary to its usually positive bias – the pension funds inflows did not help.

• Or, was it a lunar event, a new moon on 2 September? As an interesting point, the Dow Jones Industrial peaked on the 9/3/1929 new moon, leading to one the biggest bear markets. The present market valuation is similar to 1929 given several metrics I posted in the last few months. I am not predicting a 1929-like event; it is just an interesting analogy. However, my long-term outlook for the US stock market is negative.

• The S&P 500® index (SPX) dropped 119.47 points (–2.12%) to 5,528.93. 

• The Dow Jones Industrial Average® ($DJI) fell 626.15 points (–1.51%) to 40,936.93. 

• The $COMP plummeted 577.32 points (–3.26%) to 17, 136.30. 

• The 10-year Treasury note yield gave back seven basis points to 3.84%.

• The VIX soared to 20.72, the highest since August 13.

What’s Next

• Despite the big drop, the EW counts still have the same options.

• The outlook is the same as I outlined on Thursday, as I do not have much new information. . .

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