two year Tech cycle

In July 2010 we published a piece suggesting the two year cycle low in Tech was scheduled to bottom in August. It did, and the stock market soared. This year, two years later, we are expecting it to bottom in July. Typically during bull markets it bottoms in Q3, and in Q4 during bear markets.

Approximately every 18-24 months the CPU speed of computers doubles. The semiconductor manufacturers that make these breakthroughs are usually the first ones to benefit. Historically, our back data is limited to 1994, whenever the Tech cycle bottoms and turns higher it carries the entire stock market with it. When it is in the bottoming process the general stock market has a more difficult time. Observe, in the chart above, the upswings in the stock market after the 1994, 1996 and 1998 cycle bottoms. Then after the 2002, 2004 and 2006 cycle bottoms. In the past, nearly 30 years, the only time the bottoming of this cycle and subsequent upturn has failed to produce a substantial rally was during the Tech crash of 2000.

Recently the Tech cycle bottomed in Q4 2008 and Q3 2010. In late 2008 the general stock market was still in a bear market which lasted until Q1 of 2009. After the stock market bottomed they both rallied substantially. In fact, some major Tech stocks bottomed in Q4 of 2008 ahead of the general stock market. After the August 2010 cycle low, again both the SOX index and the SPX soared for the next six months or so.

Currently the SOX index has been declining since March at SOX 445. The cycle peak actually occurred in early 2011 at SOX 474. Typically, after this cycle bottoms the SOX index rallies 50% or more, over a period of six or more months. The stock market, urged on by the growth indices (NDX and NAZ), usually makes some substantial gains as well. The SOX index is tracked in the public charts on page 2, link below. Best to your trading!

CHARTS: http://stockcharts.com/public/1269446/tenpp