THE U.S STOCK MARKET IN 2004
January 2, 2004
Our last long term stock market forecast was published on January 2, 2003 and updated on March 21, 2003. The January forecast predicted that the October 2002 low at 768 would prove to be the lowest level the S&P would reach until at least the end of 2005. Moreover, we asserted that the market drop which had begun in the S&P 500 from 953 on December 2, 2002 would end at a low above the 768 low and that this higher low would occur some time in the January- February time frame.
On March 21 we identified the March 12 low at 788 as the low of that decline and predicted that the advance that had just begun would carry the S&P to 1178 before a reaction of 10% or more would occur. This price target was based upon what we thought was a likely symmetry or fold-back pattern in the S&P. If this pattern were to continue it would imply a rally to the March 2002 top at 1178, a subsequent drop to the September 2001 low at 944 and then a rally above the 1300 level.
So far the stock market appears to be following this script pretty well and until a big deviation becomes obvious there is little reason to alter our general expectation. Our best guess is that the S&P will trade in the 1000-1200 range during 2004. Moreover, the first half of the year should continue the bullish tendency of 2003 while the second half of 2004 should see a drop in this average of 10-15%.
This estimate of the S&P's likely pattern in 2004 is based in part on our interpretation of George Lindsay's stock market prediction methods. In our January 2003 forecast we explained why these methods pointed to an ongoing bull market which would continue well into 2005.
The general timing of the expected bull market top in 2005 was suggested by Lindsay's long time period of 15 years 3 months from low to high which predicts a top in January 2006 if started from the October 1990 low. Lindsay's 28 year time period from high to high would suggest a top in September 2004 if started from the September 1976 top. The 20, 40 and 60 year cycles all suggest that 2004 and 2005 will be bullish years on average while the average of these cycles predicts a big break in 2006. Moreover, this general picture is consistent with the 4 year cycle in stock prices which has been very dominant since 1950 and last bottomed in 2002.
The Mach 12, 2003 low ended one of Lindsay's basic declines, as did the September 21, 2001 low. In each of these cases the preceeding basic advance had been subnormal in duration and when this happens Lindsay's rule is to expect the subsequent basic advance to last anywhere from 26 to 32 months. The September 21, 2001 low thus leads us to expect some sort of visible top in the November 2003 to May 2004 time frame. The fold-back pattern predicts this high around 1178. However, this is too early for the bull market top and so we would expect only a drop to 10-15% in the averages before a move to new highs for the move up from 768 begins.
The basic advance from the March 2003 low is projected to end in the May 2005 to November 2005 time frame. This is likely to be the bull market top and should occur somewhere above 1300 based upon the fold back pattern. We might add that Lindsay put significant weight on the Jupiter-Saturn synodic cycle of about 20 years. This cycle called for a big top in May 2000 and another top in December 2005.
Lindsay observed that the U.S. stock market tended to follow what he called a "Three Peaks and a Domed House" formation roughly 60 % of the time from the mid-1800's until the present. This pattern typically lasts about 20 months from the date of the first peak until the top of the domed house which usually ends a bull market. The three peaks typically occur at about the same level (although there are substantial variations here) and mark the end of the first advancing phase of the bull market. About 7 to 9 months typically separates the the first peak from the third. Our guess is that a three peaks pattern has already started to develop (in which case the first peak occurred on September 19, 2003 at 1039) or will soon do so. This would suggest that no significant break will start until at least 7 months has elapsed from the first peak. Thus April 2004 is the earliest we would expect the market to be vulnerable to a drop of 10% or more. It is interesting to compare this with the basic advance fromm the September 2001 low which projects some sort of top in the November 2003-May 2004 time frame.
If a three peaks-domed house indeed started in September 2003 then the peak of the domed house and the end of the bull market becomes likely about 20 months later, i.e. in May 2005.
These calculations all point to the same general conclusion. The first half of 2004 should be bullish although not as strong as the last 9 months of 2003. A good part of the year's first 9 months will probably be spent in an 80 point trading range. A top should develop around 1178 and be followed by a substantial break of 120-180 S&P points and this break will probably end in the fall of 2004. After that low a fast advance lasting 7 to 8 months should culminate at the peak of the domed house and a bull market top around 1340 in 2005.