Stock market cycles are the long-term price patterns of the stock market.
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Description
There are many types of business cycles The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (expansion or boom), and periods of relative stagnation or decline ( including those that impact the stock market A stock market is a public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.[1]
In his book The Next Great Bubble Boom, Harry S. Dent Jr., a Harvard graduate and Fortune 100 consultant, outlines several cycles that have specific relevance to the stock market.[2] Some of these cycles have been quantitatively examined for statistical significance.
The major cycles of the stock market include:
- The four-year presidential cycle in the USA The United States of America is a federal constitutional republic comprising fifty states and a federal district. The country is situated mostly in central North America, where its forty-eight contiguous states and Washington, D.C., the capital district, lie between the Pacific and Atlantic Oceans, bordered by Canada to the north and Mexico to the.
- Annual seasonality For example, retail sales tend to peak for the Christmas season and then decline after the holidays. So time series of retail sales will typically show increasing sales from September through December and declining sales in January and February, in the USA and other countries.
- "The Halloween indicator" (or "Sell in May and Go Away")[3]
- The "January effect The January Effect is a calendar-related anomaly in the financial market where financial security prices increase in the month of January. This creates an opportunity for investors to buy stock for lower prices before January and sell them after their value increases"[4]
- The lunar cycle[5]
Investment advisor Mark Hulbert has tracked the long term performance of Norman Fosback’s a Seasonality Timing System that combines month-end and holiday-based buy/sell rules. According to Hulbert, this system has been able to outperform the market with significantly less risk.[6]
According to Stan Weinstein there are four stages in a major cycle of stocks, stock sectors or the stock market as a whole. These four stages are (1) consolidation or base building (2) upward advancement (3) culmination (4) decline. [7]
Theory
The four-year U.S. presidential cycle is attributed to politics and its impact on America's economic policies and market sentiment Market sentiment is the general feeling or mood of the investment community as to the anticipated price movement of the stock market. This feeling or sentiment is the summation of a variety of factors including market data, technical analysis, government reports and/or national and world events. For example, if market sentiment is bullish, then. Either or both of these factors could be the cause for the stock market's statistically improved performance during most of the third and fourth years of a president's four year term.[8]
The month-end seasonality cycle is attributed to the automatic purchases associated with retirement accounts.
Compound cycles
The presence of multiple cycles of different periods and magnitudes in conjunction with linear trends, can give rise to complex patterns, that are mathematically generated through Fourier analysis Today the subject of Fourier analysis encompasses a vast spectrum of mathematics with parts that, at first glance, may appear quite different. In the sciences and engineering the process of decomposing a function into simpler pieces is often called an analysis. The corresponding operation of rebuilding the function from these pieces is known as.
In order for an investor to more easily visualise a longer term cycle (or a trend), he sometimes will superimpose a shorter term cycle such as a moving average In statistics, a moving average, also called rolling average, rolling mean or running average, is a type of finite impulse response filter used to analyze a set of data points by creating a series of averages of different subsets of the full data set. A moving average is not a single number, but it is a set of numbers, each of which is the average on top of it.
A common view of a stock market pattern is one that involves a specific time-frame (for example a 6-month chart with daily price intervals). In this kind of a chart one may create and observe any of the following trends or trend relationships:
- A long term trend, which may appear as linear
- Intermediate term trends and their relationship to the long term trend
- Random price movements or consolidation (sometimes referred to as 'noise') and its relationship to one of the above
For example, if one looks at a longer time-frame (perhaps a 2-year chart with weekly price intervals), the current trend may appear as a part of a larger cycle (primary trend). Switching to a shorter time-frame (such as a 10-day chart using 60-minute price intervals), may reveal price movements that appear as shorter term trends in contrast to the primary trend on the six month, daily time period, chart.
Use of multiple screens
A stock market trader will often use several "screens" or charts on their computer with different time frames and price intervals in order to gain valuable information for making profitable buying and selling (trading) decisions.
Often expert traders will emphasize the use of multiple time frames for successful trading. For example, Alexander Elder suggests a Triple Screen approach.[9][10]
- Longer-term screen: To identify the long-term trend A market trend is a putative prevailing course or tendency of a financial market to move in a particular direction over time. These trends are classified as secular trends , primary trends (mid-term) and secondary trends (short-term). The concept of a market trend is used in technical analysis and is inconsistent with the efficient-market and opportunities
- Middle screen: To identify the best day(s) on which to locate a buy or sell opportunity
- Finer screen: To identify the optimum intra-day price at which to buy or sell a given security
Technicial Indicators
The 'technical analysis' approach to investing is based on cycles or repeating price patterns. Some of the technical indicators used to measure and project patterns include oscillators, moving averages, and candlestick charts.
- Oscillators: These illustrate the price and volume cycles thereby allowing the investor/trader to identify relevant peaks and valleys within the trend itself.
- Moving Averages: There are many types of moving average In statistics, a moving average, also called rolling average, rolling mean or running average, is a type of finite impulse response filter used to analyze a set of data points by creating a series of averages of different subsets of the full data set. A moving average is not a single number, but it is a set of numbers, each of which is the average indicators for example the exponential moving average show a slightly different version of the price trends by smoothing out the short term fluctuations.
- Candlestick charts: This is a specialized type of price chart that provides different information about price activity than the standard "mountain" style chart.
See also
- Wave A wave is a disturbance that propagates through space and time, usually with transference of energy. A mechanical wave is a wave that propagates or travels through a medium due to the restoring forces it produces upon deformation. There also exist waves capable of traveling through a vacuum, including electromagnetic radiation and probably
- Technical analysis Technical analysis is a security analysis discipline for forecasting the future direction of prices through the study of past market data, primarily price and volume
- Market timing Market timing is the strategy of making buy or sell decisions of financial assets by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis. This is an investment strategy based on the outlook for an aggregate market, rather
- Stock market bottom In investing, financial markets are commonly believed to have market trends that can be classified as primary trends, secondary trends , and secular trends (long-term). This belief is generally consistent with the non-scientific practice of technical analysis and broadly inconsistent with the standard academic view of financial markets, the
- Market trends A market trend is a putative prevailing course or tendency of a financial market to move in a particular direction over time. These trends are classified as secular trends , primary trends (mid-term) and secondary trends (short-term). The concept of a market trend is used in technical analysis and is inconsistent with the efficient-market and Trend following In finance, trend following is an investment strategy that tries to take advantage of long-term moves that seem to play out in various markets. The system aims to work on the market trend mechanism and take benefit from both sides of the market enjoying the profits from the ups and downs of the stock or futures markets
References
- ^ Channels & Cycles: A Tribute to J. M. Hurst, by Brian Millard, Traders Press (March 18, 1999)
- ^ The Next Great Bubble Boom: How to Profit from the Greatest Boom in History, 2005-2009, by Harry S. Dent, Free Press (September 2004
- ^ http://www.marketwatch.com/News/Story/Story.aspx?guid={CDFB00A7-8DAA-49A9-A2EF-83502D872CDF} For everything a season?, By Mark Hulbert, MarketWatch, Oct. 28, 2005
- ^ http://query.nytimes.com/gst/fullpage.html?res=9C02EFDA143EF936A35751C1A96F958260 STRATEGIES; Playing the January Effect, Whatever Its Cause, By MARK HULBERT, December 5, 1999
- ^ The Harvard Business Review, December 6, 2006
- ^ http://abnormalreturns.com/2005/11/03/hulbert-on-fosback-seasonality-system/ Hulbert on Fosback seasonality system (Commenting on Barron's article, Trading the Calendar Can Pay Off Big, By Mark Hulbert, Thursday, November 3, 2005)
- ^ Weinstein S., Secrets for Profiting in Bull and Bear Markets, McGraw Hill, 1988, p. 31
- ^ http://www.hussmanfunds.com/rsi/prescycle.htm Average Gain in Year Two of Presidential Cycle Hides Important Declines, William Hester, December 2005
- ^ Dr. Alexander Elder, Trading For A Living” (1993)
- ^ http://www.investopedia.com/articles/trading/03/040903.asp Triple Screen Trading System - Part 1 by Jason Van Bergen
External links
Categories: Investment
