Bad Reputation

Years ending in 7, such as the current year 2017, have a bad reputation among stock market participants. Large price declines tend to occur quite frequently in these years.

 

Sliding down the steep slope of the cursed year. [PT]

 

Just think of 1987, the year in which the largest one-day decline in the US stock market in history took place:  the Dow Jones Industrial Average plunged by 22.61 percent in a single trading day. Or recall the year 2007, which marked the beginning of the GFC (“great financial crisis”).

Given that the current year is ending in 7 as well, is there a reason to be concerned, or is the year 7 crash  pattern a myth?

 

The Pattern of the Dow Jones Industrial Average in the Course of a Decade

Below you can see a chart of the typical pattern of the DJIA in the course of a decade. This is not a standard chart. Instead it shows the average price pattern of the DJIA in the course of a decade since 1897.

The horizontal axis shows the years of the decade, the vertical axis the average performance of the index. Thus one can discern at a glance how the index typically performs in individual years depending on what their last digit happens to be.

 

DJIA, typical pattern in the course of a decade since 1897. Years ending in 7 did tend to be marked by large setbacks on average.

 

As you can see, in the first half of the decade, i.e. in the years ending in 0 to 4, the DJIA barely rose on average. By contrast, in years ending in 5 (highlighted in yellow above) the performance of the index tended to be particularly strong.

Alas, years ending in 7 (highlighted in red) typically saw a sharp retreat in prices in the second half of the year. Thus it appears as though the stock market is indeed generating a specific pattern in a 10-year cycle. Is this sheer coincidence, or does such a 10-year stock market cycle really exist?

In order to assess that, we will take a close look at the 19th century as well. Due to the length of the 10-year cycle pattern there are basically no other time periods one can sensibly review in this context.

 

The 10-year cycle in the 19th century

The next chart shows the pattern of the 10-year cycle during the 19th century.

Note: in this time period, average stock price increases were far less pronounced than thereafter. As a result the values on the vertical axis are noticeably smaller.

 

US stock prices, typical pattern in the course of a decade, 1801  to 1899.  In the 19th century prices declined in the second half of years ending in 7 as well. A major reason for the comparatively smaller nominal capital gains stocks generated in the 19th century was of course the use of sound money, i.e., the gold standard. In the absence of incessant money printing, perceptions of risk were markedly different as well, hence a far large proportion of the total return was provided by dividends, which price charts don’t reflect. More importantly though, if one looks at the stock market priced in gold, this is to say, if one looks at real stock prices – and only stock prices in terms of sound money are “real” (adjusting them by dubious statistics like CPI or PPI doesn’t make much sense to us) – it can be shown that the real returns generated prior to the  establishment of the Fed were far greater than the returns generated thereafter. In fact, in real money terms the stock market remains frozen at levels last seen in the late 1920s. That’s almost an entire century of going nowhere in interesting ways. [PT]

 

As you can see, in the 19th century, stock prices on average also tended to fall in the second half of years ending in 7.

However, overall the 10-year cycle pattern in the 19th century was nevertheless quite different from the pattern that evolved in the 20th century and beyond, which we have shown in the first chart. One obvious example is that in the 19th century the market on average tended to rally in the first half of every decade, and essentially went sideways in the second half.

 

Annual Seasonality has far Stronger Underpinnings

As you can see, the 10-year cycle pattern appears to be a less stable phenomenon than annual seasonal patterns, in the course of which certain phenomena such as the year-end rally tend to recur with remarkable regularity. Why is that?

There is no sound fundamental reason for the existence of these 10-year patterns. Perhaps the 10-year cycle does trigger certain human behavior  – e.g. in the form of a self-fulfilling prophecy, as people who are aware of the pattern may take action based on it. But that does not appear to suffice to make the 10-year cycle a pattern that is likely to reliably influence market trends.

The case of annual seasonality is different. Numerous factors can be shown to have an impact on it: they range from the weather, to holidays, to earnings reporting dates, and the associated effects, such as window-dressing by portfolio managers or recurring industry-specific events such as e.g. fairs. Annual seasonality can assist in optimizing investment strategies for all types of financial instruments.

Simply take advantage of the information provided at www.seasonalcharts.com or www.seasonax.com. Numerous statistically stable cycles can be found there. There are also countless event-related market patterns –  regularly recurring patterns are not only based on annual seasonality.

Alternatively, if you have access to a Bloomberg or Reuters system, type “APPS SEASON” into the search bar of your Bloomberg Professional Terminal, or select the App Studio in the Thomson-Reuters Eikon menu and then choose the Seasonax app. For additional background information on the Seasonax app, see here: “Seasonax – What It Is And What It Can Do For You”.

PS: Cyclical patterns based on solid fundamental reasons are more robust!

 

Addendum by PT: A Special Chart

The following chart was originally published by Robert Prechter in the Elliott Wave Theorist in June. It shows that investors enjoyed far greater real returns in the stock market when the US still used sound money and eschewed central planning by a monetary authority.

 

A chart that speaks for itself: not only was per capita real economic growth under the gold standard and prior to the advent of the Fed much stronger than thereafter, but investors actually made truly large gains in the stock market in real terms. Under the metallic money standard (Bob Prechter deems it to have ended with the abandonment of the last silver dollars in 1965) the market posted a real gain of 30,556%. Since then, it has actually lost 38% in real terms! This is quite an indictment of the centrally planned  fiat money standard amd yet another reason to abandon it and return to sound money and free banking. [PT] – click to enlarge.

 

Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com, which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix method in London. His Stay-C commodities trading strategy won several awards in Europe; it was the best-performing quantitative commodities fund ever listed on a German exchange. For detailed information on the Seasonax app click here (n.b.: subscriptions through Acting Man qualify for a special discount!).

 

Charts by: Seasonax, Elliott Wave International

 

Chart and image captions by PT where indicated

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Federal Reserve is a Barbarous Relic
      The Sky is Falling   “We believe monetary policy is in a good place.” – Federal Reserve Chairman Jerome Powell, October 30, 2019.   The man from the good place. "As I was going up the stair, I met a man who wasn't there. He wasn't there again today, Oh how I wish he'd go away!" [PT]   Ptolemy I Soter, in his history of the wars of Alexander the Great, related an episode from Alexander’s 334 BC compact with the Celts ‘who dwelt by the Ionian...
  • Incrementum 2019 Gold Chart Book
      The Most Comprehensive Collection of Gold Charts Our friends at Incrementum have just published their newest Gold Chart Book, a complement to the annual “In Gold We Trust” report. A download link to the chart book is provided below.   As of late 2019 an ounce of gold will get you 115 liters of beer at the Munich October Fest – a 7-year high. Cheers!   The Incrementum Gold Chart Book is easily the most comprehensive collection of charts related to or relevant...
  • The Golden Autumn Season – One of the Most Reliable Seasonal Patterns Begins
      The Strongest Seasonal Stock Market Trend Readers may already have guessed: when the vibrant colors of the autumn leaves are revealed in all their splendor, the strongest seasonal period of the year begins in the stock market – namely the year-end rally.   Will Santa wake up this year? Last year he was clearly missing in action – but that is actually the exception, not the rule [PT]   Stocks typically rise in this time period. However, there are questions, such...
  • Riding the Type 3 Mega Market Melt Up Train
      Beta-driven Fantasy The decade long bull market run, aside from making everyone ridiculously rich, has opened up a new array of competencies. The proliferation of ETFs, for instance, has precipitated a heyday for the ETF Analyst. So, too, blind faith in data has prompted the rise of Psychic Quants... who see the future by modeling the past.   Gandalf, quant of Middle-Earth, dispensing sage advice. [PT]   For the big financial outfits, optimizing systematic –...
  • Maybe the West Should Adopt Iran’s Nuclear Weapons Policy
      The Rise of Total War Prior to the modern age, when war was engaged in, combatants, for the most part, acted by a code of conduct which attempted to minimize civilian deaths and the destruction of non-participants’ property. With the onset of the democratic age and the idea of “total war” such modes of conduct have tragically fallen by the wayside, the consequence of which has made warfare far more bloody and destructive.   Iranian Seiji-2 missile. Of course, we...
  • Is the Fed Secretly Bailing Out a Major Bank?
      Prettifying Toxic Waste The promise of something for nothing is always an enticing proposition. Who doesn’t want roses without thorns, rainbows without rain, and salvation without repentance?  So, too, who doesn’t want a few extra basis points of yield above the 10-year Treasury note at no added risk?   The yield-chasing hamster wheel... [PT]   Thus, smart fellows go after it; pursuing financial innovation with unyielding devotion.  The underlying...
  • Bitcoin Moonshot - Precious Metals Supply and Demand
      Bitcoin Gets Juiced The prices of gold and silver were up $19 and $0.48 respectively last week. But that’s not where the massive inpouring of groceries went.   When Friday began (Arizona time), Bitcoin’s purchasing power was under 75 grocery units (assuming a grocery unit is $100). By evening, speculators added 25 more grocery units to the same unit of bitcoin.   Bitcoin, daily – shortly after breaking below an obvious lateral support level, Bitcoin did an...
  • Maurice Jackson Interviews Brien Lundin and Jayant Bhandari
      Two Interesting Recent P&P Interviews Our friend Maurice Jackson of Proven and Probable has recently conducted two interviews which we believe will be of interest to our readers. The first interview  is with Brien Lundin, the president of Jefferson Financial, host of the famed New Orleans Investment Conference and publisher & editor of the Gold Newsletter – an investment newsletter that has been around for almost five decades, which actually makes it the longest-running...
  • Targeting nGDP Targeting – Precious Metals Supply and Demand
      Everybody Has a Plan Not too long ago, we wrote about the so called Modern Monetary so called Theory (MMT). It is not modern, and it is not a theory. We called it a cargo cult. You’d think that everyone would know that donning fake headphones made of coconut shells, and waving tiki torches will not summon airplanes loaded with cargo. At least the people who believe in this have the excuse of being illiterate.   A few images documenting cargo cults on the island of...
  • Volatility Galore - Precious Metals Supply and Demand
      Fun and Regret Ex Nihilo The price of gold dropped last week, but not calamitously. From $1514 to $1459, or -$55. The price of silver dropped. Calamitously. From $18.08 to $16.75, or -$1.33. -3.6% vs -7.4%. Once again, silver proves to be volatile relative to gold.   Silver jumped off a cliff again last week – the chart formation nevertheless continues to look corrective. [PT]   In standard vernacular, the metals lost purchasing power this week. Purchasing power can...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!