Cycles in the Dow Jones Industrial Average

There are a lot of analysts who have studied cycles very extensively, two that immediately come to mind are Armstrong Economics and Solar Cycles. Based on it, I went looking for regularly repeating cycles in the markets, and found a few interesting patterns. While none of these cycles give a direct buy or sell signal, they do seem to have an element of identifying a major turning point in the market. Here is a chart of the Dow Jones during the Financial Crisis of 2008. Click on the image to view a larger version.

1989 - 2016



I've plotted a rectangle from the low of 2003 to the high of 2007. Using this length of time as one cycle, I've extended it forwards and backwards. Going backward, the previous cycle begins right after the 1998 Russian default, identifies the start of the big rally in 1994. Lets keep going further back. Surely this is a coincidence?

1960 - 1990



Looking back 1960s to 1990- it does seem to find the big bull market beginning in 1986, but nothing very interesting as the market had been largely flat throughout. Lets go back even further.

1929- 1960



This starts just after the Great Depression, and ends around 1960. It picks practically every major multi year rally and also identifies the 1929 down trend quite early on. Finally, the last chart- pre 1929

1917- 1940



To conclude, I think cycles analysis has a place in your overall portfolio allocations, and while its not exact, its a good metric to gauge how stretched is the current rally or decline, and whether a turning point is around the corner. In the next post, we'll also cover some other markets and currencies.