Larry Williams
Stock Trading and
Investing Course
Part 1
A comprensive guide
to buying and selling
the right stocks at
the right time.
Contents
The One Sure Thing of Stock Investing 4
Yet, Market Timing is So Critical 5
The 10 Year Pattern in the United States Stock Market 6
Breaking it Down to Specifcs… Taking it Year By Year 9
My Four Year Discovery 25
Dispelling Some Notions 36
The Best of the Best, 1900 to Date 39
Politics… A Special Consideration 39
Fundamentals Matter 47
P/E Formula for Predicted Future Returns 57
Disclaimer 64
© 2015 Larry Williams CTI Publishing. All Rights Reserved.
Larry Williams Stock Trading & Investing Course
Part 1
Market Timing
Te Stock Market
... A Long Term
Perspective
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I wish someone would have set me down for a “Dutch Uncle” stock market
talk when I began following the markets in 1962. My life would have been
far easier and I’d be a darn site wealthier. So that’s where I am going to begin
with you, a frank, straight from the heart lecture based on my experience and
research.
- Larry Williams
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The One Sure Thing of Stock Investing
This frst lesson of investing may well be the hardest to learn, but the simplest way to state it is just
this:
The long term trend is always up.
Never forget that lesson, and never let anyone steer you off the long term upwards path stock prices
have always been on. Oh, I know full well that stock prices often decline, and may for a year or two,
or three… but eventually they always --- yes always --- make new highs.
The purveyors of pessimism, the Bears, will always be there berating the world, the economy, the
political powers of the day and will scare you out of more profts than you will ever lose from being
long (at least if you follow my advice in this course). The purpose of the Bears is to frighten you
into inaction, to freeze your assets or worse yet, place them in the wrong investment at the wrong
time.
In an article in Forbes Magazine found:
Over the long term, stocks have historically outperformed all other investments.
From 1926 to 2014, the S&P 500 returned an average annual 10.12 percent gain. The second best
performing asset class was Bonds. Long term U.S. Treasury notes returned, on average, 5.5 percent
over the same period. Real estate has also been a good investment, but much of the “gain” is illu-
sory, for the average person has many costs of holding in real property: taxes, interest, insurance, and
upkeep. A stock investor has none of those headaches or costs!
I am talking about the very long term here and will acknowledge over the short term, stocks can be
hazardous to your fnancial wealth. On October 19, 1987 stocks experienced the worst one-day drop
in stock market history - 22.6 percent. If you had invested in a NASDAQ index fund around the time
of the market’s peak in March 2000, you would have lost three-fourths of your money over the next
three years. I was not invested at that time based on the simple rules I teach.
Danger lurks on Wall Street, that’s for sure. But you have to show up at work to get paid, and you
have to invest with a belief in the future for investments to pay off.
The trend is up and any long term view or position against the trend will punish the
investor.
There have been great times and bad times since 1926, a time frame that covers the two worst crash-
es the market has seen. Yet on balance, there was a 10.12 percent gain available and, as I will show
you, a lot more for the investor that did not get sidetracked and invested correctly.
There are cycles or patterns to the very long term stock market movements that I have learned and
observed in operation that I would like to share with you. There really is more method than madness
to long term stock market movements than you might suspect.
Long term investors can become wealthy in the stock market. In and out traders, “shooters”, and
chasers of hot stocks are destined to lose. The approaches here will help such dreamers, but the sure
thing comes from investing… not trying to hit home runs and get rich quick. Don’t take my word for
this…take the chart of the Dow from 1925-2015.
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What an impressive view of the past and future... contrast this view with what real estate has done!
Yet, Market Timing is So Critical
It’s typical for brokerage frms and mutual funds to stress that market timing is not important; that
you are in for the long haul so you want to be fully invested all the time. When a traditional broker
is asked about his sell strategy you may hear something like this, right out of a broker’s procedure
manual:
“Don’t you know that with a Buy and Hold strategy for the last 35 years, $1,000 would have become
Chart 1: Dow Jones Industrial Average monthly Price Bars 1925 to 2015
Chart 2: Home Price Index
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$11,000? That is a very good 10% annual return. A study our frm did points out that if you were
not in the game, you were out on the side line and missed the 5 best performing days, each year in
the market from 1966 to 2001, then that $1,000 investment shrinks to $150.00. That’s a -5.3% an-
nual return.
It is impossible to time the market. You have to be right twice. First when you decide to exit the
market and second when you re-enter the market. So just sit back and let me worry about your port-
folio. Stay fully invested.”
What he fails to tell you is if you miss the 5 worst days in the stock market during each of those
35 years, the $1,000 becomes $987,000, for a 19.3% annual return. Suffce to say, many studies
now show that missing the worst days is more important than participating in the best days.
That’s something I have always stressed and am willing to do… sit on the sidelines so we don’t
get clobbered as so many have. There is a time to sow and a time to reap for investors as well
as farmers. So, while I am always long term bullish I want to teach you now how to sidestep
major declines while making certain you are long at major buy point.
The 10 Year Pattern in the United States Stock Market
“It’s about time.” My 1978 U.S. Senatorial Slogan!
Edgar Lawrence Smith: The All Time Market Genius
No one has a better track record of predicting the future than the very little known Edgar Lawrence
Smith. Don’t take my word for it, read what super investor Warren Buffet said in 2001:
“And then came along a 1924 book--slim and initially unheralded, but destined to move markets as
never before--written by a man named Edgar Lawrence Smith. The book, called Common Stocks as
Long Term Investments, chronicled a study Smith had done of security price movements in the 56
years ended in 1922.
Smith had started off his study with a hypothesis: Stocks would do better in times of infation and
bonds would do better in times of defation. It was a perfectly reasonable hypothesis.
But consider the frst words in the book: ‘These studies are the record of a failure--the failure of facts
to sustain a preconceived theory.’ Smith went on: ‘The facts assembled, however, seemed worthy
of further examination. If they would not prove what we had hoped to have them prove, it seemed
desirable to turn them loose and to follow them to whatever end they might lead.’
Now, there was a smart man…” Warren Buffet
Yes, as Warren points out, Smith was not only ahead of his time, but brilliant. Buffet based his
investment philosophy on the kernel of truth Smith set forth in 1922. But Smith went beyond that,
as he also constructed a time line for investing. This was something he called the decennial pattern,
a pattern obtained by averaging stock prices for each year from 1860 to 1938. This was presented in
his 1939 opus “Tides in the Affairs of Men: An Approach to the Appraisal of Economic Change.”
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Now, old Edgar put forth the view in 1939 that stock prices moved in a certain pattern during each
decade. The basic pattern, he claimed, was for stocks to end a decade, years ending in 9 (like 1929)
with stock market weakness and then see bottoms in years ending in 2 like 1922, 1932, etc.
The Past Is Your Future
Chart 3 shows the pattern on data from 1900 to 2000. We see the pattern has continued.
It is of great interest to me that while Mr. Smith’s work was completed in 1938, we saw declines
around 1959, 1969, 1979, 1989 and of course a bull’s eye in 1999. All clearly foretold by the 1938
writings!
What you see in Chart 4 is the general long term road map I expect the market averages will traverse
every decade.
My long time friend Yale Hirsch (whose son Jeff has slipped into dads’ shoes) Chart 5 in 1969 based
on the work of Edson Gould (another supporter of Smith’s work).
Chart 3: Dow Jones Industrial Average Decennial Pattern
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What Yale did was to carry on the averaging of stock prices from 1861 to 1960 with an overlay of
how stocks performed in the next bull markets. As you see in Chart 5, it’s a very good ft. This 10
year pattern is the best general road map you will ever have to help navigate the waves of investor
sentiment and value over the years. It is probably the cause of the 10.5 to 11 year Solar Cycle, for
those wanting a reason why.
Chart 4: Dow Jones Industrial Average Decennial Pattern
Chart 5: Decennial Pattern
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Breaking it Down to Specifcs… Taking it Year By Year
The Phenomenal “Five” Years
I have learned a lot about the markets from Yale Hirsch (all he learned from me was how to catch
trout). Yale has also uncovered a second tremendously important point within this overall pattern of
price swings. Yale pointed out in his book “Don’t Sell Stocks on Monday” that the middle year of
this ten-year pattern tends to produce some real rock and roll upside markets.
The following table shows the average gain of each individual year of the decade. We have had 11
decades under our belt to study. What we see is that in 11 out of 11 times, the ffth year in the decade
produced a rally or a market-up move making it the strongest year in the ten-year pattern.
Years ending in eight, showed winners 8 out of 10 occurrences. Years ending in seven and eight also
showed eight out of 11 years of rallies. The poorer performing years were those ending in seven and
those years ending in a 0... just as Smith’s work had suggested.
Te Ten-Year Stock Market Cycle: Year in Decade
Decades1st2nd3rd4th5th6th7th8th9th10th
1881-1890----209-7-23-14
1891-1900181-20-31-21319714
1901-1910161-1925163-333714-12
1911-192013-14-9323-311613-24
1921-1930720-3192352636-15-29
1931-1940-47-1848-23928-34130-12
1941-1950-156211433-10-2-21120
1951-1960157-339234-133311-4
1961-197027-1318139-111712-14-1
1971-19801012-19-323218-1021126
1981-1990-71318026-----
1991-2000
2001-2010
Up Years78461173883
Down Years3264037227
Total %
Change25%32%27%64%254%47%-74%184%41%-36%
Based on average December prices
Table 1: Average % Gain in Standard & Poor’s Composite Index of Each Decade
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Larry Williams Stock Trading & Investing Course
That is well and good, but of greater importance to an investor is not simply if a year was up or
down, but how much money was made in the year.
Without a doubt the ffth year of the decades has been where the bulk of wealth has been made.
Yale’s work showed a total gain of 254 percent in all of these fve years, making it heads and shoul-
ders above even the second-place eight years that came in with a 164 percent gain.
What Yale had no way of knowing is what would happen in the 1990’s or 2000’s. Those years were
all out of sample. It was unknown at that time how 1995 would perform, would it follow this tra-
dition? Or would it break the consecutive string of the 11 winning years ending in a 5? And how
about that eighth-year in the pattern? Would it also produce gains similar to those as it had in the
past?
From 1881 through 1991, years ending in fve produced an average gain of 31.3 percent. Years end-
ing in an eight produced an average gain of 14.9 percent.
1995 produced a spectacular gain of 33.5 percent by the Dow Jones Industrial Average. 1998 pro-
duced a gain of 14.9 percent in the average, making these the two best-performing years of the 1990
decade! Just think, the gains of 1995 and 1998 were right on schedule with the expectation for a
forecast made generations earlier! Keep in mind that forecast was essentially locked into iron shack-
les in 1960. Yet it was able to correctly point investors to the two most proftable years in the 1990-
2000 bull market. Perhaps, just perhaps, the stock market is a little bit easier than you ever thought.
I suggest you take a great deal of time to restudy and view the longer-term charts, so you can get a
sense of this phenomenon, perhaps pick up the cadence at which the market moves. For a real lesson,
let’s take a look at all years ending in 5 from 1905 forward.
Chart 6: Dow Jones 1935
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Chart 7: Dow Jones 1945
Chart 8: Dow Jones 1955
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Larry Williams Stock Trading & Investing Course
Chart 9: Dow Jones 1965
Chart 10: Dow Jones 1975
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Chart 11: Dow Jones 1985
Chart 12: Dow Jones 1995
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Are you a believer year? I’m a huge fan of the fve year bullishness. Our next chart of stock prices
from 1795 to 1895 shows the same pattern!
To that extent the data from 1795 to 1895 is helpful, as it suggests we should be looking for a low in
April or June of 5 years… that was the typical seasonal pattern a few hundred years ago.
Chart 13: Dow Jones 2005
Chart 14: Dow Jones Industrial Average 5 Year Pattern Based on 1795 - 1895 Data
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“DEJAVU ALL OVER AGAIN --- It’s probably a good thing for us to revisit this pattern to better
understand 2005. While the 100 years from 1795 to 1895 shows early year weakness, the data from
1905 for the next 100 years is quite similar and more so in this one important respect:
The bulk of all ‘5’ year gains came from the middle of June into the end of the year.
In other words there is a ‘sweet spot’ to these years… a time when the bullish ball gets the most pop
off the racket and that time is now upon us. Only one 5 year in the last 12 such years has the market
not exploded higher. That “poor performer” was 1975; but prices were still substantially higher 6
months later.
The “Sure Thing Seven” Years
Clearly, some years are better for buying than others. The focus of my work has been to ferret out
the best years, the most explosive years… the ones with the greatest odds of having signifcant
upside action. Sure you can buy and hold for twenty years and make money… no brilliance there.
What I want is to make my wagers when the dice are loaded.
My insight and addition to our knowledge of the ten-year pattern is that there is yet one more place
to look to buy stocks. Is it just coincidence that the 1960 road map, which suggested a major buy
point at the end of years ending in seven, scored with big wins in 1977, 1987 and 1997? Each of
those years provided investors with excellent end of a year buy points. I suspect not, I suspect there
is something going on in the general economy, business cycle… call it what you may, because this
pattern is simply repeated too many times, too often, to be just some random fuctuation of numbers.
It appears God may not play dice with stock market numbers.
It’s now time for you to study the Axe-Houghton Index of stock prices from 1854 forward (Charts
15 & 16). The same phenomena can be found to have occurred. Late in 1857 stocks bottomed, then
almost doubled in price. The fall of 1867 produced an equally spectacular rally that continued all the
way to the 1869 market high.
Wouldn’t you know it, when 1877 rolled around, stocks again bottomed about midyear. Then later in
1877 a two-year bull market started steam-rolling. That takes us to 1887 when again, in the fall of
the year, stock prices bottomed and then began a two and half-year bull move.
1897 saw pretty much the same thing. Prices bottomed earlier in the year. We had a summer run up,
a pull back in the fall of the year (the 7 year buy zone), and then stocks took off on another two-year
bull market.
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This becomes almost uncanny, especially when one looks at the 1907 bottom. It came late in the
year, about December and began another two-year bull market. 1917 was almost a replica of 1907;
again prices got hammered down into a low at the end of that year before they took off on another
two-year bull market.
Then there’s 1927. What more can one say? There appears to be no major low here. Prices went
straight up... but if you look closely you will see that in the fall of 1927 prices stabilized briefy, pull-
ing back off the year’s high before another two-year bull market surged into the 1929 top.
Well, that brings us to 1937, a year stocks declined with a vengeance, bottoming in the frst-quarter
1938 and another two-year bull market began. So this time the seven-year phenomenon was off by
about three months. Big deal, that’s close enough for government work. In fact that’s pretty much
what happened ten years later in 1947; the average moved sideways for most of the year, came down
in the fall of ’47, and bottomed in mid-February of 1948. There was no two-year bull market fol-
lowing, prices simply had a huge run-up in 1948.
In 1957 stocks followed the model perfectly. There had been a run-up in the frst part of ‘57. Price
then crashed, coming into an October low or a bottom, to begin one more substantial up move in the
American stock market. This was in perfect harmony with the seven-year price pattern.
Ten years later yet one more wonderful buy point was presented. Stocks rallied during the frst
of 1967, then took a tumble into the fall of that year. The market bottomed in February 1968 and
started, not a two-year bull market but, a strong rally for the rest of 1968. Clearly, history shows
there was a very nice buy point in late 1967 and early 1968.
Does it appear to you there is something to this phenomenon? It does to me. Is there an explana-
Chart 15: Axe-Houghton Index of Stocks 1854 - 1902
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tion for it? Frankly I can come up with some explanations, but I’m not certain they prove a point
anymore convincingly than a study of fve years and seven years, as well as the two and three years
in terms of historical precedent. After all “the document speaks for itself.” The charts don’t lie. It
is there, and it’s up for us to learn how to exploit the past so our investments might be better in the
future.
Tere has been a very distinct price pattern for years ending in seven going back now for 120 years
this pattern has persisted setting up some marvelous selling opportunities, like 1987, 2007, 1977
or 1937. In instance afer instance we have seen substantial sellofs at this time. Obviously to me as
a long-term investor this means that I want to lighten up on my portfolio somewhere around the
middle of such years this cyclical pattern has just been far too strong to not honor.
The 7 year pattern calls for early in the year strength, often quite spectacular, with a bear raid on
stocks kicking off in late July.
Chart 16: Axe-Houghton Index of Stocks 1900 - 1935
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You will see this on the following chart starting with 1927 and moving forward.
Chart 17: 7th Year Pattern of Dow Jones Industrial Average
Chart 18: 7th Year Pattern of Dow Jones Industrial Average 1927
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Chart 19: 7th Year Pattern of Dow Jones Industrial Average 1937
Chart 20: 7th Year Pattern of Dow Jones Industrial Average 1947
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Chart 21: 7th Year Pattern of Dow Jones Industrial Average 1957
Chart 22: 7th Year Pattern of Dow Jones Industrial Average 1967
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Chart 23: 7th Year Pattern of Dow Jones Industrial Average 1977
Chart 24: 7th Year Pattern of Dow Jones Industrial Average 1987
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No one knows if this is the shape of things to come for 2017 it may not be, but as I see it, the president
of sellofs starting in the latter part of such years is just too strong. So I will be on the sidelines
somewhere in June July of that year.
Chart 25: 7th Year Pattern of Dow Jones Industrial Average 1997
Chart 26: 7th Year Pattern of Dow Jones Industrial Average 2007
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Of course what we’re talking about here is just timing. We still have to get into the issue of selec-
tion; what stocks to buy. However, many investors have a pretty good idea of the companies they
want to purchase; they just don’t know the right time to do so. Buying or selling them at the right
time does make a huge difference. As an example, on balance, if you purchased stocks at the start the
of sixth year you had to wait until the eighth year to make money. Another example, on balance, if
you purchased stocks in the years ending in nine, you had to wait almost fve years before your aver-
age stock showed a proft. So, timing your entries and exits in the stock market is critical. It makes
a huge difference. I believe one way to gain an advantage in this business of speculation is to follow
the ten-year price pattern.
It would seem unreasonable to expect stock prices to follow some mythical and perhaps even mysti-
cal road map printed in the 1960’s on out into eternity.
Yet, that is precisely what has taken place, by and large. Which raises the question, will markets of
this decade continue to follow this road map? Honestly nobody knows for sure, that‘s a judgment
call that will not be answered until the time period is over. However, we can look at what has trans-
pired and watch the remaining years to see how closely this pattern is repeated. Frankly, I suspect
it will be repeated, and closer than you might imagine. The acid test was that 2005 was another up
year, and 2007 took a mid year hit. The overall price pattern has generally followed the ten-year
road map. I think this gives even more validity to this concept and should give investors more cre-
dence and more confdence in using this is as a general guideline of investment activity for years, or
perhaps decades, to come.
What I hope I have accomplished is to show you that the market does have repetitive tendencies to
how it unfolds over the years. The framework of reference does indeed seem to be the decennial pat-
tern. Within that framework there are particular times that one should look for optimal buy points.
The frst would be years ending in 2’s and 3’s... that are followed by the incredibly strong 5 years.
The next opportunity to look for a buy point is in the late fall of years ending in seven.
Finally, a long-term investor should never forget that the majority of major market highs have come
in years ending in nine and zero, such as 1929, 1939, 1969, and 1999.
I look upon this decennial pattern as the most logical road map that prices will follow. I certainly do
not expect prices to mock this price pattern precisely each year or each decade. It wouldn’t be any
fun to trade stocks if it were that easy. But we are given excellent guidelines here of which turns in
the road to take, as well as when to take them.
The Straight Eight Factor
While I have pointed out a seven-year low-point phenomenon, there’s another part to the decennial
cycle or pattern I would like to share with you.
Simply stated, it’s this; years ending in an eight have shown a unique ability to start major market
rallies. Usually this begins in the frst three months of that year. It is almost as though the seven-year
low-point, such as the one presented to investors in 1987, gets so oversold, or perhaps undervalued,
that prices usually have easy sailing for the next year, the one ending in an eight.
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Again, I’m not certain why this phenomenon exists. Some say it’s due to sun spots, some say baro-
metric pressure, and I’d say Federal Reserve activity. While there’s plenty of room for discussion
about the cause of this phenomenon, there can be no discussion about whether it exists or not.
In researching prices back to 1850 I noted that there have been 15 times where we have seen this
pattern appear. That means we have 150 years experience with this intriguing eight year opportunity,
which I think you’ll fnd presents investors with a superb buying opportunity.
Some of the most exponential moves in the entire history of the stock market are those which started
with years ending in an eight, such as 1888, 1928, 1938 and no one could ever forget 1998. That
year was so strong everybody began buying every type of stock, whether good or bad, just before the
market debacle… which came to light in 1999 and 2000, just when it should have!
The only year that did not produce a substantial bull market which ended with an eight was 1948.
This was not a bad time to buy stocks, just not a phenomenal one. There was a large rally off the
March lows of that year. The March low in the Dow Jones was 165, serving as the base for a rally
up to the 195 for an 18 % gain during the year, which closed for the year at about 177.
The strong point of these eight-year patterns is that it appears one should buy about the eighth week
of the eight year. That sure worked wonders in 1928, 1938, 1948, 1958 and so on. Had you waited
until the eighth week of 1978 you would have purchased one week from the ultimate low point for
the year, while in 1988 and 1998 the low came just a few weeks earlier in January.
The study of this eight year pattern should certainly focus our attention, to be alert, for an early buy
point in the years ending with eight. Accordingly, a wise investor should pay particular attention to
2008, 2018, and yes we can even forecast out to 2028... when I expect the market to have signifcant
upside performance.
Table 2 below presents the results of buying in March of the years ending in an eight, starting in
1878 through 1998. The exit is on the close of last trading day in December. While this is not the
ideal buy point every year, I believe it does illustrate the important consideration of looking for an
early buy point to be long stocks in this subset of years.
I am showing Robert J. Shiller’s data to refect the market, using the S&P Composite Stock Price
Index starting in the 1870’s.
These monthly readings can be seen at http://aida.econ.yale.edu/~shiller/data.htm.
YearMarch PriceDecember Price% Gain
18783.243.456
18885.085.2416
1898 4.655.2621
1908 6.879.0321
19187.287.90 9
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192818.2524.826
193810.3112.6923
194814.315.17
195842.1153.4927
196889.09106.5019
197888.8296.118
1988265.7276.5 4
19981023.71190.016
20081316.94877.56-33
AVERAGE GAIN: 12%
Table 2: % Gain of Buy in March for the 8th Year from 1878 - 2008
This is certainly an impressive table of stock market performance, particularly when one considers
how far back in time we have gone. It illustrates that the decennial pattern has twists and turns to it
along the way, to which an investor should be able to take advantage of.
My Four Year Discovery
Future wealth is purchased with the scrutiny of the past.
Thanks to the writings of Gould, Smith, Gaubis, and Hirsch we have a good idea of when to expect
signifcant stock market highs and lows within the decennial pattern. It is a wonderful general road
map of what is most likely to happen in the future and alerts us to the ffth and seventh year buying
opportunities.
But it could be more specifc... after all, we all want to know not only the precise week or the day but
also the exact time of day to buy or sell our stock. I think that’s a stretch... but we can get a whole
lot closer to determining the best time to buy with several different market tools.
The next bit of market knowledge I’d like to share with you is something I literally stumbled across
in 1970. It was the key ingredient in my ability to forecast the 1982 and 2002 stock market low
point… four years in advance, as well as the 2006 low! The bear market of 1970 had been good to
me. I’d made my frst so called “killing” in the markets, about $300,000. That’s not much for now,
but back then as a 28 year old kid it counted and gave me a hefty dose of young man’s cockiness.
My “attitude” of being so smart as to fnd the bear market and sell it short also convinced me to stay
short after the low. I gave some of the money back, but was still nibbling on the short side in Oc-
tober of that year... when stocks rallied through the roof. Ouch! That hurt the pride as well as the
pocketbook.
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Larry Williams Stock Trading & Investing Course
I eventually wised up and went long. Late one night as I was licking my wounds, staring at old
charts, I saw something which changed my entire perspective of the longer-term timing.
What I noticed was the four-year space on my charts from the low of 1962 to 1966 to 1970. That
really got me to wondering, “was there some repetitive pattern at work here that no one had told me
about?” My father always told me that the little success I would have in life would be due more to
hard work and luck, than intelligence. With that thought in mind I began pouring over all the old
charts I had collected.
And there it was... going back in time... from 1962, there had been an important market low four
years earlier, in 1958! That got me excited. So, I next looked back four more years to 1954 and there
it was... the start of another bull market. By now my heart was pumping... had I found something
here? What happened in 1950? It was back to the charts and back to the start of another bull mar-
ket!
I was impressed! But, it just didn’t seem to make sense to me that we would have market lows
with such repetitive accuracy. What’s more, why didn’t they teach me this stuff in college or at least
someone talk about it in a market book? Why hadn’t anyone written about this? I had never seen this
in print; it was a sleepless night for me. I couldn’t stop thinking about the powerful effect of market
low, after market low, every four years. It was one of those things that just seemed too good to be
true. Was it possible my phenomenon would work in the future?
Market information of this nature plays tricks with one’s thinking. I had pretty well proven, to my
satisfaction, the power of the four-year phenomena --- but then reasoned that if I knew it, then it
would not work in the future. On top of that, my reactive mind added the idea that I needed more
examples out of the great unknown of the future to “prove” my discovery.
So, I waited with fear and trepidation, hoping no one knew my “dirty little secret” to see how this
four year “whatever it was” would pan out in the future. Along came 1974, again it worked. Then
1978 and a decent buy point surprisingly developed considering the stagnant market we had been in.
By this time I had “collected” three out of sample instances of the phenomena. They had all worked!
In some uncanny way stocks had continued bottoming in phase with this four-year cycle.
If that’s all you knew about the stock market back in 1978 you would have been waiting for the next
buy point to come four years later in 1982. Check your charts... that is exactly when the longest last-
ing bull market in the history of mankind began. Add four years to 1982 and you get 1986 as our
next projection. Even a cursory glance of the charts shows one yet another wonderful buy point in
the fall of that year!
Truly, my confdence in this phenomenon had increased to marked degree. To think an observation
made in 1970 was still having tremendous market success 20 years later. That was proof to me of
the validity of what I had seen late that night, when I was licking my wounds of being bearish too
long. Necessity, it certainly is the mother of invention!
The next charts break the market activity down so that you have a better view of what has taken
place from 1938 forward. I marked off the four-year phenomena and the low points. I ogle at these
charts like a 14 year old boy eyeballs at his frst copy of Playboy magazine. They can greatly add to
your understanding of major cyclical moves and help you build confdence on your own.
It is not to say that a stock market low was found exactly every four years but that the next projected
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best buying opportunity for market low will be approximately four years from the last one. In other
words the cycle can shift back and forth a little bit but it doesn’t matter all we need to do is go back
and fnd four years ago then come forward four years and there is a buy point.
Chart 27: 4 Year Phenomena Dow Jones Industrial Average 1926 - 1941
Chart 28: 4 Year Phenomena Dow Jones Industrial Average 1941 - 1953
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Chart 30: 4 Year Phenomena Dow Jones Industrial Average 1970 - 1985
Chart 29: 4 Year Phenomena Dow Jones Industrial Average 1956 - 1971
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Chart 31: 4 Year Phenomena Dow Jones Industrial Average 1982- 1996
Chart 32: 4 Year Phenomena Dow Jones Industrial Average 1994 - 2009
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This simple little stock market forecasting technique suggests we should be looking for by points in
early 2017 and early 2021.
So Easy a Kid Can Do it
This four-year phenomenon is so simple, even a kid can do it! We simply add four years to the Octo-
ber buy point in 1986, and our imagery 14 year old kid could expect to call for a market low in the
fall of 1990. At the ripe old age of eighteen he watches a bull market begin. Well, that’s precisely
where a year and half-year bull market began. Imagine, we could have kids beating the pros with a
market timing system so easy to follow, all it needs is four fngers. Throw away the rocket science
math. Leave your lap top at home. You don’t even need a computer!
Chart 33: 4 Year Phenomena Dow Jones Industrial Average 2006- 2015
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Our hypothetical kid investor now adds four years to the low in 1990 and makes this outrageous
forecast that stock should bottom in the fall of 1994. He’s not a kid any longer he’s now 22. Yet,
he beats the pants off the Wall Street experts, as the fall of that year began one of the most dramatic
price increases mankind has ever seen, an exponential rally similar to that leading to the high in
1929. Not only did the Dow Jones Industrial go up, virtually everything rallied; junk stocks, tech
stocks (is there a difference?), blue chips, red chips... everything rallied, everyone made money...
following the kid investor’s forecast to buy stocks in 1994.
As our kid investor approaches the ripe old age of 26, he’s looking for another market bottom, four
years after the one forecast in 1994. He’s made a killing in the ensuing market rally, so he’s got
plenty of cash to plunk into a market buying opportunity. Fortunately, he did not go to Harvard
School of Business, nor the Wharton School of Finance. He was smart enough not to listen to ana-
lysts, TV reporters, or read the Wall Street Journal. He just had this thing that about every four years
there should be a market bottom.
Our hypothetical investor is a little perplexed once 1998 rolls around. By now he is reading the sup-
posed wisdom of Wall Street. The vast majority of the analysts he discovers are calling for a major
stock market crash, as he kind of thought might happen (because most 4 years have early and mid
year weakness leading to a low). In the summer of that year prices take a terrible beating. Many
investors thought this was the slide that in reality came two years later. The air is thick with bearish-
ness; you could slice it with a knife in October of 1998. That is precisely when our rapidly maturing
kid investor decides to belly up to the bar and buy stocks one more time in the fall of that year. The
entry point is simple; it is four years after his 1994 wealth-making foray in the market place.
His ignorance or lack of market understanding, college degrees, and all of that paid off in spades, as
stocks began another 18 months of an almost vertical market rally. His timing could not have been
more impeccable! Once more our inexperienced, uneducated, but by now fabulously wealthy, kid
investor had hit it right on the button.
Chart 34: 4 Year Phenomena Dow Jones Industrial Average 1986- 2014
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He did what the pros were not able to do... he did what the fund managers were not able to do... what
the brokers and investment advisers were not able to do... he outsmarted them all with his annual
four-year forecast.
The Meaning of 2002 - “142 Years of Market Success”
Read now what I wrote in 2001…
I have stock market prices as far back as 1854. It appears this four-year phenomena began operating
in 1858. The market was close to an important low which actually came in 1859. The next indica-
tion would’ve been four years later in 1862, with one of the strongest bull markets of the entire 1800
time. Fast forward in to 1866 where we can fnd a low point established in the fall of that year, con-
summating into the beginning of the 2 1/2 year bull market.
You know the drill; we add four years to 1866 and come up with 1870 as a buy point in the stock
market, which was exactly on target. Michael Jordan, was never more accurate. Four more years
produces 1874. That did start a nice up move into 1875, leading into one of those long-lasting bull
moves investors dream of. Our next buy zone would of course be 1878, which was a spectacular one
in that the equity market danced to the bull’s tunes in perfect syncopation with our four-year phe-
nomenon.
This of course meant we would next be looking for a buying opportunity in 1882. Shucks, this one
was not so good. It fat-out did not work; prices continued going down until 1884. However, any
money lost at that buy point was recouped four years later as 1886 heralded in another bull market
than did not culminate until 1893.
Our next four-year phenomenon buy point was scheduled for 1890. Interestingly enough, the fall
of that year did present a wonderful buy point for a bull market that lasted into the winter of 1893.
Again, the four-year phenomenon scored a major victory... the averages rallied.
The next call was for a low in 1894. This one was a bit premature. Yes, prices did rally off the low
of the year of 1894, but the real market low came in 1896. Our patient investor awaited the next
buying opportunity to occur in 1898. That patience was rewarded with substantial investment gains
as the market took, off once more in line with our four-year phenomenon.
Oh my gosh... the turn of the century had taken place, a millennium had come! Could, and would,
this handy dandy little pattern work in both centuries? It would suggest to our investor back then to
purchase stocks in 1902, four years after the 1898 buy point. Unfortunately this market forecasted
turning point was not so spectacular... prices did rally late in that year but came down rather sharply
in 1903. Four years later we would’ve looked to step in again on the long side as a buyer in 1906.
Our reward? Failure.
1910 would’ve presented us the next opportunity to see if stock prices were moving in phase with
the four-year phenomena. Given the prior two misses, I’m sure we would have been shaking in our
boots, wondering if this phenomenon had started to falter. Because while prices did rally at this
time, it took a while and there certainly was no spectacular up move.
Then, in gang buster like fashion, the four-year phenomena started to click in like digital clockwork.
A market low came in 1914, 1918, 1922, 1926, none appeared in 1930, but reappeared in 1934,
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1938, 1942, 1946, 1950, 1954, 1958, 1962 and onto the present. Four years after four years, in an
almost robot like fashion, the phenomena kicked in working as well in the second 100 years as it had
in the frst.
Clearly one can learn from the past, and the lesson that I see here is to expect stock market lows in
harmony with these four-year phenomena. That means we should expect a low in 2002 (1998 + 4)
which just so happens to coincide with the decennial road map forecast for an important market low
in the 2002 - 2003 time period.
Double Confrmation
In other words, we kind of have a double confrmation here --- both major long-term cyclical refer-
ence frames are telling us to expect an up-move in stock prices at this time. While the decennial pat-
tern is something general we can most defnitely focus or narrow down our window of opportunity
by a substantial degree in synch with the four-year phenomena pattern, thus isolating the best of the
best.
As an aside, we can also see, in that sense, a market bottom is called for by the four-year phenomena
in 2006, four years after the 2002 low, which dovetails with our ffth year scenario. This suggests to
me not only will the stock market rally in 2005 but a buy point to be found in 2006 as well, indicat-
ing some type of substantial rally in stock prices is out there for us to take advantage.
Even better yet may be the 2014 market forecast low, thanks to the four-year phenomenon, which
then leads into the ffth-year expected rally in 2015. Should you and I both be so lucky as to still be
trading at that time, you know which side of the market I’ll be on, and you know I will have covered
my short sales.
Just so you know, the use of the decennial pattern as well as my four your phenomena is not some
conjecture on my part, some bit of numerology applied to stock prices. Let me tell you a little bit
more about my last book touching on this subject. In 1981, while standing at a supermarket check-
out counter, I noticed the then best selling book, “How to Prosper in the Coming Bad Years” by
Howard Ruff. Standing there it struck me that what investors needed was a dose of good old-fash-
ioned optimism. It was time for a new book, a new view of the economy. That began my writing
“How to Prosper in the Coming Good Years”, my refutation to the purvey yours of pessimism.
To a large degree that book, and bullish view, was based on what you just read about. I knew the
decennial pattern should pick in for a low in the 1982 or 1983 time. I also knew that my four-year
phenomenon was calling for low at the same time as the larger pattern.
As the book promotion began in the winner of 1982 things look very bleak. Most of the folks who
interviewed me were shocked by my optimism, by my predictions of good times to come and by my
panning of the pessimists.
The most notable experiences were on the Merv Griffn show, an interview by Dan Dorfman, and a
never to be forgotten radio talk show in Detroit.
The talk show was supposed to last for 30 minutes, it began with a brief introduction, my expression
of extreme optimism, the good times would come and rather quickly. Then we went to the phone
lines; they lit up like a Fourth of July night. The callers to this station where upset, angry with me
for being so optimistic. They did not want to argue or discuss the political or economic situation,
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reasons why things might get better; they simply wanted to shout and scream, taking out their frus-
trations on my optimism.
It was no wonder, stocks have been down to sideways for a year. Infation had been rampant during
Jimmy Carter’s tour of duty and investors. Even those of you who bought and held gold had little to
show in the way of profts.
For a long time, long term investors had only losses to show for their efforts and risk. This condition
breeds contempt and disbelief for bull markets. Such conditions are exactly what sets up the oppor-
tunity for major buy points. Why? You see, most investors think the future 6 months to a year will
be pretty much like the last six months to a year. They are overly infuenced by the current trend…
they are looking back, not forward.
The thirty-minute interview opened up to a three-hour telethon that Jerry Lewis would have been
proud of. The mere fact people just could not accept that things might get better, perhaps the future
of America was bright and not dim, assured me of my correctness.
In retrospect this is one of the all-time market calls. Wherever I went throughout America, some
thirty-two cities in 28 days, my message was clear, “mortgage your house, buy stocks, then get a
second mortgage and buy more.”
Here we are 20 years later... entering a two and three year time frame with a four-year phenomenon
kicking in at the same market juncture.
Let’s see, if we can get this straight now; every four years we expect a market bottom. The last one
was in 1998. So if we simply add four years to 1998 we should expect the next buying opportunity,
if my math is correct, 1998 plus four more years, in 2002. Since the 1998 low came in October of
1998, I would expect a market low to occur about the same time; the fall of 2002.”
That’s word for word out of this original manuscript in the fall of 2001. Sure enough, the 2002 buy
point came. Was this just a rally in a bear market? The history of these four year buys suggests to
me that 2002 was a major buy area, not just a bleep before a crash to lower price levels.
My Forecast of the Future
Incidentally one should also be looking for signifcant market bottoms in 2010, 2014, 2018, 2022,
2026, 2030, 2034, 2038, 2042, 2046 and 2050. Of course we will always want to go back to the last
low or blast off point, expecting a buy about 4 yeas later.
There it is; my forecast for the next ffty years of market activity. Many things will happen in the
next ffty years. There will be huge changes in society, in business, in communications, even reli-
gions and politics. Yet, I suspect the four-year phenomena will continue to be the clockwork of the
marketplace. I say that, not because this four-year phenomena has done such an exceptionally good
job of forecasting prices from 1962 forward, but because it also did such a good job of forecasting
prices prior to 1962.
One of my studies was to do a count of this cycle of all years of market activity from 1858 forward.
I found that 86 percent of the time stocks bottomed in perfect harmony with this four-year repetitive
pattern. Accuracy like this is extremely diffcult to fnd in the stock market. This certainly suggests
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something beyond random activity is involved here. The mere fact that the four phenomenon has
been so infuential for so many years suggest rather strongly to me it will continue performing for
many years yet to come. It is ironic to think that something as simplistic as this four-year pattern has
had a better job of calling major market lows than virtually any of the fancy indicators and invest-
ment strategies we have cooked up with fancy math and econometric models!
Some people suspect this has to do with the presidential election cycle, which does neatly dovetail
at times with this four-year phenomenon. Others I have shared it with think it has something to do
with the planet Mars (Yes, I have eclectic friends). Some say its part of the decennial pattern. On the
other hand, the very few people that know of this pattern seem to think it may be a natural cyclical
response to human activity or is perhaps due to the infuence of Federal Reserve Activity.
I really don’t know. I can come up with some conclusions and reasons to explain why the phenom-
ena occurs. But again, I wonder... does it make a difference? The facts speak rather well for them-
selves. The market has had way too many bottoms coming in way too many times (at the right time)
for me to monkey around much with the data. I would rather just accept it. What is, is. To me it’s
as simple as that.
Well there you have it. My research of the past to help us understand the long term moves of the
future. The following table summarizes the yearly infuences of the decennial pattern.
Long Term Cycles In A Nutshell
Years Ending In 2Buy Points
Years Ending In 5Rallies All Year Long
Years Ending In 6Buy Late In Year
Years Ending In 7Late July Sell Of To A Buy
Years Ending In 8Almost As Good As 5 Years
Years Ending In 9A Top Is At Hand
Table 3: Yearly Infuences
I have found no biases for the years not mentioned above. Treat these simple little rules well. They
have certainly been kind to me and have explained the future better than any other cyclic or econo-
metric model I have seen.
From the very long term, let’s now turn our attention to the yearly cycle or pattern of stock prices.
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Dispelling Some Notions
When Conventional Wisdom is Not Good Enough
Most market addicts will tell you one of the “sure thing trades” in the stock market is to sell in May
and walk away. True or false? In a moment you will know…
Ah, the market mavens and wizards are not too far removed from simple wives tales. One of the
most oft repeated is that it’s best to exit the market in May. Chart 35 succinctly says it all… or does
it? The gold line represents what would have happened to an investor who bought in May and held
through October. Pretty lackluster compared to a buy and hold in light blue, or buy in November and
sell in April, the dark blue line.
As the bottom line in the chart shows, buying in May and holding through October has seriously
under performed a buy and hold strategy (or the one I favor; to buy in the Sept/Oct time frame). In
fact there is a huge difference... but there is a catch here.
These are gains since 1950. Well that’s just fne and dandy but what if, as 1950 dawned upon hu-
manity, you ran a seasonal data on the Dow 30 from the frst part of the century through 01/01/1950?
What would that chart have looked like?
I’m not the type of guy to raise a question he can’t answer… here it is in Chart 36… the known sea-
sonal as of 1950.
Chart 35: Comparison of Sell in May
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The future did not quite unfold that way though.
In fact the very frst year you could have relied on the data, 1950, would have found you buying at
the end of May, just as a major slide began. The next buy date, the end of December did much better,
but it missed the low in the start of the 4th quarter of 1950.
If we wait until the start of 1950 and build a seasonal model on the data from 1900 thru 1959 we get
a “road map” for the Dow 30. The highs and lows of the seasonal tell us to buy at the end of May
and sell the frst of September… exactly opposite of what the current spate of seasonal experts sug-
gest. There is also a nice trough in the seasonal pattern at the end of the year, suggesting another
excellent buy point.
Chart 36: Dow Seasonal Pattern 1925 -1950
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End of May Still a Great Buy Point!
What a shocker... the data through 1959 tells us to look for a buy point at the end of May, ride the
rally to mid August, exit and get back in toward the middle of November. Two things stayed in the
data; the year end rally and the late May, early June buy point.
That supposed seasonal soon fell apart as numerous years in the ensuing time set up sells in late
May, not buy points.
Can we trust these shifty seasonal patterns? We simply must do it… we must face up to the facts
and ask if the supposed seasonal infuence in stock prices is random or factual, shifty or sure
thing.
In getting to the truth of this matter I tested various time periods to see what data sample held up the
best. The next chart shows the seasonal from 1950 to date. It presents a nice clean picture of sea-
sonal opportunity… but it works best in the current years, not the past.
While the seasonal from 1950 to date appears to work well now, I’d like something that works well
on all data. To uncover a “sure thing” stock market seasonal I dropped off the crash of 1929 as it
biases the data way too much. Ditto the crash of 2000-2002. I did this by looking at the seasonals
from 1900 thru 1928, from 1932 through 1949, 1949 through 1980 and fnally 1980 through 2000.
Here are those seasonal charts. They present us with some very valuable information.
Chart 37: Dow Seasonal Pattern 1950 -2015
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The Best of the Best, 1900 to Date
By adding all years and not focusing on just the last 20 or last 50 years, we get a pattern that is very
different. In this case the assimilation of all the years gives us a better pattern, road map, or plan of
action than that from a more limited view. Here it is:
The pattern is: up from the end of the year into mid April (tax time, makes sense), then down into a
low or trough or resting action close to the end of June. That ensuing rally should lift prices into the
frst week of September when it’s get out time. Then, a look-see for an entry at the end of October or
the middle of December.
Here you have the most important seasonal points. Even these will vary. They will never be fxed
and should be thought of as a suggestion, not a call to action. The “sell in May and walk away” pat-
tern is there, but not as strong in the data from 1900 into the 1950’s. It is a more recent unfolding of
price action than many suspect.
Politics… a Special Consideration
The Trend is Your Friend and So is the President
It doesn’t matter if there is an R or D after his or her name. They all goose the economy to get re-
elected. Here’s how we take advantage of that.
Chart 38: Dow Seasonal Pattern All Years
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It is truly all about the economy (and wars) when it come to the politics of getting elected and re-
elected. I see no reason why the future will be different than the past years. For that reason I’d like to
visit a chart of the seasonal pattern in stocks and back that up with interest rates.
Let’s begin with a look at the Bond market to see what the typical seasonal pattern is in the all im-
portant --- critical to stocks --- interest rate game. I’m showing in Chart 39, see the blue line below
Bond prices, the seasonal pattern of Bonds for all years from 1976 (the years bonds started trading)
forward. What we see is a typical decline in Bond prices --- higher rates --- as a year begins, then
lower rates in the May time zone.
Chart 39: Bonds Seasonal 1976 Forward
As with all seasonals, this is not perfect. It’s a general road map of what rates/prices should do. It’s
an aid, a road map of the most likely time to see market reversals. This pattern is known by those of
us that look at seasonals.
Yet, there is another chart I’d like to share with you. Chart 40 is the seasonal pattern on the Bond
market --- but only in years of Presidential re-elections.
It shows a distinctly different pattern than that of all years combined. This chart is of the yield, so an
up trend means lower bonds prices, a down trend means higher bond prices… it’s just upside down
from the frst chart above.
It seems only logical to think that Presidents and Parties infuence the Fed, either with direct arm
twisting or passing legislation. The evidence is quite strong on this point, and to my best knowledge
this view has not been presented outside of my work.
As you can see the years in this study skip every 4 years to pick up the re-election year, which means
we should look for this the general pattern in 1988, 1992, 1996, 2000, 2004, 2008, 2012 and 2016
coming up.
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Do not get all lathered up with the size or magnitude of the swings… focus instead on the dates (time
zones) when Bonds have begun their moves in these years.
Chart 40: Bonds Seasonal Presidential Re-elections
These charts are thanks to my long time buddy Steve Moore at Moore Research (mrci.com)
The lesson to learn from the past is that rates should start to drop at the end of May into the frst of
August, then from September into mid November rates again decline.
What we see here is that rates go higher in re-election years, on balance, until May, then drop rather
rapidly all the way into the election. Hey, if you were running, you’d do it too. It’s not just the Prez;
the Senators and Congressmen have to go home to brag about what goodies they brought for their
districts.
As they say, not all years are the same… especially when it comes to being the President. The next
clip is of the year after the election. This is a bird of a different feather than the chart we just saw in
terms of the timing and duration of the fuctuations in interest rates.
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Chart 41: Bonds Seasonal Presidential Post Election
Stocks and Bonds… Hand in Glove
Interest rates are the most reliable indicator of future stock prices. When rates go up, soon stocks
will go down. When rates decline, shortly thereafter stocks rally. It is just that simple.
With the perspective of what the Bond market and interest rates do in the election year we now have
a better understanding of the “whats” and “whys” of stock prices. The next chart of the seasonal pat-
tern of stocks in just the election years.
Chart 42 of the Dow from 1924 forward shows the same 4 year skip, just looking at data from elec-
tion years. Again, don’t get too carried away and think the market in 2008 will move exactly like
this pattern. It won’t. But, it should be similar; note the pattern does not use any data from 2004, yet
gave a suggestion of a January peak, a February buy point leading to a late March early April decline
that gives way to a buy at the end of May.
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Chart 42: Stocks Seasonal Presidential Election Years 1924 Forward
Stock Prices in Election Years: “Buy in May, Make Political Hay”
That’s what the record of the last 20 presidential elections suggests to us. Almost on cue, stock
prices have dipped, giving way to a May mud slide and setting up a buy point. This has been a very
strong seasonal pattern, well worth playing for this next year. But even at that, it’s not one to do
blindly… seasonals are pretty shifty, as you have seen.
As an aside this data was presented frst to subscribers of my stock newsletter on May 1, 2004.
Here’s what followed in terms of market performance 8 years later in 2012.
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Chart 43: 2012 Stock Market Price Action
Rules for the Right Time to Buy and Sell
1. I want to be a buyer of stocks the last week in October every year, or perhaps buy a little sooner
if stocks are getting clobbered or indicators you employ encourage you.
2. I will hold for 6 to 9 months, unless those same indicators of yours are excessively bearish.
3. Years ending in 5 are treated differently. Buy early in the year and hold until May of the next, a
“6” year.
4. Presidential Years are also traded based on the strong pattern presented here.
5. BE ON GUARD OF YEARS ENDING IN ‘0’ AND ‘1’.
Speaking of politics, there is a very little known fact of market performance in Jeff Hirsch’s 2015
Stock Traders Almanac. Jeff broke down market performance with a Republican President up about
7% on average vs 10.5% when a Democrat has been in charge.
That has been widely known, but Jeff went way beyond that. He found the best performing years are
when R’s control Congress, up almost 17% vs. D’s in control of Congress with a 14% average gain.
Here’s the most interesting fact from his research; when we have had a Democrat President and a
Republican controlled Congress, like 2015, stocks have done the very best, up almost 20% on aver-
age!!
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Presidential Cycle Data 1900 - 2006
Year in CycleAnnual Average GainYears UpYears Down
Post Election Year+5.0%1314
Mid Term Election Year+3.2%1412
Pre Election Year+12.6%215
Election Year+9.0%188
Table 4: Presidential Cycle
To give you a better understanding of the power of presidential politics for the stock market, I’m also
showing you each individual year within that presidential cycle. This pattern has been operative for
many years in the stock market, and given the nature of politics, I see no reason why this will stop.
Chart 44: Dow Jones Election Years
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Chart 45: Dow Jones Post Election Years
Chart 46: Dow Jones Midterm Election Years
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The pattern of these years is almost unchanged from when I frst showed this concept in my 1970
book on stock investing and trading. That is a very long record I would not want to bet against.
Fundamentals Matter
As you are seeing, there are obviously cyclical and presidential patterns to stock prices. Tey are fasci-
nating. Tey are indicative of what will happen in the future, but let’s not get too far carried away with
them. Here’s why.
Tese cycles and patterns have more to do with time than they do magnitude. Clearly they help us
in understanding when to expect signifcant market rallies and declines, but as we get to these time
zones we need to look at the fundamental conditions to see if the cyclical aspects are supported by
good or bad fundamentals.
Markets don’t move just based on cyclical activity. Fundamentals really do matter and here are some
of the fundamental indicators I have found to matter the most.
Chart 47: Dow Jones Pre Election Years
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Fundamentals Can Predict the Future
Always an admirer of Nick Wallenda, we went out on our own tight wire in December of 2013
calling for a major stock market low in November 2014. The above chart is a direct lift out of that
report. Our 2014 mid year report in July was more focused saying this suggests, “…stocks to bottom
and or rally in October…2014”. This forecast was based on the Yield Curve.
You can gaze into crystal balls or the skies at night but never forget it is fundamentals that drive
prices (magnitude); the dances along the way are to the tune of some other piper.
At the current time this is written in 2015, the Yield Curve is telling us to expect higher prices at
least until April 2016 when it turns down. Time will tell. Charts courtesy of www.macrotrends.net.
Chart 48: Te Yield Curve vs S&P 500 Performance
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You will also want to follow this spread to help you identify when we’ve reached signifcant market
highs and lows. First of all, if you don’t understand what the yield spread is here’s a defnition
We will be looking at a yield curve which is simply a graphical relationship the yields available
between short and long term debt securities. Typically the comparisons between the 30 year and 10
year notes or bonds.
What is signifcant is that an inverted yield curve (I’ll explain that in a moment) has proceeded seven
of the last seven US recessions.
A steep rising yield curve indicates investors expect strong future economic growth. That’s bullish
for stock prices. When the yield curve is inverted, sloping down to the right, that means investors
expect sluggish economic growth in the future and lower stock prices. At times the yield curve can
be fat which generally indicates investors are unsure about future economic growth.
If you would like to do some more reading on this important indicator I would suggest you read a re-
port by the Federal Reserve Bank of New York, “The Yield Curve As a Predictor of US Recessions”,
authored by Frederick Mishkin.
His work is fascinating. It tells us that when the yield curve is positive from 0.22 and higher, there’s
only a 20% probability of entering a recession. However when the yield curve is negative there is a
30% probability of entering a recession. As that yield curve goes more negative, say to -0.82 there is
a 50% probability of a recession, and when it hits -1.40 there is a 70% probability of a recession!
Chart 49: Te Yield Curve vs S&P 500 Performance
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Here is a chart that shows the treasury spread from 1960 forward (as well as a recessions) to give
you an idea of how powerful this data is.
There is a wonderful web site, www.stockcharts.com, that allows you to follow the yield curve as
well as see how it performed in the past.
The next chart shows the yield curve, that’s the red line on the left side of the chart, versus stock
prices in April 2000. As you can see the yield curve was the climbing. That’s negative and in fact
stock prices shortly thereafter plummeted.
As we approached the market low in 2002, look at the yield curve. It was rising and had been for
some time which is indicative of long-term money turning bullish, thinking the future will be better.
It was. Stock prices rallied from 2002 into the late 2007.
Chart 50: Treasury Spread
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At the peak in 2007 we are presented with quite a diferent picture. A fat yield curve indicating there
would probably be difculty ahead and of course there was. Near the low point of 2009, there was a
far diferent picture. Te yield curve was positive and sloping upward a very bullish indication.
Chart 51: Yield Curve 2000
Chart 52: Yield Curve 2002
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Te Cassandras were crying of another bear market to begin somewhere afer 2009, ofering many
reasons why stock prices should decline. But the yield curve has remained in a positive curve through
June 2015. Te suggestion, obviously, is the economy is strong and that expectations of the future are
positive.
Te large sellof in 2011 caused many people to think we’d entered another bear market. Tey were
wrong. Had they only looked at the yield curve, they would see how it was an eight sharp rising, posi-
tive formation. Tat’s simply very bullish.
Chart 53: Yield Curve 2009
Chart 54: Yield Curve 2011
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TED Spread and Stock Prices
Many traders are well aware of what is known as the “TED spread”. It is the difference between the
futures contract for US Treasury bills and the futures contract for Eurodollars (Treasury to Euro Dol-
lars).
A few years back this was a well promoted spread trade that basically called for selling when very
high and buying when very low. The problem was, what was very high then became very much
higher. Thus, a lot of short-sellers were burned. However, buying when low has always been proft-
able. But, you may have to hold for several years before the trade is successful.
A quick study of Chart 55 of the last four decades gives us a better idea of what are now the high
and low zones for potential buying and selling, and also the amount of time you may have to endure
before success is achieved.
This spread is an indication of credit risk in the marketplace because treasury bills are considered to
have less risk than the Eurodollar futures contract. This means that as the spread increases, the risk
of default is increasing… credit markets are shaky and investors will be looking for a safe haven. As
a spread declines there is less risk. Thus, the fnancial community is stable and stock prices more apt
to rally.
My observation is the spread can be used to give us a fundamental idea of risk exposure to stock
prices. I have drawn off a line (red line in TED Spread chart) for the last 30 years showing high lev-
els of credit risk as evidenced by this spread. When it is high we have been in bear markets or stag-
Chart 55: TED Spread
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nation in stock prices. When it is low… like now, the bulls rule Wall Street.
I believe fundamentals set the stage for bull and bear markets. This stage setting, as measured by the
TED spread, remains bullish. A warning for the stock market comes when it reaches the 140 area.
Chart courtesy www.macrotrends.net.
Infation and Stock Prices
You will hear many arguments about infation and its effect on stock prices. Some will say it is good.
Some will say it’s bad. Some say it doesn’t matter. I think it does matter, but only at certain time pe-
riods. Chart 56 shows when infation is greater than 5%, stock prices selloff and often substantially. I
would not be too concerned about infation until we enter what would be for America, hyperinfation
(above 5%). At that point it’s time to take a walk away from Wall Street.
Chart 57 shows what happens when an investor is long stocks when infation is below 5.3%. That’s
the blue line. The black declining line is when an investor is long stocks when infation is above
5.3%. Clearly excessive infation is something to put investors on the sidelines.
Chart 56: 5% Infation
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Fed Funds Drive Earnings?
Is there a driving force to earnings in the United States? It looks to me like the following chart shows
that when Fed Funds are increased, in other words interest rates rise, we see an increase in hourly
earnings. By the same token when there’s a decline in interest rates, look what has happened to aver-
age hourly earnings.
During the massive decline in Fed Funds and interest rates from 2008 forward, hourly earnings stabi-
lized, going neither higher or lower. My guess is once Fed Funds or rates increase we will then see an
increase in hourly earnings. Tis gets very interesting because an increase in hourly earnings means
there will be more consumer spending. It is consumer spending that largely drives stock prices. Afer
all, someone has to buy stuf corporations make so the corporations are proftable.
Chart 57: 5.3% Infation
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Another unique set of data regarding interest rates is that since 1971 there been seven periods when
the Fed has raised rates. In each of those periods the market actually gained an average of almost
20%.
On balance, interest rate hikes are positive…at the beginning of the cycle
… and negative at
the end of the cycle. In other words, it is not the frst few small increases in interest rates that hurt. It’s
the ones late in the cycle, when the Fed realizes the economy is too strong, approaching a speculative
bubble, that they put on the brakes. Interest rate increases at that time are the ones that hurt.
Chart 58: Fed Funds and Hourly Earnings
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Unemployment and High Wages
Another signifcant relationship to pay attention to is what causes unemployment. It looks to me like
the cause is average hourly earnings. Our next chart shows what seems to be the largest driving force
of unemployment… higher wages. Just look at the chart; when average hourly earnings have been
increasing, getting above 4% per annum, then the unemployment rate rises.
Once the annual increase in average hourly earnings drops below 2%, then unemployment goes
down. Tis should be interesting fodder for those seeking a minimum wage law. Certainly nothing
seems to stop job creation more than a high average increase in annual employment pay.
P/E Formula for Predicted Future Returns
Professors Ruben Trevino and Fiona Robertson looked at price-earnings ratios for the Standard &
Poor’s 500 stock index from 1949 to 2000. What they were looking for was a ratio of P/E to future
performance. What they discovered was not new; high P/Es led to lower returns during the following
fve to 10 years. Their formula for measuring the P/E ratios, however is new and so, so simple.
Studies done by these two show you can predict the fve-year average annual stock return simply by
multiplying the current P/E by 0.57, then subtracting the result from 20.67. Expected fve-year aver-
age stock return = 20.67 – 0.57 (current P/E).
You can get the P/E for the Dow at:
Chart 59: Unemployement Rate vs Avg Hourly Earnings
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http://online.wsj.com/mdc/public/page/2_3021-peyield.html
That’s all there is to it. No fancier math is needed. Let’s see what this formula is telling us now. (I
originally presented this information above to my Right Stock Newsletter subscribers in November
2004. You can see what took place—after the formula was used).
The current (as of September 2015 all important 12 month forward P/E ratio on the Dow Jones aver-
age is 15.9. So when we multiply that by 0.57, we get a result of 9.085. The last step is to subtract
this from 20.67. The result tells us that the current P/E suggests an annual return of 11.58% over the
next few years.
To put this into perspective, we need to keep in mind the average return has been 10.46%. So the
current projected return is greater than the average. There is only one conclusion I can draw from
this… stocks are undervalued.
When to Buy
It’s time for you to learn my favorite long-term stock market by indicator. All of my long-term stu-
dents know about the indicator. It has done a bang up job of calling ALL stock market lows since and
before the 1929 depression. Yet it has problems. It is not perfect. Sometimes it buys a little early, but
by and large this is the best stock market indicator I have ever seen to tell us to buy stocks..
Let me show you an example of just how good the 13 week rate of change has been. I developed the
trading rule for it in the late 1970’s. Te rule is: subtract this week’s closing price from 13 weeks ago.
When it is < -15, buy stocks. Tat is the entire entry rule which works for our requirements 3, 4 and 5
above.
I’ll let the record speak for itself. I suggest you take a look.
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Chart 60: 13 Week Rate of Change 1936 to 1943
Chart 61: 13 Week Rate of Change 1946 to 1953
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Chart 62: 13 Week Rate of Change 1956 to 1963
Chart 63: 13 Week Rate of Change 1966 to 1971
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Chart 64: 13 Week Rate of Change 1973 to 1980
Chart 65: 13 Week Rate of Change 1981 to 1987
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Chart 66: 13 Week Rate of Change 1987 to 1992
Chart 67: 13 Week Rate of Change 1999 to 2003
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Many of these entries could not have been any better; they triggered a long entry the week of the low.
Seldom is one’s long term timing this impeccable. Yet, as the 1966-1971 time period shows, buying
the absolute low week is not out of character for this index. It is not perfect though as you can see in
some of the examples.
Tere’s a big diference between how markets pop and how they bottom. It’s my belief that markets
top because eventually the economy starts to sofen and then stocks tumble. Bottoms however are far
diferent. Tey are created almost the instant price get so oversold. Tere’s so much value, the big-
money rushes in buys and drive stock prices sharply and strictly higher. Tat’s the problem with any
trend-following technique that gets you into the market on the long side… It’s late. Ofen far too late.
You’ve missed the ideal buying point.
Market Buy and Sell Rule
My 13 week rate of change sidesteps that problem. It gets you buying shortly before or right at the
market low. What could be better?
Market tops, on the other hand, are very deceptive. They are long drawn out affairs. I’ve yet to fnd
an indicator that says, “this is the day of the high.” Our business is just not that simple. But clearly if
the yield curve is inverted or sloping, unemployment has turned up, infation might be high and our
P/E evaluation model shows a little future for stock prices... it is time to leave the party to others.
You now know the right or best times to buy stocks, as well as have an understanding of the longer
term cycles and patterns. So it’s time to fnd out how to fnd the right stocks.
Chart 68: 13 Week Rate of Change 2009 to 2013
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Disclaimer
IMPORTANT: The risk of loss in trading futures, options, cash currencies and other leveraged
transaction products can be substantial. Therefore only “risk capital” should be used. Futures,
options, cash currencies and other leveraged transaction products are not suitable investments for
everyone. The valuation of futures, options, cash currencies and other leveraged transaction products
may fuctuate and as a result clients may lose more than the amount originally invested and may also
have to pay more later. Consider your fnancial condition before deciding to invest or trade.
NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY
TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED WITHIN THIS
SITE, SUPPORT AND TEXTS. OUR COURSE(S), PRODUCTS AND SERVICES SHOULD
BE USED AS LEARNING AIDS. IF YOU DECIDE TO INVEST REAL MONEY, ALL
TRADING DECISIONS ARE YOUR OWN. OUR TRACK RECORD IS FROM TRADES
GIVEN TO SUBSCRIBERS IN ADVANCE AND ARE NOT HINDSIGHT. THE RESULTS
MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. HYPOTHETICAL OR SIMULATED
PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL
PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL
TRADING. SIMULATED TRADING PROGRAMS ARE SUBJECT TO THE FACT THAT THEY
ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. THE RISK OF LOSS IN TRADING
COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY
CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR
FINANCIAL CONDITION.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE
CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED
RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE
NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED
FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF
LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT
TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO
REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO
ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.