Markets are signaling caution on the intermediate term with the 80 period cycle now topping out. The long term cycle (9-12 month) is also nearing a top, but could help markets continue to climb a little longer. Use stops underneath the 14 and 21 day moving averages.

In the above chart, you can see that the historical 3 month treasuries (blue line) slightly lead the Fed funds rate (red line). That's an important consideration as inflation remains a the single most important fundamental factor that will influence the Fed's decision about where interest rates are heading. And those rates as we have discussed often, will have a direct impact on whether monies flow into or out of the markets.

On that chart, I have also plotted the US unemployment rate (green line -left scale), but inversely. Think of that line representing employment instead of unemployment and it will make more sense the way it is plotted. Notice how that line significantly LEADS both other data when it is rising, but shows no difference when it declines. In other words, as employment improves - back above 6.5% or better range, it won't be long before its inflationary effect is impacting the 3 month treasuries with rising rates which are followed by the Fed funds rates too.

I post that chart to help illustrate that for now, the Fed is pretty much stuck with keeping rates low, hoping for improvement in the economy where job creation vs. job destruction takes over. The slight up tick in employment we're seeing now provides some hope of coming daylight, but the Fed isn't even close to raising rates in any significant way - yet.

In summary, there's a long way to go with these low rates and a continuation of potentially strong markets, before institutional money starts to look at moving into fixed interest investments.

Shorter term cycles are weakening now (which has nothing to do with interest rates), so keep positions safe with stops underneath our layered levels at the 5,14,and 21 day moving averages.

Every time intermediate cycles decline (about every 12 weeks on average), there is always a lot of bad news that follows. The opperative word is follows.

Why?

Because markets are forward looking, where institutional money and traders are anticipating trends, while news is an operation of reporting what happened, not what will happen.

That's why so many investors who get emotionally caught up in the news de jour, lose. They are playing the game from a spectator position, and just like an arm chair quarterback, they are always upset by the calls.

The current intermediate decline for example, really began in early January, at least that's what our cyclical data was telling us at the time. Then, our 80 day intermediate cycle had topped out indicating that the next 4-6 weeks were going to be weakening and even turning down.

Stock Market Prediction

Our 20 day cycles also began to form "lower highs" after that, creating a divergence from what were rising markets at the time. In fact, here were some headlines from January 4-6, 2010:

"December ISM reading shows greater-than-forecast U.S. manufacturing strength"
"Jobs show signs of life - is this a labor market rebound?
"Dow industrials rally 156 points, finish at their highest level since October 2008"
"Ford shares at multi-year high after December sales jump 33%"

If that's the kind of information you were following at the time, it's hard to start thinking in terms of what the forward looking market was really saying. It typically won't appear in the news or the headlines. It was in our analysis though.

From our commentary on January 6, 2010: "We have the 80 period cycle also topping out right now too and even rolling over on the Dow. In the cycle analysis I perform to analyze those longer cycles however, we getting a slight variance on the length of that period, depending on the size of the window we screen. For example, when analyzing the data through a window size of 512 days, it shows that cycle with a period 88 days. When analyzed with a smaller window of 256 days, it identifies the period as 80 days. Either way, both will begin roll over and turning bearish soon. "

From that point forward over the next 4 weeks, markets began to chop and stall, and finally turn bearish on the intermediate trend, shedding about 7%.

The point is, did you lose 7% or turn that 7% into gains? You see, knowing what was coming, you could have moved to cash to protect your accounts, or simply played an inverse ETF like the QID or DXD to actually profit during the decline. Both were up 11-15% over the same time.

That's not daytrading folks, it's a 4-5 week swing trade, and in my book, just plain smart money management.