Newsletter November 8, 2008 Expect Slip Ups The 40 Year Cycle Blog posts you may have missed this week: October Sector Scorecard Best Performing ETF’s -> Two Time Frames Leaders and Laggards (SP-500) ATR Channels – Another Turtles Approach Wide Monthly Ranges and the Odds of Future Performance Expect Slip Ups Good traders are disciplined however, that does not mean that they never slip up while trying to follow a trading plan. Remember you're human and no human is perfect. Realistically you should expect to deviate from your plan on occasion or make an impulsive trade based on a whim. While we are human and we make mistakes it isn't the mistake that's important but how you recover from it. Discipline is not an all-or-none characteristic. Some may view that trade-on-a-whim as a gamble and then assume that once a gambler always a gambler. That is simply not necessarily true. Everyone has a tendency to gamble on things from time to time, that is simply a normal human condition. It does not mean that a gambler is one who just takes shots in the dark and cannot learn to trade with discipline. Putting undo pressure on yourself to remain disciplined all the time will only lead to feelings of guilt and feeling guilty never leads to anything worthwhile. When one feels guilty they sometimes believe they should be punished for breaking the rules and they become distracted. Therefore you no longer take an active, problem solving approach to trading, but mull over what you did wrong. Ease your standards a bit and allow yourself to be human then you'll be able to approach the markets more calmly and creatively. The second problem with the "all-or-none" approach is you may begin thinking that you're a pathological gambler when you abandon your plan. If you think and believe that you're a pathological gambler it will become a self-fulfilling prophecy; you will start acting like one. This can lead to the following self-talk; "Of course I abandoned my plan I have no self-control because I lack the inherent ability for self-control." Self-views are very powerful. If you start believing that you can't maintain discipline, then you won't be able to. While some people are naturally impulsive; most can learn to trade with discipline. It takes experience and practice. Don't make matters harder on yourself by underestimating your skills and forgetting that you are human. The 40 Year Cycle Cycle theories in stocks and commodities have been around for at least a couple of centuries. While intriguing they are also controversial. While cyclists vehemently disagree on what constitutes a cycle and which cycles are most important, it's a good idea to use cycles only as rough guidelines or road maps if you will, and not a means of entry and exit. Success in using cycle theory should always be combined with other analytical methods such as fundamental, technical, or market psychology. The following 3 paragraphs of interest are from: Cliff Drake .com For a more detailed description and analysis visit his site. "Another important consideration in the analysis of the long-term economic/equities outlook is the economic super cycle known as the "K-Wave," named after its discoverer, the Soviet economist Nikolai Kondratieff. Kondratieff tracked wholesale commodity prices back hundreds of years to determine regular rhythmic peaks and valleys in long-term price trends. Since wholesale commodity prices include no value added, they represent the most causal approach to identifying the real supply/demand balance in the economy. Here is how one commentator describes the K-Wave: "The K-Wave is the manifesto of economic determination. It is the ultimate boom/bust condition. The cycle is caused by the beginning acquisition and the ending liquidation of debt. Debt creates a false or created incremental demand in addition to intrinsic, real demand. When debt assumption becomes excessive, the system becomes illiquid. At that time, debt must be reduced to alleviate the pressures of illiquidity.Once debt is liquidated, the system reliquifies, debt is reacquired, and the economic super cycle begins anew." The K-Wave must be distinguished from the S-Cycle in that the former is not a true market cycle in the sense of having a definite bottom. Unlike the S-Cycle, the K-Wave's duration is variable and according to Ian Gordon, editor of the Long Wave Analyst , Vancouver, B.C., can be as short as 40 years or as long as 70 years. This is why the K-Wave is termed a "wave" as opposed to a cycle. The K-Wave is unique in that it is the only long-term economic rhythm that can be heavily manipulated at both peaks and valleys by government or central bank intervention. Needless to say, the U.S. government/banking establishment has been extremely active in recent years with their interventionist policy, therefore we can expect a longer-than-normal K-Wave this time around before we see the next bottom. A 55-year duration would see the K-Wave bottoming in 2004/5. A 60-year duration would see a K-Wave bottom around 2010, and a 65-year bottom would witness a 2014 K-Wave bottom. Kress of SineScope favors the latter timeframe as the most likely time for a bottom, as does another cycle expert, P.Q. Wall." Of all the long term cycles I've played with, perhaps the most dominant is the 40 year cycle. Again according to Cliff Drake at Kitco.com the 40-year cycle bottomed in the following years: 1894, 1934, 1974. Its next bottom is scheduled for 2014. In each of those years when the 40-year cycle bottomed it produced a dramatic decline in the stock market as well as being preceded in each case by a severe economic recession (or outright depression in the case of 1894 and 1934). The most damaging part of any cycle is the final 10% of the cycle's phase, i.e. the last 4 years. Let's look at what happens when the 40-year cycle enters its final "hard down" phase. The four years prior to the 1934 expected cycle low was of course 1930 to 1934. The great crash of course, most believe, was in September/October of 1929. Actually the worst part of the decline occurred after a rally into April 1930, the decline occurred from April 1930 through July 1932; a whapping decline of 86.5% from the April 1930 high. Moving on to the 1970's the bottoming process or the last 10% of the cycle would be 1970 thru 1974. The beginning of this four year period was marked by a recession in the U.S. economy yet he market as reflected by the Dow Jones advanced after the 69 drop up to about a 1,000 from about 700. It wasn't until January of 1973 that he market topped out at 1,067. In fact I remember watching Louis Rukeyser's show on PBS (Wall Street Week) on the eve of the New Year, when he always asked his panelists for their high/low predictions for the coming year. In this particular show, one panelist stated that the low was already in. Rukeyser challenged this projection - "You mean we will not go any lower than last close of last year at any time?" - the panelist answered yes. Being the contrary opinion person I like to consider myself all I could think of was uh-oh. That was the beginning of the hard down phase of this so-called 40 year cycle taking the Dow from 1,0 67 to 570 in 23 months. That's a decline of almost 50% in two years. The following chart is courtesy of StockCharts.com from 1900 to present. Perhaps the big picture look will make this 40 year cycle more apparent. Now the big "IF" questions; If the 40 year cycle has credence and if we will soon be staring into the last 10% of a 40 year cycle due to bottom in 2014, what shape will it take; 1930's or 1970's. The only answer of course is "no one knows" although it seems everyone has an opinion. So far at least the chart does look quite a bit similar to the 1970's and if that turns out to be the case then we should essentially trade sideways till that time with perhaps one hard down move a.k.a. 1974. That of course is not a prediction; it's a guess, an observation. Have A Great Week! Bill Prudent Trader.com Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.