The US market appears to have repetitive tendencies to how it unfolds over the 10 years period. This is known as the decennial pattern which we can use to our advantage in timing the market.
The decade begins with year ending in ONE, follows by TWO, THREE and so on. It concludes with year ending in ZERO.
It is interesting to know that most major market highs have come in years ending in NINE (sell point?) and ZERO.
Based on average December prices, the annual return in years ending in ZERO are among the worst in the decade, after years ending in SEVEN (buy point?).
While years ending in FIVE have produced the best returns, follow by years ending in EIGHT.
Years ending in TWO and THREE are considered good buy points as well, as they lead into the phenomenal years ending in FIVE.
Incidentally, years ending in TWO and EIGHT have shown an unique ability to start major rallies.
The details on this study can be found at Wiley website.
Four Year Phenomenon
Larry Williams shared his observation of the Four-year cycle phenomenon: Every four years we expect a market bottom.
There was one in 1998. Cue 2002, we saw market (S&P 500 and DJIA) bottomed during the second half of the year. Similar market low can be seen in early 2003, before the market rallied through 2006, albeit a sharp correction in May-June, the bottom did not happen.
We shall wait and see what happen leading to 2010.
October, the bear killer
If our investment time horizon is 6 months, what is the best month to buy stock market index?
The answer is October. While the worst month to start buying is April.
Majority of major stock market buying points have begun in October. This has led to a market rally, on average, into the April-May time frame. Then the market is most likely to stagnant or go flat, or even decline. Sometimes there might be a substantial down move into the next October lows.
Why October? There may be 2 reasons. First, corporations announce quarter earnings, which tend to be dismal this time of year. Second, Federal Reserve starts to either decrease interest rates or increase the money supply in anticipation of Christmas sales.
The bond market (treasury bonds) usually leads the stock market. When bonds rally for a while, stock market will follow. The variable lag effect can be anywhere from 6 weeks to 6 months.
Bonds have most often rallied in October.
Also the vast majority of the time the Dow Jones Utility Index starts a big rally just about the time the stock market stops going up or goes into a sideways trading zone.
Generally, this usually begins around first week of April until first week of October each year.
Larry suggested a rolling investment program:
- Buy the DJIA in the last week of October of each year, exiting on the first Friday of April the next year.
- Purchase the 5 best Dow Jones Utility stocks of each year, holding until the first trading week of October.
How to select the best stocks?
The best group of stocks to buy would be based on the following measures of value in the average or sector we are purchasing:
a) Lowest price,
b) highest yield, or
c) lowest price to sales ratio.
NOTE: Ideas from the book "The Right Stock at the Right Time: Prospering in the Coming Good Years" by Larry R. Williams.
