Beating the Market with Two Simple Cycles (Part 1)

  • SumoMe

If I were to say to you the following:

“The only thing that matters in the stock market is whether the 40-week cycle and/or the 212-week cycle is bullish”, chances are you would say either:

a) “Wow Jay, that’s very interesting analysis.  Have you considered taking some time off?”

OR, if you were in less of a convivial mood:

b) “That’s the dumbest thing I’ve ever heard in my life.”

Either response is understandable so no offense taken.   For the record, I am not actually stating that this theory is true.  I am just raising the issue.  Now let’s look at a few numbers to back up the theory.

The 40-Week Cycle

I have written about this cycle on several occasions (for example here and here) in the past.  For our purposes we will start our test at the close on 9/14/1962.  From that date forward:

*A new “bullish phase” begins exactly every 280 calendar days

*Each new “bullish phase” lasts exactly 140 calendar days and is followed by…

*…A new “non bullish phase” which also lasts 140 calendar days.

*For trading purposes a 12.5% stop loss is used (i.e., if the Dow Industrials closes 12.5% or more below its price at the start of a new bullish phase, the current bullish phase ends there.  This does not, however, alter the start date for the next bullish phase, which still occurs 280 calendar days after the start of the previous bullish phase).

*Also for trading purposes, we assume that 1% of annualized interest is earned while out of the stock market.

Sounds ridiculous, no?  Still as a proud graduate of The School of Whatever Works I submit to you Figures 1 and 2, which display the growth of $1,000 invested in the Dow only during “bullish” (Figure 1) versus “non bullish” phases since 1962.1Figure 1 – Growth of $1,000 holding Dow Industrials only when 40-week cycle is “Bullish”; in Cash earning 1% annually while out of the market (blue line) versus Buy-and-Hold (red line);  (9/14/62-7/10/15)

2Figure 2 – Growth of $1,000 holding Dow Industrials only when 40-week cycle is NOT “Bullish”; (9/14/62-7/10/15)

For the record:

*The System gained +4,255% holding the Dow during the “bullish phase” and cash during the “non bullish” phase.

*The Dow lost -12% during “non bullish” phases.

NOTE: The next 40-week cycle “bullish” phase begins at the close on 8/7/2015 and extends through the close on 12/24/2015.

The 212-Week Cycle

The 212-week cycle is something I learned from Peter Eliades, one of the pioneers of cyclical analysis and the Editor of Stock Market Cycles, way back in 1982.  Using a starting date of 7/24/1950:

*A new “bullish phase” begins exactly every 1484 calendar days later (212 weeks times 7 days a week).

*For my purposes, a new “bullish” phase last for exactly 6 months at which point the 212-week cycle is once again “neutral” – i.e., there is no “bearish” or “non bullish”, phases, only “bullish” or “neutral”.

Figure 2 displays the growth of $1,000 invested in the Dow Industrials only during the 6 months following each new cycle start date.3Figure 3 – Growth of $1,000 holding Dow Industrials only when 212-week cycle is “Bullish”; (7/24/50-7/10/15)

This “method” is only in the market 6 months every four year and four weeks, so is not meant to be a standalone strategy.  Still, for the record:

*The average daily % gain for all trading days for the Dow Industrials since 7/24/1950 is +0.00032% (or +8% annualized)

*The average daily % gain for the Dow Industrials during the “bullish” phase of the 212-week cycle since 7/24/1950 is +0.0095% (or +27% annualized)

NOTE: The next 212-week cycle “bullish” phase begins at the close on 7/27/2015 and extends through the close on 1/27/2016.

In Part 2 we will put the two cycles together and measure Dow performance.

In the meantime, try to remain calm…

Jay Kaeppel

4 thoughts on “Beating the Market with Two Simple Cycles (Part 1)

  1. Thanks for this information, Jay. Your “school of whatever works” makes sense, especially since stock market gains tend to line up during the bullish times. Looking forward to your next article.

  2. Interesting article thanks. Here is some coincidental information. A normal pregnancy lasts 280 days from the Mother’s last menstual period. Ten lunar cycles is 280 days.

    Kind Regards,
    James

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