Life moves in cycles. The planets, the calendar, tides and women (and I'll argue men) all have cycles.
And, no surprise, the markets move in cycles, too.
Tons of them, actually. Many market observers argue that there's a three-year cycle, a six-month cycle ... there's even a presidential cycle (which we'll get to in a minute). Heck, there are even daily and weekly cycles.
Cramer recently mentioned that during options expiration week, there's alwaysa down day -- usually Tuesday or Wednesday of the week. So those weeks, too, become cycles.
A cycle is basically a pattern, and the pros are constantly looking for patterns in the marketto help them make better trading decisions. And many of you wrote in wanting to know how they do it. So theBooyah Breakdown is going to try to show you.
Market cycles are generally measured from the end of a bear market through a period whenprices rise -- your bull market -- until they reach a near-term peak before beginning adeclining phase or a new bear market, says Frank Fernandez, chief economist at the SecuritiesIndustry Association.
And when one cycle is finished, the next begins. So a cycle generally looks like that goodold bell curve from your Economics 101 class in college.
Many traders try to time their buys and sells with a cycle's highs and lows, notes JakeBernstein, author of
Hot Stock Market Strategies: 5 Secret Investment Tools That Work in a Bullor Bear Market
But before you attempt this tactic, you have to know there are risks. Too manyinvestors forget that in any cycle, regardless of its length, what goes up must also come down.
Sothat means after the peak in the cycle, you can expect things to go downhill, and you'll need toadjust your investment strategies accordingly.
In addition, you must know that while many of these cycles have been tested over the years, they're just theories. So it's still very hard to pick the top or bottom of a so-called cycle.
Still, understanding that the markets do move in cyclical ways will give you an edge and helpyou make more-informed trading decisions.
Pick a Cycle, Any Cycle
A few well-documented cycles have been in the forefront over the years. Economist JosephKitchin studied the three- to four-year market cycle, and Joseph Schumpeter conducted exhaustive research on the 10- to 11-year cycle.
Both gentlemen basically said that the market moves from bottom to top and back downover a particular time period. And both theories are worth further investigation.
But in the interest of the upcoming elections, let's take a look at the presidential cycle,developed by economist Yale Hirsch.
It's basically a four-year cycle that dates back to 1944. The theory is that the first two yearsof a president's four-year term are generally times of weaker markets, while the last two years see stronger markets.
How do you take advantage of this? The best time to trade is during the last 15 months of theelection cycle, from Oct. 1 to Dec. 31, suggests Tom Gentile, CEO of
Profit Strategies, a company that educates investors about patterns and cycles in the market.
He suggests trading the indices, HOLDRs or any product that mimicsthe index markets.
Of course, there are exceptions to every rule. When a president is elected for a second term, the reverse happens -- the first two years of the second term are stronger andlast two years weaker.
And we've sort of seen that, as the market's been pretty strong during the first two years ofPresident Bush's second term. So, if you believe in this cycle, the market may be weaker over the next two years.
Stock Traders Almanac
, the quintessential guide to stock trading, refers to thesix-month cycle, which espouses buying in November and selling in May, six months later.
But Profit Strategies' Gentile says his organization has recently uncovered a more timely cycle that revolves around five months -- or40 weeks -- instead of six.
Since April 21, 1967, the stock market has moved in 20 weeks of bullishness followed by20 weeks of bearishness, according to the folks at Profit Strategies. So that's basicallyfive months up, five months down.
And after looking at 50 completed 40-week cycles, Profit Strategies documented a 78% advance in the Dowduring the bullish cycle, but only a 50% advancement of the Dow during the bearish cycle.
So their suggestion is to trade in line with the market during bullish cycles. Again, they recommend productsthat correlate with the market, like the indices and index funds, as well as stocks that highlycorrelate to the Dow and
When the market moves into the so-called bearish phase, ProfitStrategies suggests moving your moneyinto less risky investments, like money market funds or bonds.
And where are we in this five-month cycle? "We hit the high on Oct. 13," says Gentile. So he thinks the market will pull back over the next five months and has moved his money into lessrisky investments.
The next up cycle starts on May 26, and he'll jump back into the market then.
Please keep in mind that these market cycles are just theories. There are loopholes everywhere.(And I'm sure my email inbox will be flooded with them!) We all know that there are no sure things inlife. If it was that easy to predict the market, I certainly wouldn't be sitting at my computerat 5 a.m. trying to make my deadline.
So don't let these market cycles dictate your investment decisions -- just use them as moreammo in making good choices.
Remember, life moves in ebbs and flows, so you just gotta go with it.
Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback;
to send her an email.