Monday, December 19, 2016

A Prediction from the Year 1819

If you think Nostradamus was good, and maybe you don't, back in the year 1875 a farmer in the United States, by the name of Samuel Benner, who was wiped out by the panic of 1873 sought to figure out the reasons for economic booms and panics.

He plotted corn, pig and iron prices religiously and attempted to ascertain cycles and wrote a book called "Benner's Prophecies, The Future Ups and Downs of Prices" and he published it in 1877. The book is still available today for those who are so inclined. The original price charts, and derived cycle chart are still available.

In 1978, A. J. Frost, working with Robert Prechter, updated Benner's work and added stock market prices as another indicator of economic strength or weakness. Below, you will find A. J. Frost's time table for cycle highs and lows. I have re-drawn this chart to protect the original copyright, but none of the data in the chart has changed.

Benner Fibonacci Cycle Chart

So, the key to this chart is that the economy experiences peaks every 8, 9 or 10 years - repeating. And it has minor troughs every 16, 18, or 20 years - repeating. And it has major troughs every 16, 18, or 20 years - repeating.

And, when you seriously look over this chart, and consider that some of these predictions were made with cycles derived in the 1800's, you might think "not too shabby". You have a certain stock market peak in 1929, a low about 1933 - which are hard to argue with. Some stock market highs in the late 1950's and 1960's followed by some lows around 1975. And then there is a general upswing in stock prices indicated from 1975 to about 1983.

Now keep in mind, this chart was never intended as an Elliott Wave counter. That is, the chart is not trying to count Elliott Waves one-for-one. No, counting Elliott Waves is a separate and distinct exercise. Instead, this chart was trying to elicit the best years to look for tops and bottoms.

Alas, even with that as the case, this chart has fallen into severe disrepute because of what people see in the chart from 1983 to 1987! What most people see is that "yes, stocks did have a bottom in 1987", and that was the famous crash of October, 1987 - that was predicted by Robert Prechter. But, the problem is what they also see is a line going down from 1983 to 1987, and their eyes glaze over, and  they shake their heads. "No", they say. "Stock prices rose in one of the greatest rallies of all time from 1982 to 1987. This chart can't be right! Throw it away! Now! It would have wiped me out!". People are like that sometimes.

I argue that even when you use the original chart, you need to make only one visual modification to have the chart make sense. I have made that modification, below.

Benner Fibonacci Chart with Important Notation

I contend you only need to realize what happened in 1973 - 1975, when President Nixon closed the Gold window to fully understand this chart. Since the dollar post-1975 was not convertible into gold, this chart now makes ultimate sense - because the central bank was able to inflate like crazy and change the measuring stick. So, that means even though a cycle trough is due in 1987, it occurs from a much higher level than the prices in 1983. Oh, the crash happens alright - and right on schedule - but the change in the measuring stick is not recognized in the chart! And, how could it have been? How could someone predict what one, certain, individual man, or a particular president will do - at some point in the future from an aggregate of past prices?

There's no way to do that.

But what would we find if we looked at an update of the chart above now knowing that the measuring stick for prices has changed, is changing and will continue to change in the near future? Is the chart still as useless as some people claim? Well, I have taken considerable time to update this chart for cycles in the future, and show it below.

Updated Benner Fibonacci Chart
Now when you look at this chart, ask yourself, "did stock prices generally rise from 1987 to 1991, in opposition to Robert Prechter's call for a major bear market?" Yes, they certainly did. And, how about in the year 1995, was there a stock market crash? What's that? "No", you say? You say stock prices continued rising? Well, let me remind you about this little problem experienced in Orange County and in Mexico.

Courtesy of the Wall Street Journal ...
"For most, 1994 wasn’t a particularly notable year. There was no presidential election, no major geopolitical developments, no stock market crash, and no summer Olympics. And yet it’s a year that ought to be etched on investors’ minds. Because, in 1994, the bond market suffered a very sharp and sudden selloff that started in the U.S. and Japan and then spread more or less across all developed markets."

And, this sell-off occurred late in 1994, resulting in a second wave for US indexes, as shown in the chart below.

SP500 - Weekly - Late 1994 Correction

Ok. So this chart being what it is, now ask yourself, "did stock prices go up into the year 2000?" You bet they did. In spades! And, then, "did stock prices go down after the year 2000 into the year 2003?" Once again .. you bet they did: there is no debate about that.

So, then what about a continuous up cycle from 2003 to 2010? Well, here again, there can be no doubt that prices were higher in 2010 than they were in 2003. We know that. And we also know that prices made a new all time in 2007, due to Alan Greenspan's goosing of the housing market along with George Bush, and Bill Clinton's signing of the repeal of the Glass-Stegall Act.

But we all also know that 2009 made a new low over prices in 2003 - well - at least it did in some markets! Certainly, the DOW and S&P did. But certain other markets like the Dow Jones Transportation Index, the NASDAQ Composite, the NASDAQ 100, and the London FTSE did not make new all time lows in 2009 over 2003. Still, we probably both could say, we could not use this chart as an "ultimate" wave-counting or wave timing chart because we simply couldn't sit through a swing like 2007-2009. And, that is, in fact part of my message here. So hold on for just a moment.

We also know that in 2008 the activist Federal Reserve again, unilaterally began dropping interest rates to try to sooth the banking sector - in a very big way - with QE1, QE2 and QE3. And yet, all will recall that 2010 was the year of the still unexplained FLASH CRASH. I traded during that time, and there was no doubt then that it changed a short term market cycle anyway. Yes, prices did recover to a new high from it, and then the chart says we should expect a low in 2011 - and what happens? Prices peak in May, 2011, and then decline into October, 2011. From a peak of about 1,370 to a low of 1,074 is a near perfect "bear market decline" of 21.6% (by the generally accepted definition of a bear market).

So, while this doesn't again prove anything, ask yourself again from the lens of history, "why was there two market tops, and both a flash crash and a beautiful five-wave decline in 2010 and 2011?" Why did they happen in those years? Why didn't a flash crash happen in 2006, for example, or why didn't it happen in 2013? Why those years? Do you begin to see what I am getting at?

Of course, the rest is history in one way of looking at the world. Prices again are higher now than they were in 2011, and we are not yet to the next key date on the chart. And yes, we did have another major correction in the middle (as 2015 and 2016 do not appear on the chart.)

What year is this? Yep, 2016.  We are less than two weeks from 2017, and what year is the next key date on the chart? Yup, 2018. Don't look at me. I did not make up the math of these cycles. They were discovered by others. They date back to data from 1819, and they make some fairly narrow patterns for some specific years!

On the one hand, I am as skeptical of long term cycles as anyone may be. But I am more friendly to this verifiable record (or not - as you wish to see the errors in the cycles) of this cycle chart than any other type - especially some ridiculously vague idea of a Saeculum cycle as a way to predict the health of financial assets.

So, if I'm not a full believer in these cycles, what schema am I proposing in general?

First, and foremost, if I can do the above work, and update the chart in an afternoon or two, you can bet your boots that the Federal Reserve has employees (or even college interns!) that can have done it, have actually done it, and are doing more. Next, recall Federal Reserve press conferences or Congressional testimony. You will sometimes hear the FED chairperson talk about "anti-cyclical policy". Yes, you have it right. The Federal Reserve knows what the cycles are - and, they often actively use  monetary policy to combat the cycle currently in place. The FED has gotten you off the GOLD standard; they have both tightened interest rates in an unprecedented manner up to 18% to crush inflation in the 1970's and they loosened interest rates to near 0% in the 2010's to fight deflation. Most importantly, the FED, by these actions, keeps changing the very measuring stick of financial assets, and so it is no wonder that one cycle chart developed with data almost two centuries ago doesn't provide an exact road map. Was the FED as active in 1819 as it is now?

But it is amazing to see where the hits are!

Secondly, no one ever proposed that this cycle chart be used as a replacement for wave counting. And I am not either. Certainly, from my vantage point, it is, in fact, wave counting that protects one from the 2007's and 2009's that don't show up on the chart! So, wave counting takes precedence.

Thirdly, I like to "test" things. This chart provides a major upcoming test - of a top in 2017 or 2018. I'd like to see if there's another "hit". If so, it would project a three-year decline or bear market into 2021. That would be interesting, indeed. But I do have to say, that knowledge of this work is one of the reasons I was a staunch proponent of a Primary Vth wave in February, 2016, rather than the bear market that so many predicted.

Unlike some other amazingly vague cycle work, done by some people I don't even consider Elliotticians any more, this work gives you a clear hypothesis to test. And it is reasonably objective. You can do the test yourself. And, when things work or don't work, you don't need a guru to be telling you, "see how good my methods work", or "we have this exception because I said so".

As you may know, this Benner-Fibonacci chart was popularized in the Elliott Wave Principle by Frost and Prechter. I have read many, many newsletters by EWI over the years. Do you think they ever dusted this one off to see what it says now? I've never seen it. Isn't that kind of a shame? Keen minds wonder.

Have a wonderful week ahead.




18 comments:

  1. Thanks Joe. Great study. This is where astro finance come into the picture, and I follow Merriman who is fairly accurate with the cycles. Planetary positions follow cycles similar to the one above, but it is also important to notice the impact of tertiary planets impacting the conjunctions or squaring of these known combinations. For examples, 2009 -2012 was when jupiter and aries were present in the bullish mix, and that caused the exuberance that you refer to as "Fed". And a venus translation is around the corner in April that correlates to large market tops/bottoms. Also to note, in many cases polarity is used instead of a bullish or bearish cycle.

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    1. Thanks regarding the study, but science has long shown that the energy from any planetary gravity is too small to affect anything meaningful. In other words if planetary alignments were strong enough even to affect our 'brainwaves' for example, they would have to be strong enough to be able to be detected because we can now detect the energy from even one photon, or one electron, which we couldn't before - when people believed in astrology. Given that no such detections have been made, the planetary hypothesis is set aside in favor of the Fed which can be seen and felt - especially by those in the banking industry.

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    2. Joe thanks for the powerful commentary. There is just the other dimension that you are screening out, not that you need it to succeed in what you are doing. But there is a logical fallacy in the background cosmic assumptions you make...planets do not influence because of some material assumed force like gravity. There is a dimension of "meaning" in which planets are carriers of a meta-language, very accurate and very revealing. They are part of the same phenomenon as cycles that exist in every area of nature not just markets and existed way before there was a Fed. Learning to read that language is a plus, not necessary for you of course, but please don't deny it.

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    3. Oh. I don't deny it. The planets have orbits about their sun. That is their cycle. Whether they influence anything much on earth, meta-wise or not, is up to you to 'prove', and not me, because I don't make that claim. Certainly we know the Sun influences things on earth - it makes the earth warm and drives the weather - and shoots out plasma solar flares every now and again - and keeps the earth in it's orbit. That's a large influence. But the sun is massive compared to Uranus or Neptune and it's energy can be measured. Likewise, the moon influences the tides. Again measurable. Show me the actual metrics that refer to the effect of the influences of the distant planets or constellations and I'll look it over. Only peer-reviewed university-level or higher studies will be accepted as evidence. Thanks.

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    4. It's there, but it takes effort to access, not worth either of our time right now. Merriman is one who has done statistical studies, and I have the lines on charts to illustrate, but without desire on someone's part to investigate, it's not worth the heavy lifting. It's just not about gross sizes of planets and measuring tides and stuff. That's a bullock cart approach. The planets are all Fibonacci distances apart. that might be a little hint.... Don't want to get into a quibble with you as I have massive respect for you as a teacher of an approach I need to learn.

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  2. The problem with charts like this is that we could have a brutal recession next year, with the market declining 40% or more, and then recover and make new highs at the end of 2018...and folks would conclude that the chart is magic.

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    1. Yep. Tell that to the bulls in 1929, the bears in 1975, the bulls in 2000, or the bears in 2003 or 2011. There is no magic in the chart. There is no magic in investing. You can chose to give more attention to the Federal Reserve or to Facebook, for example: the choice is up to you.

      If the chart has any value, then it is probably in the description of a "muddled, chaotic, cycle". It shows things swinging back and forth. It may be over-production that leads to under-production. It may be irrational exuberance that leads to introspection or more conservative values. Not magic.

      But it is "muddled and chaotic" cycle because things are not now as simple as they once were. At one point there was not a Federal Reserve. Now there is not a gold standard for the US Dollar. At one point there were not automobiles. Now there are planes, high-speed trains, computers, iPhones and the Internet. At one point (in 1835) the US actually had or owed 'no' (i.e zero) debt. Now it owes $19.9 Trillion. Things have become more complicated.

      Will such cycles work in so much more of a complicated world? Maybe. Maybe not. But one can not test a hypothesis without first describing what hypothesis is being tested. Meanwhile, waves are counted. Day-by-day .. counting waves .. wax-on, wax-off.

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  3. Thank you for this wonderful piece (as well as all the others you write). I greatly appreciate the information you provide.

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  4. Hi joe
    Armstrong made more or less the same picture
    file:///C:/Users/domin/OneDrive/Documents/Qui%20perd%20gagne%20_%20Bourse%20–%20Economie%20_%20Page%202.pdf

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    1. It is not possible for me to read your local file. It would have to be an http://.

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  5. Thank you Joe. This is an awesome article.

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  6. http://www.quiperdgagne.fr/le-cycle-darmstrong-lance-une-alerte-pour-debut-octobre-2015
    Hi joe
    Here is the cycle of armstrong that I have since August 2015 but it does not quite correspond

    what do you think about it?

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  7. http://www.quiperdgagne.fr/le-cycle-darmstrong-lance-une-alerte-pour-debut-octobre-2015
    It is in English
    On the top right you can change the language

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    1. Interesting. Thanks, and thanks for the helpful link.

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  8. Hi joe
    It is a good French site that gives good info
    If it can help you for your analysis I'm happy

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  9. Joe I give you another interesting french site
    http://www.businessbourse.com/

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