Business cycle can be characterized as the economy-wide fluctuations in the economic activities or production over certain period of time, involving shifts in growth, decline, stagnation and recession. There are a number of cyclical theories of economic development, concentrating on the analysis of these business phenomena, cyclic measurements and stages; nevertheless, the paper will be focused on the investigation of the convincing nature of Kitchin cycle used in modern economy.
The Kitchin cycle is considered to be the technical cycle with the application to be applied generally to the stock market. This cycle was uncovered by economist Joseph Kitchin in 1923; later it was titled as Review of Economist statistics and published by the Harvard University Press. Nowadays this cycle is perceived and understood as the business statistically important and predictable cycle with the duration of 42-54 months, covering the economic altering periods of recession and recovery. It is necessary to underline the fact that this cycle is characterized by the following key phases:
- Economic peak;
- Trough
- Recession;
- Renewed expansion.
It should be noted that the period’s rise and fall is in most cases measured by GDP (gross domestic product) of the country. The Kitchin cycle is closely associated with inventories accumulating as production advances from trough to peak. The analysis of the US economy shows that inventory investment throughs conform to such hypothesized timing and behavior; the erratic changes in the business inventories allow taking a data moving average. (Murphy, 111)
In accordance with the Kitchin cycle, the following analysis of the progression is to be presented: the peak of interest rates and the increase of money supply are followed by the decline of public demand for credit; this leads to the rates lowering of short-term interests. So, as a result of these processes, one can observe the decrease of stock value and investors’ anticipation for better period. The decline of the commodity prices identifies the phase of recovery; it can be characterized by the acceleration of economic activities stimulating the considerable increase of the interest rates, as well as credit demand for building. It is necessary to underline the fact that in some periods the interest rates can become too high providing anticipated earnings within stock market; this phenomenon is followed by the boom in business activities and the increase of commodity prices because of demand. It should be noted that money supply contraction of the central bank combined with high interest rates leads to the lowering of the commodity prices and stimulates the beginning of the next recession. (Farago, 41)
It is necessary to underline the fact that the Kitchin cycle comprises several 1 year stages called ‘Kitchin thirds’; besides, this cycle is subdivided into sub-cycle in 20 weeks called Wall cycle. This phase can be characterized by the most apparent effect produced on the stock market completing every 4-6 months. (Plummer, 109) Wall days comprise four stages called Wall years with the period of 30-40 days; while the wall years are divided into the phases of wall seasons of 8-10 days. It is necessary to stress that the shortest cycles of this cycle are considered to be of special interest for the economists, especially for the short term traders. (Kacapyr, 35)
The fall of the Kitchin cycle can produce the steep and sharp sell-off within the market. It should be noted that the cycle bottoms in the process of high volume reversal sets through carrying the high level of the stock prices. The analysis of this cycle is to demonstrate the idea the concern as to the intermediate stage within the Kitchin Thirds.
The chart illustrated above underlines the two phases of Wall days lasting about 5 months; it can be seen that the first period lasted from the October till the March, 2003, being 5 months in the length; while the second stage lasted from the March till the August being about 4,82 in length. (Chapman, 2004)
One should underline the idea that the economical analysis demonstrated previous Kitchin cycle lasting for four years from 1998 till 2002. Here, the first Kitchin third covers the period of 16 months; the second could be observed in the period of 2000-2001 for 19 months; the third stage lasted for 13 months. It was found out that the last Kitchin cycle peaked at the first third totally commencing; this gives an opportunity to broadcast the secular bear market within the next two thirds. Such a position is considered to the push to the highs within the next several years till the period of this Kitchin cycle lowering. (Murphy, 207)
The concentration of the Kitchin cycle analysis demonstrated its fitting with the economic business cycle; the period of economic development is based on the process of fluctuations from the recession to the business expansion peaks. So, it should be noted that the period of Kitchin cycles makes stocks, commodities and bonds experience the following phases:
- Early recession providing bear market for stocks;
- Deepening recession when the commodity prices are identified through bear market and the slowing bull market for bonds with bottoming bear market for stocks are observed;
- Expansion providing the start of new bull markets and bonds development in the bull market stages;
- The maturing of business expansion;
- Peaking of business expansion;
- The move into recession of the business;
The real market can be analyzed through the first four stages; March, 2002 demonstrated the bottoming of the bonds, their soaring and collapse of the stocks in October; the peak of bonds soaring in June 2003 and the lowering of stocks soaring with the pausing of commodity prices; and finally, the fall of bond prices, overvalued levels of stock market and the commodity prices being backed off. (Murphy, 146)
The Kitchin cycle is regarded to be the subset of wave Kondratieff cycle being considerably longer in the length and covering about 48-64 years of its functioning. It should be noted that this wave analysis is also subdivided into four different phases, called Kondratieff years, lasting about 14 years having the range of 12-20 years. Thus, there are four Kitchin cycles within the Kondratieff year, and sixteen such cycles in the total Kondratieff cycle.
References
Farago, A. How to Survive the Recession and the Recovery. Insomniac Press, 2002.
Kacapyr, E. Economic forecasting: the state of the art. M.E. Sharpe, 1996.
Murphy, J. Intermarket analysis: profiting from global market relationships. John Wiley and Sons, 2004.
Plummer. T. Forecasting financial markets: the psychology of successful investing. Kogan Page Publishers, 2003.