Saturday, October 19, 2013

2013.10.18 DJIA Cycle Chart

If the DJIA cycle model has any internal validity, based on cycle parameters of the price time series extracted by the model since 1896, the DJIA is once again at a much higher level than would be expected by historical standards. Readers can see the Z-score of the model deviations for comparison to other manic eras. On the other hand, it is also possible that the model is incapable of capturing the recent changes in liquidity managed by the Federal Reserve, and hence it is "broken." In any case, one soft interpretation is that the DJIA is much higher than cyclical patterns indicate it should be, and we should see a very severe correction in the next few months. Nevertheless, given the performance of this particular model to date, I would maintain a skeptical view of the prediction.