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Cycles

The stock market, and most other markets, has distinct cycles. Prices oscillate up and down around a trend. Sometimes these oscillations show regularity in their occurrence beyond pure chance. We call them “cycles,” but they are not cycles in the harmonic sense. They are constant intervals between successive price tops or bottoms. They are also controversial. Some think cycles are imaginary, visions in the eyes of technical analysts; others discount them because their behavior is unexplained. Whereas cycles such as the 68-day are obviously difficult to justify, others are obvious and as regular as the sunrise each day.

The most obvious and easily explained are the seasonal cycles in agricultural commodities. The most predominant cycle in the stock market is the four-year cycle. This stock market cycle makes an important low roughly every four years. Wesley Mitchell (1874–1948), economics professor and founder of the National Bureau of Economic Research (NBER), discovered it. He observed that the U.S. economy from 1796 to 1923 suffered a recession approximately every four years. The stock market over the past 200 years has shown the same periodicity. Table 3.1 shows the cycle lows over the past 100 years and the average interval between lows.

Table 3.1. Four-Year Cycle in the Dow Jones Industrial, 1896–2010 (Adapted from Bressert, 1991)3

Date of Low

Low Close

% Decline from High to Next Low

Date of High Close

High Close

% Advance to High

Months Low to Low

Months Low to High

Months High to Next Low

August 8, 1896

28

–31.2%

April 25, 1899

77

175.0%

49.0

32.0

17.0

September 24, 1900

53

–46.2%

June 17, 1901

78

47.2%

38.0

8.9

29.2

November 9, 1903

42

–48.5%

January 19, 1906

103

145.2%

48.9

26.7

22.2

November 15, 1907

53

–27.7%

November 19, 1909

101

90.6%

47.0

24.5

22.5

September 25, 1911

73

–43.6%

September 30, 1912

94

28.8%

39.5

12.4

27.2

December 24, 1914

53

–40.0%

November 21, 1916

110

107.5%

36.4

23.3

13.1

December 19, 1917

66

–46.7%

November 3, 1919

120

81.8%

44.8

22.8

22.0

August 24, 1921

64

–16.7%

February 11, 1926

162

153.1%

56.0

54.4

1.6

March 30, 1926

135

–47.8%

September 3, 1929

381

182.2%

44.1

41.8

2.4

November 13, 1929

199

–86.1%

April 17, 1930

294

47.7%

32.3

5.2

27.1

July 8, 1932

41

–49.0%

March 10, 1937

194

373.2%

69.7

56.9

12.9

March 31, 1938

99

–40.4%

September 12, 1939

156

57.6%

49.6

17.7

32.0

April 28, 1942

93

–23.5%

May 26, 1946

213

129.0%

54.2

49.6

4.5

October 9, 1946

163

–16.1%

June 15, 1948

193

18.4%

32.6

20.5

12.1

June 13, 1949

162

–12.9%

January 5, 1953

294

81.5%

51.8

43.4

8.4

September 14, 1953

256

–19.5%

April 6, 1956

522

103.9%

50.0

31.2

18.8

October 22, 1957

420

–27.1%

December 13, 1961

735

75.0%

56.9

50.4

6.5

June 26, 1962

536

–25.2%

February 9, 1966

995

85.6%

52.1

44.1

8.0

October 7, 1966

744

–35.9%

December 3, 1968

985

32.4%

44.2

26.3

18.0

May 26, 1970

631

–45.1%

January 11, 1973

1052

66.7%

55.2

32.0

23.1

December 6, 1974

578

–26.9%

September 12, 1976

1015

75.6%

39.3

21.5

17.8

February 28, 1978

742

–24.1%

April 27, 1981

1024

38.0%

54.2

38.5

15.7

August 12, 1982

777

–36.1%

August 25, 1987

2722

250.3%

63.1

61.3

1.8

October 19, 1987

1739

–21.2%

July 17, 1990

3000

72.5%

36.3

33.4

2.9

October 11, 1990

2365

–9.7%

January 31, 1994

3978

68.2%

42.4

40.3

2.1

April 4, 1994

3593

–18.5%

July 17, 1998

9338

159.9%

54.0

52.2

1.8

September 10, 1998

7615

–37.8%

January 14, 2000

11723

53.9%

61.9

16.4

45.5

October 10, 2003

7286

–6.6%

March 4, 2005

10941

50.2%

24.5

17.0

7.4

October 13, 2005

10217

–53.8%

October 9, 2007

14165

38.6%

41.3

24.2

17.1

March 5, 2009

6547

 

 

 

 

 

 

 

Averages

 

–33.3%

 

 

99.6%

47.2

32.0

15.2

There are other cycles in the stock market, but the most important, and the one we are concerned with here, is the four-year cycle. It is often associated with the business cycle, and because it bottoms every four years, it is also called the “Presidential” cycle for the interval between Presidential elections. I believe it has nothing to do with the Presidential election because it also occurs in most other countries and especially in those whose elections occur at intervals other than four years. It has also occurred for well over 150 years and began long before the U.S. became an economic superpower. It is likely due to a combination of business cycle and investor memory, but both thoughts are unproven. Nevertheless, it exists and is a very important factor when analyzing the probability of imminent market declines.

Of course, the business cycle is not a cycle in the harmonic sense either. Instead, it is a wide fluctuation in business activity with an irregular periodicity that averages four to five years. However, it does affect stock market prices and bond interest rates.

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