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Interview by Donna Guzik

Technical analysis of 4 year market cycles show that we are in for more bad news, with the bears still growling, says Cycle News & Views Researcher Tim Wood

If the bear market of the last three years hasn’t depressed you enough, one US researcher says the Dow Jones industrial average is going to drop to the 3,000-level between 2006 and 2010.

Tim Wood, a certified public accountant in Louisiana, is becoming increasingly recognized for his research on stock market cycles. He publishes Cycles News and Views on the web under www.cyclesman.com. He’s on the line from Monroe, Louisiana.

Tim, you’ve looked at these four-year market cycles going back to 1896. Where are we in the market cycle right now and what tells you the indexes are going to drop?

Wood: Well, I think that the four-year cycle has extended. Everyone thinks that October, or as counting the October low as that four-year cycle low.

At this time, I do not think that we saw the four-year cycle low.

A couple of reasons I point to, number one, Peter Eliades has an indicator he calls CI-NCI indicator. It’s Cycle Indicator, Neutral Cycle Indicator.

That indicator is kind of an early warning indicator, if you will, of four-year cycle bottoms and it did not give us the correct readings to signify a four-year cycle bottom, and that indicator has been accurate back to 1920.

The second reason is Paul S. Desmond has done a study using 90 percent days and a 90 percent day is a volume day where 90 percent of the volume on the NYSE as well as 90 percent of the points on the NYSE are both positive or negative and going back to 1940, that indication has also worked with only two slight exceptions.

And the other thing I found is that October, if I remember right, was the 49th month from the previous 1998 four-year cycle bottom. Going back to 1896, the four-year cycle has averaged 47.08 months.

So you look at it and you go wow!, that was right in the window. The timing was perfect. No. Those two indicators I don’t think have failed with that kind of track record.

And if you look at the statistics, the four-year cycle has extended beyond 49 months, 35 percent of the time.

So you add all that up and there’s just no indication to me that we’ve seen the four-year bottom. Plus the sentiment is far, far too bullish at this point.

IC: So when will we see this bottom?

Wood: I think we’re going to see it with the next seasonal cycle bottom, which is due in the fall of 2003.

IC: And you’re saying that you’re calling for the Dow to go down to 3000?

Wood: Not by then. This is a long secular bear market. I look for, yes I do have a down side target on the Dow.

Actually, it’s a minimum downside objective of 3,000 on the Dow and I’m looking for that somewhere in the 2006 to 2010 timeframe with one of those four-year cycle bottoms, yes.

IC: How do you crunch the numbers in technical analysis, looking at trends numerically when so much of the buying and selling on the stock market is psychologically based? It’s people’s fear and greed?

Wood: That’s an easy one. I think that fundamentals as well as the psychology, everything is discounted into price. I mean, if a news story hits, it’s reflected in price.

So why worry about the fundamentals? Why worry about the psychology? Analyse the price. It’s all there.

IC: So you’re saying that the price is always accurately reflecting what’s in the marketplace at any given time?

Wood: Absolutely. The downside is the analyst is looking at the price. It’s like it’s a giant puzzle. You have to extract and understand what you’re seeing, and none of us are right 100 percent of the time.

IC: But there are so many different variations for the prices of stocks when we saw the so-called bubble in the tech stocks, the prices were higher than they should have been in a lot of cases in terms of looking at the fundamentals of the company. And by a lot of people’s accounts the prices were rising just because of the hype. There was a lemming effect.

Wood: And that happens in any blow off stage, in any bear market and we’re still in the beginning phases of this bear market. I mean, you look at the PEs.

I don’t have the numbers in front of me, but the PEs on the S&P are still astronomical. They’re still above where any other bear market has historically ended in the past. We’re still far above those levels. So we’re just at the beginning of this thing.

And there’s another aspect of it I’d like to talk about. If you look at, and going back and study and one of the other things I’ve done is combined cycles with Dow theory and it was pretty obvious when you start reading these old writings by Robert Rae and Charles H. Dow and S.A. Nelson and these guys they were looking at cycles within the markets.

And actually, I even found a page in one of these old books where they identified tops and bottoms and primary trends of the market and they were identifying four-year cycle tops and bottoms.

As I study market history, what I have found is that in the early days around the turn of the century, the upside piece of the four-year cycle was a bull market. The downside piece was the bear market and one cycle, one bull and bear market cycle was simply one four-year cycle.

Well then, my theory is as time has gone by, as our country became more and more sophisticated, more people came into the investing arena, then those four-year cycles started stringing together to create longer bull and bear market periods.

The first one being from 21 to 29 was obviously two four-year cycles. That market advanced a total of 568 percent.

Let me make a couple of points here. In the bear market that followed was from 1929 to 1932. Time wise, that bear market was 37 percent of the time of the preceding bull market.

Then there’s a base building period through the 30s; the market meanders around. The next great bull market begins in ‘42 and runs to ‘66.

That’s a period of 24 years. So that was again a number of four-year cycles strung together. That market advanced 1,076 percent from bottom to top.

If you look at the bear market period that followed, the bear market was 33 percent in duration of the preceding bull market. Look at the situation in hand today.

From 1974 was the four-year cycle low where the bear market ended and the bull market began. From 1974 to 2000, the market advanced 2061 percent, in 26 years.

And if you look at it, a couple of points I want to make here, each one of these great bull market periods have doubled in intensity.

The first one is 568 percent and 1076 percent. This one is 2061 percent. Good, old common sense tells you you don’t correct a 2061 advance in two years. It doesn’t happen.

And then you apply those percentages and you say well, that’s just two incidents. You can’t say that the bear market that’s going to follow is going to be roughly 30 percent, 33 to 37 percent.

Yes, you kind of can because in studying these four-year cycles, these bull and bear market periods back around the turn of the century, the bear market period always tends to last about somewhere between 33 and say 40 percent of the time of the preceding bull market.

So if you apply those percentages, I don’t see this market being over until its earliest 2006 and probably at the latest 2010.

IC: Well, the pullback then in the market, the correction, will that then push PE ratios down to a level where they are supposed to be?

Wood: I think it will. I think we’re going to see stocks that according to one of the main aspects of Dow theory is that at some point, stocks are going to represent great values.

And they do not represent great values with PEs in the 30s still.

IC: How do you account for other variables that may be introduced into the methodologies such as laws changing or rules changing for taxes or for spending or for accounting rules or anything that the government might make changes to?

Wood: Right, but I think that’s always the case and I’ll say this. I think cycles are an elastic thing. It’s not that… I mean, they breathe.

It’s just like if you count your respirations in any one given moment, one time you might… I don’t know what an average person inhales, but let’s say that it’s 17 cycles this minute and the next time, maybe it’s 20.

It’s the same with the market. They contract, they expand and the federal government cannot change the inevitable. This bear market, the primary trend of the market is stronger than all governments combined.

It is a force and I know that might be a hard thing to understand, but that is a force that, yes, they can manipulate it, yes they can stretch it out.

Obviously, that’s happened with the Greenspan policy, creating more money, the liquidity thing, lowering interest rates. Sure. They can extend this.

But they can’t stop the freight train. It’s going to happen. That’s my view.

IC: If this methodology is so successful in predicting the cycles, then why is it not getting more attention? Why aren’t people looking at it and understanding it and saying now, I know when to get out and when to get in?

Wood: I don’t know. My best answer to that is that I think that people are by and large – I use these words with some reluctance – but I think people are by and large a little bit lazy.

It’s too hard to go and dig and do the research that I’ve done and find the truth. It’s too easy to take a tip, or just listen to someone or do what your broker says and listen to the positive stuff that’s coming out on mainstream T.V.

And it’s not that I'm a pessimist or that I want to see these things happen. It’s just reality and it’s what I see and I feel that the message needs to be gotten out.

IC: Will there be any areas or any sectors that will fare well when everything else seems like it’s going to tank?

Wood: Sure, I think there’s always, in any bear market, there’s going to be certain areas that are going to do well and one example of that is most stocks have been going down.

The gold stocks have been doing fairly well recently. So that’s just one example.

IC: How about gas and oil?

Wood: I think gas and oil is going to do well and again, that’s the fundamental thing looking at it, just looking at the political horizon, I could see how it would do very well.

Looking at it technically, I haven’t looked at it as close. But I would let the charts tell me what’s going to happen.


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