Stock market cycles
The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. (December 2010) (Learn how and when to remove this template message)
Stock market cycles are the long-term price patterns of stock markets and are often associated with general business cycles. They are key to technical analysis where the approach to investing is based on cycles or repeating price patterns.
The efficacy of the predictive nature of these cycles is controversial and some of these cycles have been quantitatively examined for statistical significance.
Well known cycles include:
- The lunar cycle
- Annual seasonality, also known as Sell in May or the Halloween indicator As well as the January effect and July effect.
- The four-year United States presidential election cycle in the US.
- The 17.6 Year Stock Market Cycle
- The 60 year Kondratiev cycles
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. 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.
Short term and longer term cycles
Cyclical cycles generally last 4 years, with bull and bear market phases lasting 1–3 years, while Secular cycles last about 30 years with bull and bear market phases lasting 10–20 years. It is generally accepted that in early 2011 the US stock market is in a cyclical bull phase as it has been moving up for a number of years. It is also generally accepted that it is in a secular bear phase as it has been stagnant since the stock market peak in 2000. The longer term Kondratiev cycles are two Secular cycles in length and last roughly 60 years. The end of the Kondratiev cycle is accompanied by economic troubles, such as the original Great Depression of the 1870s, the Great Depression of the 1930s and the current Great Recession.
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.
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 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 try to gain information for making profitable buying and selling (trading) decisions.
- Longer-term screen: To identify the long-term trend 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
- Conference Board - Consumer Confidence, Conference Board’s Present Situation Index - Major turns in the Conference Board’s Present Situation Index tend to precede corresponding turns in the unemployment rate—particularly at business cycle peaks (that is, going into recessions). Major upturns in the index also tend to foreshadow cyclical peaks in the unemployment rate, which often occur well after the end of a recession. Another useful feature of the index that can be gleaned from the charts is its ability to signal sustained downturns in payroll employment. Whenever the year-over-year change in this index has turned negative by more than 15 points, the economy has entered into a recession. The most useful methods to predict business cycle use methods similar to the organization as Eurostat, OECD and Conference Board.
- Federal Reserve Bank of Chicago - Chicago Fed National Activity Index (CFNAI) Diffusion Index - The Chicago Fed National Activity Index (CFNAI) Diffusion Index is a macroeconomic model of Business Cycle Models. [When passing through a value of -0.35, the] “CFNAI Diffusion Index signals the beginnings and ends of [ NBER ] recessions on average one month earlier than the CFNAI-MA3.” … the crossing of a -0.35 threshold by the CFNAI Diffusion Index signaled an increased likelihood of the beginning (from above) and end of a recession (from below)...,
- Federal Reserve Bank of Philadelphia - Aruoba-Diebold-Scotti Business Conditions Index (ADS Index) - is published by the Federal Reserve Bank of Philadelphia. The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions.
- Federal Reserve Bank of New York - Yield Curve - the slope of the yield curve is one of the most powerful predictors of future economic growth, inflation, and recessions.,
- BofA Merrill Lynch - Global Wave - has indicators from around the world such as industrial confidence, consumer confidence, estimate revisions, producer prices, capacity utilization, earnings revisions, and credit spreads. When the Global Wave troughs, THEN the MSCI All Country World equity index is up 14% on average over the next 12 months.
- JP Morgan - Equities tend to do well in environments featuring rising growth rates as well as falling inflation. S&P 500 return = 9.80% - 6.44 x Max [0, -1.26% - annual change of the GDP growth rate in %]. R2 = 22.4%.
- Technical analysis
- Market timing
- Bottom (technical analysis)
- Market trends and Trend following
- Histoire des bourses de valeurs (French)
- 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, Jr., Free Press (September 2004
- The Harvard Business Review, December 6, 2006
- Hulbert, Mark. "For everything a season?". MarketWatch. Retrieved 16 December 2018.
- Hulbert, Mark (5 December 1999). "STRATEGIES; Playing the January Effect, Whatever Its Cause". Retrieved 16 December 2018 – via NYTimes.com.
- The 17.6 Year Stock Market Cycle, Connecting the Panics of 1929, 1987, 2000 and 2007 by Kerry Balenthiran, Harriman House, February 2013
- "Hulbert on Fosback seasonality system". Abnormalreturns.com. Retrieved 16 December 2018.
- Weinstein S., Secrets for Profiting in Bull and Bear Markets, McGraw Hill, 1988, p. 31
- Dr. Alexander Elder, Trading For A Living” (1993)
- Bergen, Jason Van. "Triple Screen Trading System - Part 1". Investopedia.com. Retrieved 16 December 2018.
- Federal Reserve Bank of New York, Consumer Confidence: A Useful Indicator of . . . the Labor Market? Jason Bram, Robert Rich, and Joshua Abel ... Conference Board’s Present Situation Index This article incorporates text from this source, which is in the public domain.
- Andrea Tkáčová; Barbora Gontkovičová; Emília Duľová Spišáková. "MONITORING AND PREDICTION OF BUSINESS CYCLE" (PDF). Researchgate.net.
- "A different way to review the Chicago Fed National Activity Index" (PDF). Chicagofed.org. Retrieved 16 December 2018.
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- Federal Reserve Bank of Chicago (1 May 1967). "Chicago Fed National Activity Index: Diffusion Index". FRED, Federal Reserve Bank of St. Louis. Retrieved 16 December 2018.
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- "Aruoba-Diebold-Scotti Business Conditions Index (12/08/2017 - 12/08/2018)" (PDF). Philadelphiafed.org. Retrieved 16 December 2018.
- Arturo Estrella & Frederic S. Mishkin, The Review of Economics & Statistics, Predicting U.S. Recessions: Financial Variables as Leading Indicators, 1998
- Bank of America, Merrilly Lynch, RIC-Themes and Charts | 21 February 2017, page 12
- Ro, Sam. "BofA: The Economic 'Global Wave' Just Turned Positive And That's Extremely Bullish For Stocks". Business Insider. Retrieved 16 December 2018.
- "Abdullah Sheikh, Director of Research, Strategic Investment Advisory Group (SIAG). Regime change: Implications of macroeconomic shifts on asset class and portfolio performance" (PDF). Jpmorgan.com. 2011.
- U.S. Bureau of Labor Statistics (1 January 1948). "Civilian Employment-Population Ratio". FRED, Federal Reserve Bank of St. Louis. Retrieved 16 December 2018.
- "Wells Fargo Advisors". www.wellsfargoadvisors.com. Retrieved 16 December 2018.
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