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What Fed Does Now Could Skew Longer Term Cycles

The following is an excerpt from the Wall Street Examiner Professional Edition Long Term Outlook Update. The link for subscriber access to the full report with 13 pages of charts, analysis and conclusions is below.

For the past several years I have alluded to the similarity between this market and the 1969-71 period. That market made a major cyclical bottom in May 1970 and a major cyclical top in January 1973. The bull market lasted 32 months. In September 2011 it is now 30 months since the March 2009 low. No two market eras are identical, but the suggestion is that the current market may be in a topping window between now and the end of the year. The August peak may be premature in this context, but certainly within what could be considered a normal variance. As I wrote earlier this year (below) there were several reasons to expect this market to top out earlier. Here are some of those comments.

(4/19/11) It was 18 months after the 1970 low that that market began a 14 month trek to new all time highs. That suggests that this market might still be 5 months away from a final peak. However, no 2 markets are exactly alike. My bet would be that this bull market ends when the Fed stops printing. It will attempt that this summer, but a sharp market break would almost certainly bring the Fed back into the market, and that could lead to a subsequent test of the high or a minor new high.

(2/7/11) Obviously there are variances, but with Fed printing due to last until June, it seems likely that there will be at least several more months of upside. If this bubble gains enough momentum it could extend beyond the end of QE2 by a month or two as the dealers use every trick in their books to set up the sheep for the kill. We saw it in the 2007-08 commodities blowoff. The high in commodities came well after the Fed had shut off the spigot in mid 2007.

(6/8/11) That was written in February. Given the market’s recent behavior and the action of the long term cycle momentum indicators I now rate the odds of a new high later this year as about a tossup. High tide may have already been reached. Much will depend on how much damage the market will sustain over the next couple of months. If it holds above 11,500, then at least a retest or higher high is probably in the cards. Between 11,000 and 11,500 is a gray area. Below that, a bear market would probably be under way.

Long Term Dow Comparison Chart- Today vs. 1972- Click to enlarge

There’s much more in this report including a drilldown into weekly charts for a better idea of where things currently stand and where probability suggests they will head from here. The Professional Edition Daily Market updates will fill in the blanks day to day as things progress.

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