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The 18 Year Stock Market & Commodity Cycle at Trader’s Narrative

If we step back from the day to day movements of the stock market and take a very wide perspective, we notice some overarching cycles at play. One of these is the 18 year stock market. Some, like Art Cashin in the video below, express it as a 17.6 year cycle but in reality this is not a precise determination. The 18 year cycle is more an average than an accurate, regularly repeating cycle:

18 year cycle dow jones industrial

Since stock prices are supposed to be random, it is odd to find such an orderly pattern. Why equity prices follow this rhythm may not be so befuddling if we consider commodity prices as their counter balance. For example, zooming in, we can see the period from 1980’s to the present for the Reuters/Jeffries CRB Index, the most popular proxy for the commodity markets:

While the equity markets went on a generational bull market from the 1980’s to their top in 2000, the commodities markets were in a painful and protracted bear market. This wasn’t just a coincidence. Over the long term, equities and commodities are on a teeter totter: when one is up, the other down; when one wins, the other loses. Of course this relationship isn’t evident until you step back from the short term fluctuations.

CRB futures index long term chart

The rationale for this is simple. The price of physical goods are expenses for corporations as they are the raw materials to produce things. When the costs increase, profits decrease. This trend continues until it reaches an inflection point where it can not continue. Profits decrease and a retrenchment takes place. Demand decreases for raw materials and their prices fall.

Then this trend continues until investments in the acquirement and production of raw materials is ignored. Mines take billions of dollars to develop and can take decades to ramp up production. Oil reserves likewise are expensive to find and exploit. As the current supplies are depleted, the prices of physical goods rises. It continues to rise until it reaches a tipping point when investment in the sector once again is lucrative. And the wheel turns again.

I was introduced to this cycle when I read Hot Commodities by Jim Rogers. This is a great introductory book to the commodities markets by the way. I highly recommend it.

According to economist David Rosenberg, we are halfway through the current bear market. This estimate is in keeping with the 18 year cycle if we assume that the top was in early 2000. And the counter estimate is that we have the same period of time left in the commodities bull market. But something is amiss.

The CRB index crumbled 57% from its top in 2008. We haven’t seen such a decline before in a commodity bull market. Those are serious deflationary forces at play right now in the world economy. Which is why central banks are throwing everything and the kitchen sink at it to prevent it from spiraling out of control. Here is a free 60 page book from EWI about the dangers of deflation and how to position yourself both defensively and offensively to benefit.

deflation ebook EWI

Rosenberg continues to believe in a healthy commodity bull market but I’m not so sure. What we saw last year was not a normal bull market but a speculative bubble caused by lax regulations which allowed large institutions to run roughshod over everyone else and walk prices higher. The aftermath of bubbles is always ugly and unpredictable to some degree so I have my suspicions that the regular cycle was tampered with, in a sense, by this.

Art Cashin on the 17.6 Year Cycle:

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3 Responses to “The 18 Year Stock Market & Commodity Cycle”  

  1. 1 mark

    Lowry’s Buying Power Index nudges record 1933 low

    I regularly monitor the breadth of the stock market, or so-called market “internals”, for guidance regarding the most likely direction for equities. This is worthwhile research as I have often seen breadth leading price.

    Few breadth studies are as insightful as those provided by Lowry Research, as reported below by Richard Russell of Dow Theory Letters fame.

    “Following are a few facts that I found fascinating. On May 8, Lowry’s Buying Power hit a high of 172. Since then, it has been falling. On July 2, Buying Power dropped to 95. This was one point below the level of Buying Power on March 9, which was 96.

    “In the 78-year history of Lowry’s, Buying Power has never dropped below its level at a supposed bear market bottom. In other words, Buying Power is now below where it was at the “supposed” March 9 bottom.

    “Buying Power has now fallen to its lowest level since September 1942.

    “The lowest level of Buying Power in the 78-year history of Lowry’s occurred in February 1933 during the depth of the Great Depression. As of July 10, 2009, Lowry’s Buying Power was only 9 points above that level.

    “What makes the situation even more ominous is that Lowry’s Selling Pressure is at 885, and it has been climbing steadily since a low of 857 recorded on June 1.

    “The key to Lowry’s is not the absolute level of its Buying Power Index. It’s the relationship between Buying Power and Selling Pressure.

    “The span between declining Buying Power and rising Selling Pressure hit a 78-year record distance of 807 on July 8. The wider the span, the more bearish the situation.”

    It sounds as if a very cautious approach is in order.

  2. 2 Jim

    mark, insider trading also suggests that we are not too far from a top. However, the price action itself seems constructive to me.

  3. 3 Pat McGroin

    hey, mark, the S&P 500 is 20% higher than it was when you posted here. How’d that Lowry’s “Indicator” work out for ya?

    Such nonsense. My advice: stop trying to time the market with a multitude of obscure “indicators” (or predictions of “grand supercycles”) and buy/sell stocks based on FUNDAMENTAL ANALYSIS.

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