August 10, 2008
By Cliff Droke
I have long been an admirer of the stock market cycle analysis of one Samuel J. “Bud” Kress, proprietor of SJK Capital and publisher of the cycle-based SineScope advisory. Kress has been in the equity market business all his adult life, either on Wall Street or in more recent years as an independent analyst/trader. If the Kress name seems familiar to you it’s probably because you remember the chain of S.H. Kress & Co. “five and dime” stores that once dotted the country. The store’s founder, Samuel H. Kress, was Bud’s grandfather.
During my 10 year acquaintance with Mr. Kress, I’ve been privileged to learn of his discovery of a remarkable series of weekly and yearly cycles. These cycles (Kress Cycles as I’ve taken to calling them) have an amazing correlation to each other and are based on the Fibonacci sequence. More importantly, they have accurately identified the major turning points in the financial markets and the economy over the last several years. The Kress Cycles are predicting a major period of change ahead for the U.S. stock market and economy, particularly between the years 2010-2014.
Using his cycle system, Mr. Kress correctly identified the 1999/2000 stock market top and also the 2002/2003 end to the bear market. More recently, Kress identified the stock market top in 2007 and is looking for the start of a new cyclical bull market to begin soon. Kress recently published a “Special Edition” to his SineScope publication, the fifth one of the past 10 years. Each previous Special Edition has been eye-opening in its predictions for equities and thus far has proven to be accurate. The latest Special Edition is perhaps his most important one yet, and with that in mind I decided to pursue an interview with the author. Kress was kind enough recently grant me an interview concerning his cycle work and investment/economic outlook for the U.S. in the foreseeable future. He also shared his longer-term outlook for gold and commodities.
Q: How did you get your start in the business and what brokerage firms did you work for?
Kress: I started in the business right after graduating from college in the mid 1960s. I joined Smith, Barney & Co. which at that time was the premier fundamental research and investment banking and institutional research firm. More innovative firms were becoming more competitive with the advent of the smaller “boutique” firms. Prior to 1970, I joined Faulkner, Hawkins & Sullivan as an institutional rep. This time I shared the position with Donaldson, Lufkin & Jenrette at the premier “special situations” firms. I later became available to institutional buyers relegated as an institutional rep to nothing more than a link in the party line, so I decided to enter the retail (individual) side of the business and joined Kidder, Peabody & Co. I found this disconcerting for, in actuality, a rep was paid for the volume of business done rather than for the amount of money made for a customer.
Q: In the introduction to your latest publication, you make reference to the superiority of market analysis compared to fundamental analysis. At what point in your career did you discover the technical approach to the stock market worked best?
Kress: My gut told me that fundamental analysis was a reactionary, loss prone approach to value whereas sound market analysis is anticipatory and can provide a value added for the investor or trader. I became associated with an individual who did market analysis. This sparked my interest in doing my own work. In the earlier 1980s, I left the brokerage industry and joined a computer leasing firm wholesaling tax advantaged partnerships. While at the firm, I began developing a specialized methodology to market analysis. With the change in tax regulation, I left the leasing company in the early 1990s and became involved exclusively to developing SineScope [Kress’s proprietary cycle method for stock market trading]. After years of trial and error, I finally achieved the desired level of competitive excellence last year.
Q: What about p/e ratios? Many fundamental analysts swear by them. Do you attach any importance to them?
A: Earnings are a lagging indicator. Prices are a leading indicator of earnings reversal, consequently they can have predictive value. The whole key is to identify price reversals using the Fibonacci-based mathematical identifications of the cycles. Mathematics being the most precise language allows the market to convey what it’s doing.
Q: What is the philosophy behind your cycle method and how do you apply it to the stock market?
Kress: I believe that natural forces overpower those created by man and that everything goes in cycles. The market isn’t exempt [from this principle]. Cycles are a natural phenomenon and represent the natural law of physics which states that what goes up must come down. In effect, this is a cycle in rudimentary form. The cycles’ derivation are quantified by a basic mathematical sequence which identifies the natural order of universal events.
Q: What is the basis for the market’s cycles?
A: Mathematics has been defined as the most precise language. Consequently, the mathematically based cycles are an orderly conduit though which the market conveys its directional behavior. In effect, my methodology tracks the least common denominator, which is time. I believe the market itself is the ultimate authoritative opinion. With an understanding of the cycles, the sequential series can be applied to both yearly for investment purposes, or weekly for interim-oriented traders.
Q: You place a lot of weight on the Fibonacci numerical sequence in your cycle work, don’t you?
A: Yes. Let me give you just one example of how important the Fibinoacci sequence is. A deck of cards is constituted similar to a year: 52 cards (weeks), four suits (seasons), 13 cards in a suit (weeks in a season). The numbered cards begin with two, the basic prime number, and end in 10, a decade. The width of a conventional deck is 5/8 of the length (two Fibonacci numbers), the beginning of the 62% odd infinitum ratio. Fibonacci numerology is clearly evident in various aspects of life. Whenever a bear market or contracting economy occurs, the blame game begins. However, this is a futile exercise for “it’s all in the cards.”
Q: Through the years I’ve noticed that you’re a big believer in using the rate of change (momentum) in the new 52-week highs and lows to confirm your cycles in timing market reversals. You’ve even developed a tool you call “HILDEX” to quantify these reversals. Why are the new highs and lows so important?
A: The new highs and new lows are important because they represent the incremental money changing the supply/demand equilibrium of equities. I developed this indicator to confirm the cycles’ reversals. HILDEX includes two components to track each cycle. The first is called the reversal component and is used to confirm the day of a cyclical top, plus or minus 1-2 days standard deviation. The second series has a directional component, which tracks the interim trend. It also includes a longer term, or bias component. As the name implies, the bias component tracks the market’s underlying bias [longer term]. When the directional component reverses and penetrates the bias, a bull or bear market is confirmed as the case may be. These components are all based on the difference between the number of the NYSE new 52-week highs minus the lows. The indicator is constructed using daily moving averages based on the Fibonacci sequence and corresponding to the cycles that are being tracked.
Q: Earlier this month you published a special edition to your SineScope publication entitled, “The Grand Bull’s Terminal Years: 2009-2011.” It contained an ominous warning for the years 2012-2014. Please elaborate.
A: The term “Grand” was included since it refers to the composite of all the cycles. Its duration is 120 years and I refer to it as the revolutionary cycle. A revolution occurs with each cycle bottom which changes the three basic institutions that govern our lives: political, economic and social. The first revolution in this country was political since it involved war in the 1770s when America was freed from an occupied to an independent territory. The second occurred in the mid 1890s when America transcended from an agricultural-based to a manufacturing-based economy. This was an economic revolution. The third 120-year revolutionary cycle is scheduled to bottom in 2014. To complete the third institution, the upcoming Grand cycle bottom should be a social revolution. The final three years prior to the bottom are ominous, historically, for they include a depression and a devastating war. Since “history always repeats itself” and there is yet to be a precedent to violate this, the years 2012, ’13 and ’14 have grave, broad-based implications. The various potential is too lengthy to discuss now but they are discussed in the Special Edition.
Q: If an investor shares your conclusions based on the 120-year revolutionary cycle, what is the best strategy for the years ahead?
A: The answer is very simple and straightforward. Liquidate all conventional equities on strength in 2011. Notwithstanding the negative potential that exists during 2012-2014, funds can be 100% committed and produce gainful returns. However, the old generals who have fought the old wars during the past half century with the “buy and hold for the long term” philosophy will have to change their mindset. I have difficulty with this approach, for long term we’re all dead. It appears that this is a rationalistic euphemism for the inability to manage and avoid interim risk, thereby awaiting the market to recover the investor’s loss.
Q: What about income investors?
A: If current income is required, AAA rated quality must be employed but maximum maturity can be considered? The equity segment need include only three vehicles in the 2012-2014 time period: S&P index inverse dynamic funds, gold exchange traded funds (ETFs), and S&P index options. The percentage weighting between debt and equity and within equity can be determined by individual risk/return positions.
Q: Is the latest Special Edition we’ve been discussing available for individual evaluations?
A: Yes. You can request a copy by writing to the following address: Samuel J. Kress, 15 Phoenix Avenue, Morristown, NJ 07960.