Stocks Enter Important Short-term Cycle

| October 3, 2012

The S&P 500 index closed moderately higher today, continuing a test of support at the lower boundary of the power uptrend from July below recent highs of the cyclical bull market from 2009. Technical indicators are slightly bullish overall, tentatively favoring a continuation of the advance.

With respect to cycle analysis, we have been monitoring the likely development of the latest short-term cycle low (STCL) since last week. The move higher today finally generated a cycle low signal, confirming that the STCL occurred on September 26.

It is possible that stocks could rise further during the highly speculative advance from June. However, market risk has increased to a historic extreme, so equally extreme caution is warranted. Recent gains have been fueled by an unprecedented amount of monetary stimulus, so it is highly unlikely that they will be sustained and the next cyclical downtrend will almost certainly erase a substantial portion of the bull market advance from 2009.

At a current duration of 43 months, the bull market from 2009 is overdue for termination and the next cyclical top could form at any time. Therefore, it will be important to monitor market behavior closely for signs of a long-term reversal during the next several weeks.

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