Last week I mentioned the fact that the 40-week cycle in the stock market was about to re-enter the "bullish" 20-week phase (at the close of trading on 3/2/07). I also sort of apologized for my apparent obsession with market cycles. So let me state again for the record, if they didn't work so dog gone well, I would ignore them completely. Alas and amen, they seem to have some value. Let's look a little more closely.
I talked about the 40-week cycle and the 212-week cycle, each of which have a surprisingly decent track record on a stand-alone basis (not that I would suggest using them that way). This week I want to talk about another cycle that has a mixed record as a stand-alone model, but has proven to be quite useful when combined with other time cycles, such as the 40-week cycle.
THE 53-DAY CYCLE
One place where I part company with a lot of people who look at cycles is that I require a cycle to be exactly the same length in time over and over. Often I will read something like "â¦and the 248-day cycle is due to bottom around such and such a date." Now to me that is useless information, entirely open to subjective interpretation. So the way I look at cycles is this â if the 40-week cycle is due to start again on a given date then that is when it start again, period.
This week I want to introduce the 53-day cycle. For our study of the 53-day cycle we will start on 3/23/67. The theory goes like this: A new "bullish phase" starts every 53-calendar days and extends for 27 calendar days (typically about 18 to 21 trading days). The next 26 calendar days are considered to be the "bearish phase." As we will see, the bearish phase has not necessarily been bearish, just not as bullish as the bullish phase. (FYI: If you think this is all completely nuts please see my DISCLAIMER from last week).
Chart 1 displays the growth of $1,000 invested in the Dow Jones Industrial Average during each bullish and bearish phase since 1967. The blue line shows the growth of equity achieved during the bullish phases and the purple line shows the same for the bearish phases.
Chart 1 â Growth of $1,000 since 1967 during bullish (blue line) phase bearish (purple line) phase of 53-day cycle
There is good news and there is bad news. The good news is that the bullish phase has clearly outperformed the bearish phase.
The bad news is that had a person actually invested only during each bullish phase he would have under performed a buy-and-hold approach. Likewise, in actuality the bullish phase actually underperformed the bearish for most of the first 20 years (1967-1987) of this study. It has only been in the last 20 years that the bullish phase has vastly outperformed the bearish phase. As a result of these factors, a trader would not want to consider this as a stand-alone model.
COMBINING THE 40-WEEK CYCLE AND THE 53-DAY CYCLE
As a test I combined the 40-week cycle with the aforementioned 53-day cycle. And here is the strategy I came up with:
$1,000 invested in this manner since 1967 would have grown to $96,818. This represents a return of 7.4 times as much as a buy-and-hold approach, which would have seen $1,000 grow to $13,955 during the same timeframe. See Chart 2.
Chart 2 - Growth of $1,000 since 1967 using cyclical method (blue line) and buy-and-hold approach (purple line)
To better illustrate the surprising success of this strategy, I broke down the performance on a decade-by-decade basis starting on 12/31/1969.
The cyclical approach grew +174.4% versus +4.8% for a buy-and-hold approach. Thus $1,000 invested using our cyclical method grew from $1,000 to $2,744 versus $1,048 for the buy-and-hold approach. See Chart 3.
Chart 3 â Growth of $1,000 during 1970s using cyclical method (blue line) and buy-and-hold approach (purple line)
The cyclical approach grew +283.4% versus +228.3% for a buy-and-hold approach. Thus $1,000 invested using our cyclical method grew from $1,000 to $3,834 versus $3,283 for the buy-and-hold approach. See Chart 4.
Chart 4 â Growth of $1,000 during 1980s using cyclical method (blue line) and buy-and-hold approach (purple line)
During the great bull market of the 1990s our cyclical method under performed the buy-and-hold approach. The cyclical approach grew +292.2% versus +317.1% for a buy-and-hold approach. Thus $1,000 invested using our system grew from $1,000 to $3,922 versus $4,171 for the buy-and-hold approach. See Chart 5.
Chart 5 â Growth of $1,000 during 1990s using cyclical method (blue line) and buy-and-hold approach (purple line)
The cyclical approach has so far grown +132.3% versus +6.4% for a buy-and-hold approach. Thus $1,000 invested using our cyclical method grew from $1,000 to $2,323 versus $1,064 for the buy-and-hold approach. See Chart 6.
Chart 6 â Growth of $1,000 during 2000s using cyclical method (blue line) and buy-and-hold approach (purple line)
So have we discovered the Holy Grail of trading? Is a calendar all we need in order to outperform the stock market? Well, despite the fact that it probably seems like I am saying that from time to time, the answer unfortunately is "no." Cycles should not be used in exclusivity. Nevertheless, the evidence in this article clearly seems to suggest that investors may be able to gain an advantage by being aware of the likelihood of the stock market to rally within certain cyclical patterns.
The 40-week cycle will be bullish from:
3/2/07 through 7/20/07 and
12/7/07 through 4/25/08
The 53-day cycle is bullish from:
2/15/07 (oops) through 3/14/07
4/9/07 through 5/6/07
6/1/07 through 6/28/07
7/24/07 through 8/20/07
9/15/07 through 10/12/07
11/7/07 through 12/4/07
Upcoming "Double bullish" Phases:
3/2/07 through 3/14/07
4/9/07 through 5/6/07
6/1/07 through 6/28/07
To search for previous articles written by Jay Kaeppel, please click here.
Staff Writer and Trading Strategist
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