Wednesday, October 28, 2015

blue skying with George Lindsay

Every once in a while I feel the urge to think way out of the box and envision market scenarios which are far from anything currently seen as plausible by most investors. The other day I was mulling over the possibility that quantitative easing policies of central banks may turn out to be vastly more successful than any of the numerous critics of these policies can imagine. If this happens world stock markets will march much higher from current levels. I wanted to see if I could guess just how high the current US bull market might go in such a scenario and when it might end.

George Lindsay's timing methods offer a way of structuring one's thinking about the longer term moves in the US stock market. Lindsay always emphasized the importance of using the Dow Industrials as a market indicator when applying his timing techniques. The chart above is a monthly chart of the Dow Industrial ETF, the so-called Diamonds (because their ticker symbo is DIA). Just multiply the price scale by 100 and you get a chart of the Dow itself.

Fundamental to all of Lindsay's longer term projections are his concepts of Basic Advances and Declines and of Long Time Periods from bull market highs to bear market lows and vice versa. 

The Long Time Periods are 12 years 8 months from bull market highs to subsequent bear market lows and 15 years 3 months from bear market lows to subsequent bull market highs. Sometime I like to reverse the roles of these numbers and have found it helpful to do so, but in this post I will stick with Lindsay's dicta.

If we count 15 year and 3 months from the July 2002 bear market low  we arrive at October 2017 as a likely time for a bull market top. That would be 26 months from the recent August low. Lindsay's basic advances typically run anywhere from 20 months to 32 months with 22-26 months being the most common duration. 

Is there any justification for treating the recent August low as the starting point for a basic advance? I think there is. On the chart above I have delineated a sequence of basic advances (green lines), each followed by a basic decline (red lines). The most recently ended basic advance reached a high in July 2014 which was 33 months from the October 2011 low. This identified it as an  extended basic advance and the subsequent basic decline ended at the August 2015 low, lasting 13 months, a normal basic decline.

August was also identified as a low by Lindsay's Long Time Periods. In theory a complete cycle from bear market low to bear market low should last 27 years 11 months (the sum of 12 year 8 months and 15 years 3 months). The August 2015 low was 27 years 10 months from the October 1987 low of that year's famous crash. So we have a second reason for thinking that a new basic advance started this past August.

If a basic advance indeed started in August and lasts about 2 years how high will it carry the Dow? On this question Lindsay's methods are silent. But we can use the two basic advances of the current bull market as measuring sticks for making a rough and ready projection.

If the current basic advance lifts the Dow by as much as the first one did (100% during 2009-2011) it will carry the Dow up to roughly the 30,000 level. A more modest target is derived by matching the size of the basic advance from 2011 through 2014. This lifted the Dow about 65% and a similar sized rally from the August low would push the Dow up to roughly 25,000.

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