102-08 Cycles in the Markets

Cycles in the Market

Over the past 200 years, much has been written about cycles, some of it very useful and some of it not so applicable to trading success. Cycles are evident in nature in the form of the earth’s rotation (days), earth’s rotation around the sun (years), the moon’s rotation around the earth (tides), the seasons, animal migration, and solar activity. Some traders believe natural cycles affect the market. In some ways, they do; for example, weather cycles can affect crop output which can affect commodity prices, affecting the stock price of a company dependent on the commodity. However, are there other cycles that can be measured for the more general stock market activity?

The effect of cycles on the economy, marketplace, and business is clear; in this section, we will look into the theory of cycles and look at how we can apply them to improve our understanding of market fluctuations and major moves. This will, in turn, enable us to make better trading decisions.

The most famous cycles are the Kondratieff Wave, Kuznets Cycle, Business Cycle, Presidential Cycle Seasonal Cycle, and Daily Cycles. There are even intraday cycles.

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The Kondratieff Wave

The Kondratieff wave measures between 46 and 60 years with a periodicity of 54 years. Based on wholesale prices in the US in the 1800s, this phenomenon has been mapped from the 1800s through to today. The last trough was 1940, and the prediction for a trough in 2000 seemed correct. However, if this cycle theory proves correct again, we will have to wait for another 40 to 50 years. How actionable this data is, is another question. Normally using statistical data, a trend/theory is proven after 12 to 16 data points which we certainly do not have here. Also, this theory is quite controversial in the annals of economists. Is it a tradable cycle? Well, not really.

The Kuznets & Juglar Cycles

The Kuznets Cycle, named after Simon Kuznets, lasts 18.3 years, and here you can see it plotted onto the Dow Jones Industrial Average starting in 1934.

The Kuznets cycle seems to work reasonably well, marking the low point of the 1930’s depression, the start of the price surge in the 1950s, the market crash of 1987, and the consequent establishment of the roaring bull market that lasted until 2000; however, its timing seems to be slightly off in 2008, as it predicted a new phase from 2006 onwards. However, all in all, it is a very interesting element of cycle analysis.

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Clement Juglar was one of the first to develop an economic theory of business cycles; the Juglar cycle is approximately half of the 18.3-year cycle at 9.2, fluctuating between 7 and 11 years. This highlights the concept of nominality, meaning each larger wave detected seems to be twice the size of the next smaller wave. The Juglar cycle is of a similar wavelength to the 10-year “stock market cycle.”

There are also smaller cycles existing within the larger cycles.

The four-year Business Cycle is popular and trustworthy. This suggests business and production output fluctuate within a regular four-year cycle. This means within four years, we tend to see a bull market rise and fall.




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