The Q2 Bear Is Here

Cycle projections had pointed to a weak Q2 as can be seen in the charts below.

Much useful guidance can be derived from the four- year cycle (presidential) and the decennial cycle. The latter analyzes market behavior according to the position of the year in a ten-year pattern. The first histogram below is that of the monthly expected return of the DJIA from 1885 in years that have been two years past the presidential election. Below that is the same graph of DJIA performance in years that have ended in two. The last chart combines the first two.

Histogram of Monthly Return in 2022 Election Year Plus Two

Blue: Average Percentage Change

Red: Probability of a rise on that day

Green: Expected Return (Product of the first 2)

Histogram of Monthly Return in Years Ending in Two

Histogram of Monthly Return in 2022: All Years Ending in 2 that Have Also Been Election Years Plus Two

In each case, Q2 has been weak. Here is some added bearish evidence.

April had been the strongest month in the past, so it appeared that the high would be in late April. However, the 4% drop on April 21-22 suggests that the high is already in and that lower prices are due through May-June. Searching back to 1885, there have been no cases of such extreme weakness on those two days. If the parameter is reduced to -1%, the DJIA was down in 10 of 17 cases in the next month.

January and April have historically been the 2 months with the best forecasting ability. In 2022, both will be bears. A lower January and April have been bearish in the past confirming the 2022 bear.

The current market position supports the cycles. The prior low has been taken out, and the prior February-March rally appears to have been an A-B-C correction. The current decline is likely a wave three to the downside. The cycles point to lower prices through June, suggesting that more selling lies ahead. The first retracement level that may provide support is 3700-3800 on the S&P 500, but the more firm level is at 3300.

The cycles point to a Q3 trading range and a strong close to the year in Q4.