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Posts Tagged ‘solar cycle’

Long term commodity price cycle

Posted by Danny on April 27, 2013

In a recent article posted by NASA, the possibility that we may be entering a Maunder minimum type period of global cooling was openly discussed. The current very weak solar cycle 24 is supporting that hypothesis.

This prompted me to take a closer look how long term solar activity has influenced commodity prices in the past.
The sun is known to be in an approximately 11 year sunspot cycle, which is half of the 22 year solar magnetic cycle.
This means we can filter out these 11 year and 22 year fluctuations by calculating a running 11 and 22 year average of the yearly sunspot number.
The yearly sunspot number since 1700 can be found at the SIDC site : http://sidc.oma.be/sunspot-data/
Calculating the running 11 year and 22 year averages we get this chart (click for larger image):

sunspots

Both curves are quite similar. When trying to connect it to long term commodity prices I noticed that peaks and bottoms in commodities (CRB) have lagged the sunspot graph by 15 to 16 years. Or in other words: long term sunspot average has been a 15 year leading indicator for commodity prices.
This image lines up the most important peaks and bottoms with the historic CRB index (source: Bianco Research), using a 15 year lag (click for larger image):

CRB vs sunspots

The blue line (22 year running average) sets the long term pattern, with the green line (11 year running average) marking some secondary peaks and bottoms. The correlation is quite remarkable.
And while we don’t have yearly sunspot numbers prior to 1700, it is quite likely that the broader pattern matched sunspot averages in these earlier centuries as well.
We see rather flat commodity prices coinciding with the Sporer minimum until the early 16th century, then a period of rising solar activity and rising commodity prices during the Renaissance. The Maunder minimum brought a long term downtrend in prices, which lasted until solar activity started picking up again in the 18th century.

Listing the main peaks and bottoms in the 22Y sunspot average – “ssn” (blue line):
* Very low ssn: 1826 -> followed by a 100 year low in CRB 16 years later in 1842
* Next major high ssn: 1850 -> followed by an all time high in CRB 15 years later in 1865
* Next major low ssn: 1916 -> followed by a major low in CRB 15 years later with the 1931 great depression
* Next major high ssn was a double peak in 1960 and 1968 -> followed 15 years later by inflation peak of the mid 70s and early 80s
* Next low in ssn: 1981 -> marked the period of desinflation that ended around 1996, 15 years later
* Next major high ssn was again a double peak in 1991 and 2000 -> there was a CRB peak in 2008 and we could thus expect another one in 2015 or 2016 (15-16 year after 2000 peak).

Since 2000 the 22 year ssn is falling rapidly and will probably fall to levels last seen 200 years ago. The same happened in the early 19th century (Dalton minimum), and probably also during the Maunder minimum (17th century). This is a ~200 year cycle.
On these earlier occasions the CRB index dropped 70-80% within 10 to 20 years.
If history repeats then a similar period of deflation would start by 2015-2016 and probably not end before 2030. If the next solar cycle is also weak then deflation could extend to 2045. A 70% decline would take the CRB down to ~140 on the basis of its 2008 peak.

Is it possible?
These earlier periods of deflation during weak solar cycles came as the result of a combination of two main factors: stagnant or declining population (because of famines and war) + technological advances that led to more efficient and thus cheaper production.
That’s a scenario that could repeat itself in the coming decades.

Will the central banks’ easy monetary policies prevent this from happening again?
That’s not so sure. In fact their QE may well make the ensuing deflation worse, when the accumulated debts start imploding under their own weight.

PS: in his newly released book, Global Crisis: War, Climate Change and Catastrophe in the Seventeenth Century, historian Geoffrey Parker describes the events of the “Little Ice Age” in over 900 pages. How would our modern society deal with such a cold period: are we better prepared, or worse?

Danny

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Posted in Financial Astrology, Market Commentary | Tagged: , , , , , , | 8 Comments »

Sunspots high – sell or buy?

Posted by Danny on March 9, 2013

This is a follow up chart to our article about the solar cycle we posted back in January: New highs

One reader pointed out that the actual sunspot peak can come anywhere between 3 and 5 years after the start of the cycle, and is thus not very visible in the charts that we presented.
That’s a fair criticism, and I have now generated another chart that makes the market activity before and after and solar peak much easier to see.
I have used the Dow Jones Industrials average and the months of maximum SSN (smoothed sunspot number) have been derived from http://sidc.oma.be/sunspot-data/.

This chart shows you how the Dow Jones has moved from 1 year before sunspot max until 1 year after, for all solar cycles since 1798 (=SC5) (click for larger image):

solar cycle peak vs DJIA

Nineteen solar cycles were considered in this study.

By normalizing all sunspot peak months to 1, it becomes very easy to see whether the market went up into the solar peak, and we also see what happened in the 12 months after each solar peak.
We can see it is very much a mixed bag.
In 8 cases the market went down in to the solar max, in 9 cases the market rose into the solar peak, and in 2 cases the market was breakeven. This is comparing the Dow Jones at sunspot peak versus the Dow Jones 1 year before it.
If we look what the market did in the 12 months after the sunspot max, we see 8 cases where the market went up, 8 cases where it went down, and 3 cases that were breakeven.

Is there perhaps some connection between what happens in the 12 months before and the 12 months after?
If we look at the eight solar cycles where the market declined into the solar peak, then we find that the market subsequently turned up on 4 occasions, it continued to go down in 3 cases, and was flat in 1 case.
If we look at the 9 cycles where the market went up in the year prior to a solar peak, then we find that the Dow Jones turned down in 4 cases, it continued to go up in 4 cases, and it went flat in 1 case.

The bottom line is that in these 19 solar cycles:
* the sunspot peak was near a peak in the Dow Jones on 4 occasions
* the sunspot peak came near a bottom in the Dow Jones on 4 occasions
* the Dow Jones just continued in its pre-solar peak direction on 7 occasions

Basically, the solar cycle peak does not help us to decide whether we should sell or buy, regardless of what happened in the 12 months prior to the sunspot peak. Half of the time the market reverses direction, half of the time it doesn’t reverse direction.
There is also no obvious recurring pattern from cycle to cycle.
This is the table of monthly values for each cycle (click for larger image):

sunspot peak table

Danny

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New highs

Posted by Danny on January 21, 2013

Stock markets have held steady, and several market indices have recorded all time highs.
Still, most retail investors and people in the street are nowhere near optimistic about the economy. And that probably means there is more upside action to come.
We have to bear in mind that the 2008 crisis and market decline is still not forgotten by most. After such a sharp decline, which shocked small investors, it usually takes many many years for these investors to come back. After the bottom in 1931, the market went up until 1937 even though the depression was ongoing.

Let’s have a look at the Nasdaq index (click for larger image):

Nasdaq

We have another week of lunar Red Period to go. The market is moving sideways, suggesting ongoing strength.
This market has been lagging several other indices because Apple shares, the largest component in the Nasdaq, have been declining. I think it will catch up and I would look for the Nasdaq to test and possibly exceed 3200 by early February.

***

Last week I gave some information about the solar cycle.
The complete article is now ready and you are welcome to download it here (PDF file):
https://lunatictrader.com/?download=SolarCycles.pdf

Or read it in the Scribd frame below.
As always, your comments or questions are welcome.

Be well,
Danny

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Posted in Market Commentary | Tagged: , , | 4 Comments »

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):

S&P500

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):

solarcycles

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):

decades

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.

Good luck,
Danny

Posted in Market Commentary | Tagged: , , | 3 Comments »

 
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