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Cycle Update: I've Got Some Good News and Some Bad News image

Good Morning. Based on what now appears to be a daily dose of intraday volatility, in which the market is pushed around by computers to the tune of 1% or so in both directions - oftentimes without any obvious catalyst at all - it is safe to say that the trend of the stock market is uncertain at this stage. And since we've got a holiday shortened week on our hands, I thought this might be an excellent time to do our monthly check-up on the stock market's cycle composite in order to get a feel for what July might look like.

As I've explained a couple times already this year, the projection of the cycle composite (which includes the 1-year seasonal, the 4-year Presidential, and the 10-year decennial cycles) is one of the inputs to our Market Environment Model. And while I would never trade solely on this indicator, it has proved to be very useful on occasion. As such, I am willing to check in on these indicators on a regular basis - especially when it suggests that a big move may be at hand.

Up until the latest little dance to the downside, the cycle composite has been fairly "on" so far this year. Although, as I mentioned the last time we visited this subject, there was a brief hiccup in May as stocks went straight up for a couple weeks which was the inverse of what the cycles called for. And since 2009, the cycles have been very helpful in calling the major moves of the market.

Looking at the cycles for July, I've got good news and bad news to report. First some good news. The composite itself along with the one-year cycle and the four-year cycle all call for July to finish in the black. However, the bad news is that the 10-year cycle suggests that stocks will ultimately finish in the red for the month.

It is also good news that all four cycles suggest the first half of this month will include a strong rally that takes the indices to new highs for the year. The bad news is that the rally looks like it will be short-lived. As for the damage inflicted, it appears that this decline could be rather intense. The composite shows that nearly all of gains from the first-half of the month's rally will be given back while the 10-year cycle suggests that all of the gains and more will be wiped out during July's second half decline. However, the one-year and four-year cycles sport declines that are less vigorous, with only about one-half of the rally's gains slated to be given back.

The good news is that the one- and four-year cycles portend good things to come for some time after the mid-month decline ends. The one-year cycle sports an ongoing rally that doesn't end until September whereas the 4-year shows a steady advance into the end of July.

The bad news is that the cycle composite is quite choppy from the middle of July until the end of the month while the 10-year suggests a steady decline into early August.

So, after reviewing the four cycles, here are my conclusions for the month of July:

      1. Stocks are projected to rally for the first half of the month


      2. At about the half-way point in the month, a rather intense decline is slated to begin


      3. Depending on the cycle in question, the decline will wipe out somewhere between one-half and all of the early July rally


      4. After the sell-off, the picture is mixed as the one- and four-year cycles suggest a rally while the 10-year calls for a resumption of the downtrend


    5. All in all, it looks to be a volatile month

Looking ahead, I'm afraid there is some bad news to report. In short, the cycles suggest that the traditional fall swoon will once again make life difficult for investors for a few months. However, the good news is that if one can survive until November, it appears the year-end rally may arrive right on schedule.

In sum, it looks like the volatility we've been seeing recently is likely to stick with us for a while. Thus, the game could become quite frustrating as the dog days of summer approach. As such, it is probably a good idea to remain flexible and to have an exit strategy in place for any and all positions because the cycles suggest that we may need to start playing some defense for a while.

Publishing Note: With the week being shortened by the July 4th Holiday, I'm going to use this opportunity to recharge the batteries a bit and I will not publish my morning report for the rest of the week. Regular State of the Markets reports will return on Monday.

Turning to this morning... Believe it or not, Greece is back in the news today (yes, again). The Troika (ECB, EU, and IMF) has given Athens three days to deliver on the country's financial requirements in order to receive the next round of funding. This has put pressure on most European markets in the early going. In Asia, credit concerns continue to plague China, but most markets were able to rise. Here in the U.S., traders are waiting on some data (Factory Orders) as well as some additional Fedspeak (NY Fed President Dudley will speak on economic conditions at 12:30). Interest rates are lower this morning and stock futures are currently pointing to a modestly higher open.

Positions in stocks mentioned: none

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