We are entering the first eclipse season of the year, so today I will share some research before we present our current interpretation of the market.
Upcoming lunar and solar eclipses are known in advance and sometimes announced in the news. And on astrology related sites you will usually find forecasts about the impending disasters that are going to hit us as a result of the next eclipse. Indeed, eclipses have had a bad reputation for centuries.
But it is also clear that we get a couple of eclipses every six months, usually in the form of a solar eclipse preceded or followed by a lunar eclipse. Obviously the world is not ending every six months.
So, how do eclipses influence the stock market? If they evoke fear in a lot of people, then we would expect some effect.
Well, I have looked into all eclipses going back to 1950, and how they have affected our lunar Red and Green periods in the stock market.
Solar eclipses always come within a lunar Green period, because solar eclipses always come on a new moon day. Lunar eclipses always happen on a full moon in the lunar Red periods coming before or after a Green period with a solar eclipse.
The result (based on over 130 eclipses in 60 years): solar eclipses have historically been very good for the stock market.
Investing in the eclipse Green periods has yielded and annualized 17% gain, vs 11% annualized for all Green periods. That’s significantly better than average.
Of course, that doesn’t mean the stock market never goes down in eclipse Green periods.
About one eclipse green period out of six has generated a decline of more than 2%. But once out of four it has produced a gain of over 2%, and in 10% of the cases it produced a better than 4% gain.
But that’s not the end of the story. I also looked in the Red periods that come before and after a solar eclipse. This are typically the periods that contain the lunar eclipses.
These Red periods have a negative expectation, especially the red period that comes before a solar eclipse. It doesn’t really matter whether the period gets a lunar eclipse or not, these periods have averaged an annualized loss of 8.5%.
Again, this doesn’t mean that every red period before a solar eclipse has been negative. In about 15% of the cases these periods have shown gains of over 2%.
But in 33% of these periods there has been a loss of over 2%, and in 20% of the cases the loss was over 5%.
So, fairly often these red periods have produced significant downturns in the market.
The red periods that come after a solar eclipse are less outstanding and have just a break-even expectation, they tend to go either way.
Bottom line: historically the most profitable strategy going into eclipses has been: go short in the Red period before a solar eclipse, and then go long in the ensuing Green period that contains the solar eclipse.
There will be a solar eclipse on May 10th. This means we are now starting the Red period that precedes this eclipse, the most dangerous type of Red period in the cycle. Given that the market has climbed to record highs, the setup for a sudden downturn is fully in place.
Let’s have a look at the current Nasdaq chart (click for larger image):
The Nasdaq is trying to follow the S&P with a break out to the upside. But there are warning signs. The Earl2 remains negative for the moment, but could turn into a buy if the market continues to go up from here. In the shorter term Earl we see a bearish divergence shaping up.
So, given the history of eclipse red periods, I have now sold almost all my stocks and bought some put options.
One doesn’t need to be fully invested in the market at all times. These eclipse red periods are the best time to stay away from the market, and if a downturn materializes then you can jump back in to benefit from the positive Green period that often comes with the solar eclipse.