About the Solar Cycle
Posted by Danny on January 14, 2013
Markets continue to trade with a positive bias, but it is not a crazy race to the top.
We will be entering a lunar Red Period this week, so I am looking for a bit of a pause to start.
Let’s have a look at the S&P 500 index (click for larger image):
This market is already testing its 2012 highs, satisfying a forecast we made back in December.
With my Earl2 indicator still nicely pointing upwards, the upcoming lunar Red Period is likely to offer some consolidation, followed by further gains in February. I think the S&P will reach at least 1500 before we see any broader correction.
The current Solar Cycle 24 is expected to peak in 2013, and I have been getting some questions whether one should prepare for it. The previous Solar Cycle peaked in March 2000, and of course a lot of investors remember that was a major stock market peak. Does that mean we should look for another market top to come with the current solar cycle peak in 2013?
I have been doing some research on this topic recently, in preparation for a bigger article. But some things I can share already.
Using monthly historic data for the Dow Jones Industrials Index going back to 1790, I have looked what happened in all these earlier cycles. (click here for the list of solar cycles)
In the 19 solar cycles that were covered by data, there have been 6 occasions where the solar peak coincided with a clear stock market peak (March 2000 and November 1968 are the most recent cases), on 7 occasions the solar peak produced a market bottom (December 1979 and March 1958 are recent examples), and in the other 6 cases the solar peak came more or less in the middle of an ongoing move.
If we average out the month by month changes in all these solar cycles we get this chart (click for larger image):
In this chart we start with solar minimum at year zero and generally the solar peak comes about 4 years into the cycle.
As we can see, the market just climbs steadily throughout the solar cycle and never varies much from the long term average. We see neither a peak nor a bottom around the solar max, which means it is not something that can be exploited for market profits. The stocks can go either way after a solar max.
I also made a chart for the average performance over a decade, known as the decadal cycle (click for larger image):
Here we see a more outspoken pattern and more variation away from the mean. This implies that the decadal cycle is more relevant than the solar cycle. It is probably just a psychological effect. There is uncertainty in the early years of a decade, then confidence returns by mid-decade, and there is a typical crisis towards the end of the decade.
There is an average 40% gain in the 3rd through 5th year, and we also see an average 10% decline in 7th year through mid 8th year. That is useful.
If historic average holds up perfectly (which almost never happens), you would thus look for 40% stock gains by 2015 or 2016.
2015 and 2016 will also be the 6th and 7th year in the current solar cycle (which started December 2008), and that happens to be the strongest years in the solar cycle chart as well.
So both the decadal cycle and the solar cycle will be supportive for stocks over the next 3 to 4 years.
More details about this in my upcoming article.