Hirsch, The Little Book of Stock Market Cycles

Jeffrey A. Hirsch is best known as the editor-in-chief of the Stock Trader’s Almanac. He draws on the extensive research behind that yearly publication for The Little Book of Stock Market Cycles: How to Take Advantage of Time-Proven Market Patterns (Wiley, 2012).

Let’s get Hirsch’s most controversial call—that the Dow will reach 38,820 by the year 2025—out of the way right at the beginning. He claims that this “is not a market forecast; it is an expectation that human ingenuity will overcome adversity, just as it has on countless past occasions.” (p. 66) The operative equation is “War and Peace + Inflation + Secular Bull Market + Enabling Technology = 500% Super Boom Move.” (p. 67) But don’t buy that magnificent villa overlooking the Pacific or the Ferrari you’ve been coveting just yet. “[A]fter stalling near 14,000-resistance in 2012-2013, Dow 8,000 is likely to come under fire in 2013-2014 as we withdraw from Afghanistan. Resistance will likely be met in 2015-2017 near 13,000 to 14,000. Another test of 8,000-support in 2017-2018 is expected as inflation begins to level off and the next super boom commences. By 2020, we should be testing 15,000 and after a brief pullback be on our way to 25,000 in 2022. A bear market in midterm 2022 should be followed by a three- to four-year tear toward Dow 40,000.” (pp. 67-68) In brief, if Hirsch’s scenario plays out, we’ve got quite a wait for the market to catch up with our dreams.

The bulk of Hirsch’s book describes the most effective market seasonalities. Take, for instance, the presidential election cycle. Since 1913, from the post-election year high to the midterm low the Dow has lost 20.9% on average. By contrast, from the midterm low to the preelection high, the Dow has gained nearly 50% on average since 1914.

An aside, thanks to Reuters: “Barack Obama often gets slammed for his stewardship of the U.S. economy, but for stock investors, he's been one of the best presidents since World War Two. At 1,400, the S&P 500 on Friday was closing in on a four-year high and was up 74 percent since January 20, 2009, the day Obama took office. Not since Dwight Eisenhower's first term has a president had such a strong run for their first term.” Will this make any difference to his reelection prospects? It’s hard to tell.

Hirsch provides data on the performance of the Dow in the year in which a sitting president is running for reelection. On average the DJIA gains 9%--10.7% when a sitting president wins reelection and 4.3% when he loses. But the numbers are all over the place—from a gain of 41.7% in 1904 when Teddy Roosevelt was reelected to a loss of 23.1% when Hoover was defeated. The more recent numbers are less telling: 1972 (Nixon won) +14.6%, 1976 (Ford lost) +17.9%, 1980 (Carter lost) +14.9%, 1984 (Reagan won) -3.7%, 1992 (G.H.W. Bush lost) 4.2%, 1996 (Clinton won) 26.0%, 2004 (G.W. Bush won) 3.1%. (p. 89)

Most of the timing strategies described in this book are familiar to long-time readers of the Stock Trader’s Almanac. We have, for instance, the best six months switching strategy and the January indicators. Hirsch also expands on the effect of option expiration dates and trading around holidays. He turns around the old Wall Street adage “Buy Rosh Hashanah, Sell Yom Kippur.” The wiser course of action these days is to “Sell Rosh Hashanah, Buy Yom Kippur, Sell Passover.” He explains that “the basis for the new pattern is that with many traders and investors busy with religious observance and family, positions are closed out and volume fades creating a buying vacuum.” (p. 181) In the last ten years (2002-2011) the percentage change from Rosh Hashanah to Yom Kippur has been -0.6%, 3.0%, -1.8%, -3.0%, 1.4%, 2.9%, -20.9%, -0.3%, 1.8%, and -0.5%. From Yom Kippur to Passover the change has been -0.5%, 10.2%, 1.1%, 9.0%, 7.2%, -7.0%, -5.8%, 11.4%, 15.6%, and 17.6%. (pp. 182-83)

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.