As a proud graduate of “The School of Whatever Works” I for one am not afraid to “get down in the weeds” when it comes to finding ways to get an edge in the stock market. Take for example the 40-week cycle in the stock market.
I have written about this cycle several times in the past (here and here) so I won’t go into a long-winded explanation here. To make a long story short, it goes like this:
Our test starts on 9/8/1967.
*A new 40-week cycle starts exactly every 280 days after that
*The 1st 20 weeks of the cycle is considered “bullish”
*The 2nd 20 week of the cycle is considered “bearish”
(DO NOT STOP READING – I know, I know. It sounds ridiculous, right? But at least consider the results detailed below)
For testing and actual trading purposes:
*During the “bullish phase” we will hold a long position in the Dow Jones Industrials Average
For actual trading purposes:
*A 12.5% stop is used as follows: If the Dow Jones Industrials Average declines 12.5% or more on a closing basis from its price at the start of the latest 40-week cycle, the “bullish” phase of the cycle ends (to put it mildly) and the “bearish phase” begins at the close of the next trading day (this has happened twice – in 1974 and in 2008).
*We will assume that interest is earned at an annual rate of 1% while out of the stock market.
Figure 1 displays the growth of $1,000 invested since 1967using the “system” detailed above versus buying and holding the Dow.
Figure 1 – Growth of $1,000 using the 40-Week Cycle System described above (blue line) versus buying and holding the Dow Jones Industrials Average(red line); 9/8/1967-2/7/2017
To put things in perspective, Figure 2 displays the growth of $1,000 invested in the Dow ONLY during every “bearish phase” since 1967.
Figure 2 – Growth of $1,000 invested in Dow Jones Industrials Average only during “bearish phases”; 9/8/1967-2/7/2017
For the record, since 1967:
*There have been 65 completed 40-week cycles
*The “bullish phase” has showed a gain 49 times (75%)
*The “bearish phase” has showed a gain 36 times (55%)
*The “bullish phase” has generated a net gain of +3,957%
*The “bearish phase” has generated a net loss of (-27%)
*Buying and holding the Dow has generated a net gain of +2,175%
The next 40-week cycle begins at the close on 2/17/2017. The “bullish phase” extends through the close on 7/7/2017.
Welcome to “the weeds”.
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
Jay, why 12.5% stop? What do results look like ‘around’ this level e.g. 10 or 15% etc. Does the 40 week cycle work on the S&P, Q’s, Russel, other markets e.g. commodities etc. I understand that there would be less data in some cases but other market confirmation would be of interest.
General question – when you run your tests do you use in sample / out of sample data? Also interested in understanding the mechanics of your testing as opposed to the idea generation. Perhaps a post covering this aspect would be of interest to your readers?
Thanks,
Ryan
Ryan, the truth is that I stumbled upon this one so long ago I don’t even remember where it came from. Not sure if I found it myself or read about it somewhere else. In all candor my guess is that 12.5% was probably curve-fit to CYA during the 1974 bear market. Still, the only other time its been triggered was in 2008 – which came in pretty handy at the time. Jay
I’ve noticed stock indexes sometimes recover after a 10% or 20% correction. Those seem to be important psychological numbers, just like “Dow 20,000” or the 200-day MA. Maybe they chose 12.5% to give the Dow a little room to bounce during corrections that are ~10% or less. Just my guess…