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The Little Book of Stock Market Cycles, by Jeffrey A. Hirsch
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Jeffrey Hirsch discusses how to capture market-beating returns by following specific stock market cycles
While predicting the direction of the stock market at any given point is difficult, it's a fact that the market exhibits well-defined and sometimes predictable patterns. While cycles do not repeat exactly all of the time, statistical evidence suggests that cyclical tendencies are very strong and should not be ignored by investors. The Little Book of Stock Market Cycles will show you how to profit from these recurring stock market patterns and cycles.
Written by Jeffrey Hirsch, President of the Hirsch Organization and Editor-in-Chief of the Stock Trader's Almanac, this reliable resource explains why these cycles occur, provides the historical evidence behind them, and shows you how to capture consistent profits from them moving forward. In addition to describing his most widely followed cycles and patters, Hirsch also discusses both longer term boom-bust economic cycles and shorter term tendencies involving the best days, weeks, and months of the year to trade the market.
- The methods found here follow everything from presidential election cycles to the "Santa Claus" effect
- Written by Jeffrey Hirsch, the pre-eminent authority on market cycles and seasonal patterns
- The strategies explored are easy-to-implement, and based on research that has proven profitable over the course of time
For investors looking to beat the buy-and-hold philosophy, The Little Book of Stock Market Cycles will provide simple, actionable ideas that have stood the test of time and consistently outperformed the market.
- Sales Rank: #43940 in Books
- Brand: Brand: Wiley
- Published on: 2012-08-07
- Original language: English
- Number of items: 1
- Dimensions: 7.30" h x .95" w x 5.35" l, .62 pounds
- Binding: Hardcover
- 240 pages
Features
- Used Book in Good Condition
Amazon.com Review
Q& A with Author Jeffrey A. Hirsch
What impact do you think the 2012 presidential election will have on investors? Presidential elections every four years have a profound impact on the economy and the stock market. After a president wins the election the first two years are spent pushing through as much policy as possible. Frequently the market, economy, and country experience bear markets, recessions, and war. Since 1941, the post-election year has posted the lowest average gain for the Dow Jones Industrials at 4.5%.
Seasonality has been on track since September 2009. 2011 unfolded in near textbook fashion. 2012 is also unfolding in rather typical seasonal and election year fashion. The catalyst for 2011's decline was persistent European debt concerns. These sovereign financial troubles continue to pressure markets. Slowing growth in emerging markets, a historically weak post-election year track record, the expiration of tax cuts, and unemployment benefits at yearend is likely to make for an exciting three-ring circus in D.C. after Election Day and plague stocks in 2013. Markets do not like uncertainty.
Unless a full-blown bear market occurs in 2012 or the market slogs along into the New Year, market gains will be harder to come by in 2013 than they have since the March 2009 bottom. A more likely scenario is that seasonal and economic softness gives way as the presidential election approaches and some resolution in Europe coincides with at least the hint of an easing move from the Bernanke Fed.
If things look good for Obama, October is likely to be stronger. If Romney wins, expect a bigger move in November. Either way, there have been only two losses in the last seven months of election years for the S&P 500 since 1952. Also on the bright side for 2012, the DJIA has averaged 9% in years when a sitting president was running for reelection; win or lose.
2013 is another story. Markets are likely to come under pressure as whoever the president is will have tall orders to remedy the economy, the deficit, and the dysfunctional government. The easy economic data and corporate results comparisons of the past few years will be gone. Foreign hot spots and diplomatic issues will also require renewed attention from the White House once the campaigning and/or inaugural balls are over. Central banking will remain accommodative, but there is little more they can do. After the yearend rally and positive 2012, I am concerned that the next major bear market will occur in the 2013-2014 period.
What are some of the cycles you talk about in the Little Book and how can investors use those? In the Little Book of Stock Market Cycles I have boiled down all the most pervasive and persistent market patterns. From our nearly 50 years of research these are the ones that continue work. I begin with the long term, multi-year secular bull and bear market patterns. Then I delve deep into the nuances and details of the four-year presidential election stock market cycle, the perennial seasonal pattern before I drill down into the prevailing monthly, weekly and daily patterns. Whether you are day trading, trend trading or investing for the long haul the Little Book provides insight, guidance and confidence when you are making buy and sell decisions.
What's the best time of the year to trade the market? The best time of the year to go long stocks is October and the best time to sell is April. This is our Best Six Months Switching Strategy that we discovered in 1986. The saying "sell in May and go away" has become quite well known. But I am amazed at how few fail to realize, and capitalize on, the flip side of this phenomenon. You can't sell in May if you don't buy in October. Investing in the Dow Jones Industrial Average between November 1st and April 30th each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950. Our Best Months Switching Strategy will not make you an instant millionaire, as other strategies claim they can do. What it will do is steadily build wealth over time with half the risk (or less) of a "buy and hold" approach.
Generally speaking, during the Best Months you want to be invested in equities, mutual funds or exchange traded funds (ETFs) that offer similar exposure to the companies that constitute the Dow, S&P 500, NASDAQ and Russell 2000 indices. During the Worst Months, switch into Treasury bonds, money market funds, or a bear/short fund. Grizzly Short (GRZZX) and AdvisorShares Active Bear (HDGE) are two possible choices. Money market funds will be the safest, but are likely to offer the smallest return, while bear/short funds offer potentially greater returns, but more risk. If the market moves sideways or higher during the Worst Months, a bear/short fund is likely to lose money. Treasuries offer a combination of decent returns with limited risk. In the 2013 Commodity Trader's Almanac, a detailed study of 30-year Treasury bonds covers their seasonal tendency to advance during summer months as well as a correlating ETF trade.
Additional Worst Month possibilities include precious metals and the companies that mine them. SPDR Gold Shares (GLD), Market Vectors Gold Miners (GDX), and ETF Securities Physical Swiss Gold (SGOL) are a few well recognized names available from the ETF universe. Gold's seasonal price tendencies are also covered in the 2013 Commodity Trader's Almanac.
Why? The quarterly and annual operations of institutions and the seasonal behavior of society and individuals have created a Best and Worst six months of the year. Our Best Six Months Switching Strategy revolves around the fact that most of the markets gains occur from November to April while the market is usually flat to down from May to October. 2012 is a case in point.
There is and ebb and flow of cash and trading volumes that is clearly influenced by the perennial activities of institutions individuals and society. Market seasonality is a reflection of cultural behavior. In the old days, farming was the big driver, making August the best market month-now it's one of the worst. This matches the summer vacation behavior where traders and investors prefer the golf course, beach, or poolside to the trading floor or computer screen. Institutions' efforts to beef up their numbers help drive the market higher in the fourth quarter as does holiday shopping and an influx of year-end bonus money. Then there's the New Year, which tends to bring a positive new-leaf mentality to forecasts and predictions and the anticipation of strong fourth- and first-quarter earnings. After that, trading volume tends to decline throughout the summer and then in September there's back-to-school, back-to-work, and end-of-third-quarter portfolio window dressing that has caused stocks to sell off in September, making it the worst month of the year on average.
Would you say that history repeats itself? Why or why not? History never repeats exactly, but is sure does rhyme. The collective human memory is short and the forces of greed and fear are unrelentingly powerful. As George Santayana famously said, "Those who fail to remember the past are condemned to repeat it." I like to say, "Those who stuffy market history are bound to profit from it."
Review
"The Little Book of Stock Market Cycles is ideally suited for fans of the Hirsch almanacs as well as for those who have never been exposed to seasonal statistics and who have a hunch that they may have missed something useful." (SeekingAlpha.com, August 2012)
‘…a nice primer on cycle research and an excellent starting point for further research…he has given us an insightful collection of market observations and plenty of food for thought. I recommend you add it to your winter reading list.’ (ForexPros, November 2012)
From the Inside Flap
While predicting what direction the stock market will take at any given moment is difficult, if not impossible, the market does exhibit well-defined and predictable cyclical patterns. For example, history shows that the best six-month period for stocks is November through April and that by moving into stocks in October-November and out in April-May you can significantly reduce risk while increasing profits. What other important lessons does history have to teach about the market? What are the key cycles and patterns you should know about in order to optimize your investment strategies? Find out in The Little Book of Stock Market Cycles.
Written by Jeffrey Hirsch, the pre-eminent authority on market cycles and seasonal patterns, this book draws upon the Hirsch Organization's five decades of meticulous historical research and market analysis to help you understand market cycles and what drives them. More importantly, it shares time-tested cycle-based trading and investing strategies that can dramatically boost your ability to capture market-beating returns, year-in and year-out, through bull markets, bear markets, and everything in between.
If you're looking for a safe, proven alternative to conventional buy-and-hold stock strategies, this book is for you. A concise and commonsense guide, it:
- Brings together the best, time-tested indicators, patterns, and seasonalities developed and refined over the past fifty years
- Discusses longer term boom/bust economic cycles as well as shorter term tendencies involving the best hours, days, weeks, and months of the year to trade the market
- Shows how to use easy-to-implement strategies that have been proven to beat the market more than 85 percent of the time
- Describes an array of highly reliable event-driven cycles and patterns, such as presidential election cycles, the "Santa Claus Rally," and the best six-months strategy
- Explores, in-depth, the long- and short-term impacts of key exogenous factors on the market, including war, peace, inflation, political shifts, and more
Providing simple, actionable investment strategies that have stood the test of time, The Little Book of Stock Market Cycles offers you a golden opportunity to learn from history and profit from its lessons.
Most helpful customer reviews
0 of 0 people found the following review helpful.
Excellent for the novice
By Paul Nippert
Easily read and understood the author makes it Ezra's to see SOME patterns and proves the adage buy in November and sell in May with fact . Every month every electoral cycle is covered including days of the week and hrs of the day
0 of 0 people found the following review helpful.
Five Stars
By A Customer
Great book. Have learned a lot and have profited quite a bit the past 6 months because of it.
16 of 18 people found the following review helpful.
Good primer on stock market cycles
By Charles Lewis Sizemore, CFA
"There is no magic formula to make trading or investing easy," starts Jeffrey Hirsch in The Little Book of Stock Market Cycles. "Nothing can replace research, experience, and a healthy dose of luck."
History, however, can be a useful guide in understanding the environment in which you are investing. This is the focus of Mr. Hirsch's latest installment in the Little Books series. Hirsch is the Editor in Chief of the Stock Trader's Almanac and an authority on stock market cycles and seasonal patterns.
Cycle research is dismissed in some investing circles as "voodoo," but Hirsch makes a compelling defense of the discipline throughout the book and explains it with clarity: "Recurring events such as the presidential election every four years, end-of-quarter portfolio rebalancing, options and futures expirations, tax deadlines, and holidays have a predictable influence on traders and investors."
Indeed, all of these predictable events affect flows into and out of the stock market, as do many, many others detailed by Hirsch.
Hirsch starts his book with a description of secular bull and bear markets. For the uninitiated in market terminology, "secular" means long-term in this case. Secular markets tend to last 8 to 20 years, and recent history has been no exception. The last secular bull market lasted 18 years, from 1982 to 2000. The secular bear that followed started in 2000 and still persists 12 years later.
Within a secular bull or bear market, there are smaller and shorter cyclical bull and bear markets that can last anywhere from a couple months to several years.
It is somewhat controversial to consider the 2003-2007 bull market--which peaked with a new all-time high--as a "cyclical" bull market, but I consider that a fair description given that price / earnings multiples contracted throughout the period and that it ending with one of the worst cyclical bear markets in history in 2008. This was also the view of John Mauldin, whose Little Book of Bull's Eye Investing we covered in a separate book review.
Though most of Hirsch's work is empirically sound, he falls into the mental trap of confirmation bias on a few occasions and tries to fit the data to his thesis rather than shape his thesis around the data. This was certainly the case when he contends that "a new secular bull will not emerge and lasting prosperity will not take charge until there is an extended period of relative peace."
Why? Because "the single most important enduring influence on the stock market is war."
Hirsch states that the stock market has never made significant headway when the United States was involved in a major war. The problem with this argument is that there have only been a small handful of wars in modern U.S. history and certainly not enough to reasonably draw conclusions.
But more than that, the statement is just flat-out not true, at least not unless you ignore the Korean War (perhaps it was called the "Forgotten War" for a reason). Stocks soared throughout the Korean War, as the 1950s were one of the best decades in market history.
That Kirsch considers the Iraq and Afghanistan campaigns "major wars" and Korea--where U.S. involvement lasted longer than World War I and where 36,500 Americans died--not, is a fatal flaw in his argument on the role of wars on the stock market.
The war argument notwithstanding, I would agree with Kirsch when he asserts that "all of the previous secular bull trends were accompanied by a major paradigm shift from an enabling technology or cultural change."
Disruptive technologies are essential to the process of creative destruction that is so important in driving the economy forward. Kirsch believe that the next boom will be driven by alternative energy (as is already happening in the shale gas boom), biotechnology or perhaps some other "yet-to-be-discovered" field.
Kirsch sees the next secular bull market--which he believes will send the market 500 percent higher before it is finished--starting in 2017-2018.
Much of the book is a description of shorter-term market cycles and seasonal patterns. Most readers will be familiar with the Presidential Cycle, but Kirsch takes the analysis several layers deeper, looking at month-by-month returns and dividing his analysis between elections with incumbents and elections without. Even seasoned market technicians will find some new angles on this old standard.
Kirsch takes the "sell in May and go away" maxim several layers deeper as well. Given the time of year, it is worth mentioning that November, December, and January are the three best consecutive months out of the year: "If you were only to be invested for three months out of the year, these are the months."
But if this period fails to deliver, watch out. There are macro forces at work overpowering the cyclical forces, and it is a major red flag.
Kirsch also has a trading tip that might be a bit puzzling to non-Jewish "goy" investors: "Sell Rosh Hashanah, Buy Yom Kippur, Sell Passover."
This is really just a slight variation to the standard seasonal advice of being invested from late October to April, as Yom Kippur falls in October and Passover falls in March or April. But as Kirsch elaborates, "Perhaps it is Talmudic wisdom, but selling stocks before the eight-day span of the High Holidays [of Rosh Hashanah and Yom Kippur] has avoided many declines, especially during uncertain times like 2008."
In any event, The Little Book of Stock Market Cycles is a nice primer on cycle research and an excellent starting point for further research. Kirsch is not offering a magic solution that is "guaranteed" to improve your investment performance, and he would never claim to. But he has given us an insightful collection of market observations and plenty of food for thought. I recommend you add it to your winter reading list.
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