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I have posted year-ahead stock market forecasts on this list three
times previously, January 2, 2003 (RT #20354), March 21, 2003 (RT#
21839) and January 5, 2004 (RT #24289).
Here is my latest effort.
Carl
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THE U.S. STOCK MARKET IN 2005
December 31, 2004
We have made year-ahead stock market forecasts based on George
Lindsay's methods twice before, the first time on January 2, 2003 and
then again on January 5, 2004. To put our 2005 forecast in
perspective we first quote from the summaries of the 2003 and 2004
forecasts.
>From the January 2, 2003 forecast:
"The 20 year cycle…and Lindsay's 12 and 15 year periods all suggest
that a bear market low occurred in 2002 and that a bull market top is
due possibly as early as late 2004 but more likely sometime in 2005.
"The dop from the market's December 2002 top will probably end at a
low above the October 2002 low and terminate the basic decline which
began from the march 18, 2002 top. Counting forward a long basic
advance of 26 to 32 months from the upcoming secondary low also
projects a bull market top for 2005. Finally, we suspect that the
first stage of this bull market will take the form of Lindsay's three
peaks and a domed house formation."
>From the March 21, 2003 update to this forecast:
"…the low established on March 12 [2003] ended the drop from the 954
top [of December 2002]…Counting forward 26 to 32 months (a long or
extended basic advance) from March 12 we find a bull market high
likely sometime between May and November 2005…..If this foldback
pattern continues to develop the market should now rally to the level
of the top of the big rally which preceeded the drop into the July,
2002 low. This is the 1178 level…After 1178 is reached [in late 2003
or in 2004] the foldback pattern would then call for a drop to the
940 level (2004?) …and then a rally to 1320 (mid 2005)."
>From the January 5, 2004 forecast:
"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 [in the S&P]. 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."
What can Lindsay's methods tell us about 2005?
First let's consider the 20 year cycle and Lindsay's long term time
periods. The years 1985, 1965, 1945, 1925 and 1905 were all bullish
years for U.S. stocks. Lindsay's 15 year 3 month period from bear
market lows to bull market highs reinforces this 20 year cycle,
bullish prognosis. Adding 15 years 3 months to the October 1990 low
predicts a bull market top for January 31, 2006. Moreover, adding 12
years 10 months (Lindsay's time period from bull market tops to
bear market lows) to the January 31, 1994 top (which started a year
long sideway's period) predicts a bear market low for December 1,
2006. The predicted 10 month interval from 2006 high to 2006 low is
the length of one of Lindsay's basic declines. This internal
consistency reinforces our confidence in the forecast of a bullish
2005.
The next step in Lindsay's forecast technique is to consider the
status of the market in terms of his theory of basic advances. These
are time intervals, measured in calendar days, which typically start
at bear market lows or at secondary lows near the bear market low and
end at or very near the subsequent bull market top. In our 2003 and
2004 forecasts we noted that the 1998-2000 basic advance was
abnormally short. Lindsay's theory of alternation would therefore
lead us to expect an abnormally long basic advance for the 2002- 2005
bull market. After analyzing the basic declines during the 2000-2002
bear market we concluded that the March 12, 2003 secondary low
probably marked the start of a long or extended basic advance. This
in turn implies that a bull market top should probably develop
sometime between May and November of 2005.
The fact that Lindsay's theory of basic advances predicts a bull
market top before his long term time periods do also has some
implications. Lindsay often observed that when these two forecast
methods are out of sync by a few months the market does its best to
make both "come true" for all practical purposes. In this instance we
would therefore expect either a top very near the average forecast
date (i.e. around September- October 2005) or alternately (see below)
a top in July followed by a sideways trading range that terminate in
January 2006. In either case 2006 should be a bearish year.
At this juncture we also have two additional pieces of information
that were not available a year ago.
In the previous two annual forecasts we said that we expected a
Lindsay "three peaks and a domed house" formation to develop during
the 2002-2005 bull market. Just such a pattern developed in the Dow
Industrials during 2004. The three peaks came in February, June and
September and spanned a 7 month interval. This compares favorably
with the 6 to 10 month interval Lindsay observed for major examples
of this 3P-DH pattern. The subsequent separating decline in the Dow
ended on October 25 at 9708. We interpret the December 9 low as
Lindsay's base point for measuring forward in time. To this date we
add 7 months 10 days to predict July 19, 2005 for the top of the
domed house rally and the end of the bull market. Lindsay also
observed that after the domed house is completed the subsequent bear
market returns at least to the price level at which the three peaks
formation began. This in our interpretation is the 958 low of August
2003. Thus 958 is a reasonable target for the bear market low
expected late in 2006.
The second piece of information is the development during 2004 of
what Lindsay called the "middle" section of the basic advance. In
this case it is a declining middle section and lasted from February
to October in the Dow and from March to August in the S&P. We shall
use the Dow to make our projections to maintain consistency with the
3P-DH analysis above.
Lindsay's "count from the middle section" is a long term tool and in
principle can be used only to predict the timing of the next bear
market low and of the subsequent bull market high. However, Lindsay
himself often described the process of forecasting as similar to the
process of assembling a jig-saw puzzle. All of the pieces (forecasts
derived from various techniques: long term time periods, basic
advances and declines, 3P-DH and counts from the middle section) have
to fit together smoothly. This requirement makes the entire Lindsay
method much more effective than any one of its techniques used in
isolation.
In this instance we know that Lindsay's other methods predict a bull
market top for the second half of 2005 and a bear market low late in
2006. Moreover, counting 15 years three months from the March 1994
low brings us to June 2009 as a likely bull market top. Now we can
attempt to count from 2004's middle section in the Dow.
Lindsay's "point E" for this decending middle section is June 25,
2004 in our interpretation. The first consideration is that the time
from this point E to the bull market top should equal the time from
the bull market top to the next bear market low. At the moment our
best estimate for this low comes from the 12 year 10 month time
interval and is December 1, 2006. This is a little more than 29
months from point E and if the count from the middle section were to
work exactly this would imply a bull market top 14 ½ months after
June 25, 2004, i.e. September 10, 2005.
Moroever, the duration of the subsequent bull market, in Lindsay's
theory of the middle section, should equal the time from point E to
the bear market low. Our current estimate for this time interval
(again based on the 12 year 10 month period) is 29 months and thus we
would expect a bull market top in May 2009, almost exactly coincident
with the implication of the 15 year 3 month period from low to high.
Let's now summarize the deductions we have drawn from Lindsay's
timing methods. First, 2005 should be a generally bullish year. The
bull market top could come as early as July 19, 2005 (3P-DH) or as
late as January 31, 2006 (15 year 3 month period). Our best guess is
that in any case the market will trade essentially sideways after
July 19, 2005 but that no really bad drop will occur until 2006
begins.
A bear market should be expected for 2006 with a low coming late in
the year. The years 2007 and 2008 are expected to be bullish with a
bull market top in 2009.
Where might the S&P stand at these highs and lows? Here Lindsay's
timing methods are silent but we can make some deductions based on
historical averages.
The 2000-2002 bear market dropped the S&P 50%. The last bear market
of comparable magnitude was the 1973-1974 bear market. The
subsequent 1974-1976 bull market sent prices up 77%. A comparable
advance from the 2002 low of 768 predicts a 2005 top at 1350. The
1976-78 bear market dropped prices 28%. A similar drop from a 2005
top at 1350 would give a low in 2006 around 980. This should be
compared with the 958 forecast for that low derived from the 3P-DH
formation. The 1978-1980 bull market moved the S&P up to 225% of its
1974 low. A repeat performance for the 2007-2009 bull market would
predict a top for the S&P in 2009 at 1730.
For those interested in learning more about Lindsay's methods we
suggest the booklet "Selected Articles by the late George Lindsay"
which is published by Investors Intelligence in New Rochelle, New
York.
Carl Futia
Copyright 2004.
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