Let Me Take You Behind The Scenes in My “SPX Prediction Machine”…

In a recent post, the headline said “My S&P Target is 2800.” You are probably wondering how I got there. Well, I didn’t quite get to 2800, but round numbers are nice, and I got close enough that there’s a reasonable rationale for expecting the S&P to get there. The actual technical target range was a little lower.

Here’s how I got there…and why you should be prepared for the S&P to get to 2800 and know what to do when it does.

The long term cycle projection first pointed to a target of 2600-2650 in June of this year.

6/11/17 I have updated the long term cycle projections and the news is not good for bears. Cycles beyond 4 years are trending, with no date projection for a final peak. The long term trend (cycles longer than 8 years) price projection is 2600-2650.  (Source: Wall Street Examiner Pro Trader Market Update)

Long term projections now say that the SPX is going higher.

Here’s how this works….

These Cycle Charts Show You Exactly How I Got to “2800”

Cycle analysis expert JM Hurst proposed that by centering 2 moving averages back in time we could project the target of the move. One of the moving averages is set at the full time length of the cycle. So for example, the 2 year cycle would use a 104 week moving average, because that’s how long the cycle would ideally last. Typical variances wouldn’t matter.

Keep in mind that a moving average is just that, an average. It represents the middle value. For a time series like a stock chart, the latest calculation actually represents not where the average is today, but where it was as of the middle of the period, or back 104 weeks. So Hurst has us drop the moving average back by 52 weeks. That accurately centers it in time. It looks like this.

Here’s where the magic starts. With a little math, we can extrapolate that line forward into the future.

That line with its dotted line extension now gives us a picture of what the next bigger cycle is doing. In this case it’s the 4 year cycle.

Hurst then tells us to overlay a half span centered moving average, which would be 52 weeks, dropped back by 26 weeks in this case. Then extend that to its best fit with the current price action. There are little keys to doing that to get the best fit. I have learned what they are through observation and learning what works over the 47 years that I have been doing this. I’ll keep those keys to myself, but I’m glad to share the resulting projection with you.

The final result looks like this.

Measuring from the 2016 low, the crossover point of these two centered moving averages is around 2305. The cycle low was 1865 on a weekly closing basis back in January 2016. The distance from the low to the crossover is roughly 440 points.

Hurst then taught that adding that amount to the crossover point would yield the projected high of the cycle. In this case the number is 2745. The typical wiggle room on an intraday basis is about 50 points at a low and around 25 points at a high. There’s less volatility at a high.  Therefore the projected range for the high is about 2745-2770. Just a tiny, tiny shift in the centered 104 week moving average over the next couple of weeks would result in a projection of around 2800.

That’s consistent with a Hurst cycle wave chart, shown below.  This is an update of the long term cycle chart of the SPX that I showed you last week and that I publish weekly in the Wall Street Examiner Pro Trader Market Updates. It is current through last Friday.

This busy chart graphically represents the concept of nested cycles developed by JM Hurst in his 1970 book on cycle analysis. In essence, longer term cycles contain progressively shorter term cycles.

The chart shows a very long term cycle, or secular trend, of 8 years or more, in dark blue with projected extensions based on linear regression shown as dotted lines. The S&P has blown through the upper projection. That’s extraordinary. If this is not a new phase of a bull market, then the market is hyperextended. I lean toward the latter view.

The next shorter cycle is in teal, representing the theoretical 4 year cycle. Then the next shorter cycle of a theoretical 2 year length, but often longer, is shown in red. That cycle has varied widely in duration with a relatively smooth wave mimicking the 4 year cycle in recent years. The price action is still contained within those sharply uptrending channels.

I have also drawn a couple of linear trend channels. The market has just broken out of one of those when the SPX broke through 2600. It’s a little early for the bulls to claim victory, because there are often false breakouts.  But as of last weekend Hurst Theory shorter term projections now point to 2675-90, so there’s a good chance that this breakout will stick.

If the market successfully holds this breakout, 2800 would be a possible target over the next couple of months. A linear trendline connecting the market’s peaks since 2016 suggests that it would take until mid February to get there.

But I don’t think that the market will have the juice to hold out that long. The liquidity underpinnings of the rally will be turning increasingly less favorable for the rally.

The LAMPP Tells Us It’s Too Late to Go Long, But Too Soon to Go Short

The long term LAMPP is still green, but hovering just above a red signal. The Treasury continues to issue large amounts of new debt, which will increase when Congress adopts final passage of the big tax cuts. The Fed will also increase its draining of funds from the banking system in January. These actions should cause the Long Term LAMPP to turn red by January, or February at the latest. We will watch for a signal change each week as these reports are updated.

If the Treasury continues to issue new debt at the current rate in December, as the TBAC has forecast, then the long term LAMPP should flash a red signal in roughly 4 weeks.  That’s the first week in January. It wouldn’t be the first time the market has peaked in January. However, if the Treasury suspends debt issuance because of the reimposition of the debt ceiling this week, then the reduction of supply pressure would foster higher prices.

The short term LAMPP remains red. This signal has appeared to be wrong, although for several weeks in September and October my short side trading picks in the Wall Street Examiner Pro Trader model trading portfolio were doing better than the longs. That has again been the case over the past few days.

The stock market rally continues to apparently be driven by foreign inflows and increased use of leverage by traders. No doubt, short covering has played a role in the rally as well. When this is exhausted, it’s likely to end with a thud. We’ve seen a few air pockets and one day reversals lately. That could be the start of something bigger on the downside.

While I’m still hesitant to go all out short, I would not be buying long positions. While it has mostly worked for the past couple of weeks, even short term trading from the long side will become increasingly risky over the next 3 weeks or so.

When the Long Term LAMPP turns red, I would concentrate on trading from the short side.

The days of favorable liquidity conditions are numbered. And cycle analysis suggests that the upside on this market is 4-5% tops. As I wrote the other day, if you’re comfortable riding this wave, you can hold off on further liquidations of your stock portfolio until clear evidence that this euphoria has reversed.

But in January, I would start selling more aggressively. I am still looking to reach 60-70% cash by the end of January, or the end of the first quarter at the latest. Your cash target could be more or less depending on your personal circumstances.

As a trader who is thinking of shorting the market, based on the cycle projections and strong short term momentum, I would continue to hold off until there’s an intermediate term trend break. That would require the S&P holding a weekly close below 2580 in the short run or below 2600 in January.

In the meantime, I’ll be looking for specific stocks or sectors that appear set up for swing trades to the short side. I’ll report a few of them here when the time looks right. So stay tuned for that.


Lee Adler

One Response to “Let Me Take You Behind The Scenes in My “SPX Prediction Machine”…”

  1. Hi Lee . Enjoy your articles. Your views about tax cuts and the market still tanking seem to conflict with what Shah Gilani says. Can you expound on how a tax cut will be bearish. Here is a cut and paste: “What’s going to happen next is that tax cuts will flood already flush corporations.

    They’ll enjoy a 10-year run of record low capital costs, record profit margins, and record profits (especially at giant tech companies) with even more ways to raise cheap capital, fatter profit margins, more profits, and more cash to plow back into their pockets.

    By pockets, I mean their stock options packages, the price of their stocks, and the dividends they throw off. It will create more and more momentum, lifting markets higher and higher.

    That’s the “miracle.”

    Riding the market higher is the only way middle-class Americans are going to get their share. Now and moving forward, if you aren’t in the market, you’re losing money.” Thanks Jesse

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