QUICK LOOK REPORT #19: NYSE Index
by Dr. Stephen Rinehart
February 3, 2006

Background:

Quick Look Reports will look at a possible dominant trend in an Index, Equity or Commodity and some possible long-term (monthly/yearly) trends which could emerge from the dominant cycle(s) (the datasets will be either daily, weekly or monthly). Quick Look Report # 19 revisits the daily closing prices of the daily NYSE Index from 1966 through Jan 2006 (Reference earlier NYSE predictions on Magnificent Seven Series).

The primary seven daily cycles in the NYSE Index are at periods of 260, 380, 525, 850, 1165, 1600 and 2800 days (looks almost identical to S&P 500 Index). As we have noted in the past, the amplitude of the long-term cycles in these major market Indices correlate very strongly with similar cycles in M3 and Bond Markets (for decades) and therefore it is in the interest of the Federal Rascals to stop publishing data on M3 and keep adding ETFs to the NYSE Composite and call it the “New Method”. Is that because the “Old Method” does not look politically correct?

In this study, we present a set of pictures as to how a prediction is made for 2006 for the daily NYSE Index from the existing cycles in the daily closing prices of the NYSE Index. The idea is to establish a rough trend from a long dataset (lots of values) and add the cycles together (perhaps starting with the longer cycles and adding the shorter cycles to see the overall coming picture). The main focus is not really on the trend line (which is pumped up by liquidity from the Central Banks) and continuing inflation but what you really want to know is when the major cycles are all “coming together” to form a high top (SELL) or low bottom (BUY). In the past decade (as well as far into the future), buy and hold “strategies” are badly flawed and serve only to allow a constant influx of money to be attacked by hedge funds (and others). To pull of this game requires a lot of “cheerleading” and sleight of hand tricks on the geopolitical fronts (Iran Gate is next). It has been noticed that major Federal Bank decisions, OPEC cut/glut oil strategies (phased with NYSE cycles) and “geopolitical events” occur at coming tops and bottoms of these long term cycles (not vice versa!).

The major trend in the NYSE Index daily closings is shown in Chart 1 from 1966 thru 2005. It is not a polynomial fit. In general, polynomial fits (to any order) cannot be projected with any accuracy. This trend is established by using a mathematical technique called a Low Pass Filter which acts a “smoothing” to the data. This long term trend has almost leveled off to a huge top.

Chart 2 shows the three largest cycles in the NYSE Index from 1966 thru Jan 2006. A long time ago (in the pre-Greenspan era), the cycles were well-behaved and much smaller in size (looked more like gentle rolling waves coming on the beach on a balmy day). After Mr. Greenspan took office, the cycles have continued to grow in amplitude and look bigger and bigger coming on shore (like a Big Storm is approaching but is still far away). All of the growth in the waves is a direct consequence of printing a lot of fiat money over the past 18 years – I think they are close to “papering the planet” in USD!? We will pour these cycles onto our major trend and stir the mixture but we need a bigger bowl each time “we make the recipe”.

Chart 3 shows the sum of adding the three largest cycles to the major trend in the NYSE Daily Index from 1966 thru Jan 2006. We begin to see our recipe beginning to come together but more ingredients are needed to “bake the cake”. So we will add some smaller cycles to the mixture.

Chart 4 shows the sum of adding the seven largest cycles to the major trend in the NYSE Daily Index from 1966 thru Jan 2006. Normally the waveform of adding the seven largest cycles to the major trend starts to match the actual daily closings much more closely. The major trend in the NYSE Index has not shown any downtrend but it appears to be making a large broad top (currently characteristic of many of the world’s major indices). The cake is beginning to bake.

Chart 5 shows a peak at the remainder of 2006 if we project the current cycles forward into the future. It show some “choppy action” for the next three months and a try at a final major top in the NYSE in late June 2006 if Iran does not get into a fight before then with US/Israel. This chart strongly suggests to expect a major “geopolitical event” by late June 2006 when the world markets should be reaching (or have made) major tops. The second half of 2006 is going to be a rough period for equities and world markets as we grind toward a recession and more regional conflicts. Recall that a candidate time in the 18-week cycle of the Dow for possibly making one of its periodic tops will be around early April and will reach its point of maximum downward acceleration in early June 2006.

Chart 6 presents some additional detail in the NYSE over the next three months. The action will continue to be “choppy” over the next three months as the NYSE Index will try for its 2006 top in June/July 2006. Expect some cyclic variation with a possible relative low in early March and maybe a drop going into the 1040 date of April 15^th.

Chart 7 gives the prediction for the 18-week cycle for 2006. A nice top should be forming around June 09, 2006 with maximum downward acceleration by mid-July. Watch out as this cycle starts to bottom in August 2006. The market generally does not start responding to tops in these cycles until they have started down and start accelerating.

Chart 8 depicts the prediction for the 36-week cycle for 2006. This is one of my all-time favorite cycles in the NYSE. A nice top should be forming around June 09, 2006 with maximum downward acceleration by mid-July. Watch out as this cycle starts to accelerate downward in August 2006. When you get the 18-week cycle going down together with the 36-week cycle, the fireworks may light up the boards. Add into this witch’s brew, Iran, Iraq, Syria, bad weather, gold prices, oil crisis, and even worse political advertisements and Congressional gridlocks and no telling what can happen!?

Bottom Line:

1. The predictions given in this study (and the other studies) do not predict a continued upward trend in the NYSE Daily closings after late June/July 2006. There is a price to be paid for pumping major cycle amplitudes with excess M3 money to keep “blowing asset bubbles” and the Piper may be close at hand with the retirement of Mr. Greenspin. We need to let this air slowly out of this market but that is a tricky proposition since we are in a Catch 22 situation.

2. If you keep feeding more air (M3) into this hot air balloon, you are already getting way too high and far off course and if you start letting out the air slowly you may actually come down too fast – there are no nice options left for Dr Bernanke. To keep the balloon going up you must slowly deflate the USD by printing many more Benjamins (using up the remaining gas in your reserve tanks). Heads the Yuan wins, tails the USD loses. You can pay the Chinese now and you can pay the energy companies later (maybe in Euros or gold). There is only one real trend line for a fiat currency and that is an exponential decay down. I don’t give a “Continental” how you get there. I think I will wait at the end of the line with a gold ticket (How much is that ticket going to be worth in 2018?). Meet me at the end of the Stagecoach Line in 2018 in a small town called Purgatory and bring your gold with you.

3. The major trend line in the NYSE Daily Index has significantly changed in the last four hundred days in terms of a “moving average”. It has become much flatter which is indicative of a broad top and we think this is part of a huge “Head and Shoulders” formation going back for years.

4. The downward trend in the latter part of 2006 may reach a relative bottom FY2007 (May/June) as we try a counter the recession worldwide (maybe we can print our way out) and possibly see a resolution to Iran/Syria (by July 2007) as we try and rally into the 2008 Olympics and “showcase” China – what webs the people in DC weave!

5. If this were “Texas Hold ‘Em”, my two ideal hole cards would be to get out of USD, get out of REITS, and stay out of the NYSE by June 2006. Now what is all this talk about Iran having nuclear weapons? So, is it ok if Los Alamos can’t find the missing plutonium? Why should Iran have one or two when Russia, US, China, UK, France and Israel have over 40,000 combined? The “flop” in this hand maybe Russia, China and Iran. The turn card will be gold and the river card will be India. What happened to North Korea as the big “boogeyman”? Can anybody keep this story straight? Let’s see – China is on first, who’s on second, Iraq is out, Russia is on third heading home, US wants to play hard ball, Iran is at bat, Syria wants to pinch hit, Hamas is going to sacrifice bunt, and what’s not happening?

6. The eighteen-week cycle together with 36-week cycle often shapes the incoming wave fronts and some key dates to watch are around June 09 and Nov 03, 2006. We may have a beauty shaping-up. Why is the Big Oil Man telling the rest of us we are addicted to oil? What’s wrong with this picture? Is the Big Oil Man going to stick it to himself – maybe? Why can’t Mr. Cheney hold some more secret meetings and fix this energy problem? Do you people have this under control or not?

Hypotheses: Seven major cycles in virtually all the worlds’ indices/commodities determine our oil and gas lives far into the past (and have for many decades). Hey, what you gonna do when the Fed Printing Press comes after you? Keep a weather “eye” on the key date of June 09, 2006 – fireworks may start by or soon after this date. Now what is all this nonsense that my Social Security Trust is going bankrupt – why don’t they try keeping their little paws off it by 2026? Asta Lavista, Baby!

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© 2006 Dr. Stephen Rinehart
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Dr. Stephen Rinehart
Lynn Haven, FL USA
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DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, the author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.