Stock Market Cycle Analysis
Stock market historians generally accept the cyclical nature of the stock market. But they have not agreed upon the relationship between these cycles and other events, nor have they agreed on the time frames of the various cycles proposed. Many stock market theorists have propounded cycle-based trading methods, but with mixed results.
Other People Are Reading
-
A Typical Market Cycle Analysis
-
Writing in Investopedia, Matt Blackman notes that "all markets are cyclical." He sees four phases. In the "Accumulation Phase" following a market bottom, early adapters begin to buy. In the "Mark-Up Phase," more investors join in and the media reports increased buying, but also continuing problems like unemployment. In the "Distribution Phase," the previous positive sentiment begins to sour. Early investors now begin to sell. The market moves up and down within a trading range. In the "Mark-Down Phase" selling accelerates while some frightened investors hang on because they hope to regain their losses.
How Long Does a Cycle Last?
-
To profit from Blackman's analysis, you have to know your current location in the cycle. This proposes many problems. When a market moves decisively downward, which happened on March 6, 2010, that could signal the kind of panic that, according to Blackman, accompanies the Mark-Down Phase. It could also signal one of the transitory low points (called double or triple bottoms) that occur within the Distribution Phase. Or, as some have since speculated about the March 6 meltdown, it may have no cyclical significance at all, and resulted from a computer glitch.
-
An Eccentric Cycle Theory
-
The difficulty of understanding how long a cycle lasts has encouraged theorists to find some objective way of determining cycle length. In the 1970s Martin Armstrong, a commodities trader, noticed that one group of market cycles lasted 8.6 years. He then realized 8.6 years equaled 3,141 days--the number pi times a thousand. From this he concocted a predictive market theory, with cycles lasting pi times 1,000 days each. Unfortunately, he defrauded a number of investors who bought into his theory and, as of the fall 2009, had spent nine years in jail.
The Fibonacci Theory
-
Another popular cycle theory relates market cycles to Fibonacci series. Fibonacci series begins with 0 and 1. To get the next number you add the previous two, which produces this series: 1, 2, 3, 5, 8,13...and so on, to infinity. The literature relating Fibonacci series to stock market cycles abounds. One such book proposes a "harmonic unity Within Market Price and Time," illustrating the point with a photo of a sunflower. Another proposes that you create "Fibonacci price cluster setups," by overlaying Fibonacci number series on a stock's price chart. These books point to past market events that illustrate and support the theory.
The Problem With Cycle Theories
-
In retrospect you can find days or weeks of market movements that support a given theory. But you can't tell which moments support the theory and which don't when you need the information--in the present. You can observe this not just about cycle theories, but about even Benjamin Graham's respected approach to value investing. If you could invest according to some external criteria and always do better than the market, quite soon everyone would use it. That hasn't happened.
-
References
Resources
- Photo Credit stock market analysis screenshot image by .shock from Fotolia.com
