Stock Markets, The Curse of the Year Ending in 7 – True or Myth?
I’ve heard many times thoughout the year that the market is bound to go down in 2007, “because it always goes down in the years ending in 7″. Nobody knows why or how, but it just happens, deal with it. Just for the fun of it and in part to calm my own fears, I thought I’d check if it’s true. Here’s a chart of Dow Jones Industrial Average (DJIA) annual closing values, courtesy of StockCharts.com. The red lines are my doing – they highlight each year ending in 7.
Click to enlarge
If any conclusions can be drawn it would be that 1) the market (as represented by DJIA at least) does not go down every year ending in 7; 2) true, it did go down in the years ending in 8 a few times; so it’s possible this is what we’re building toward this time as well.
Wouldn’t it be easier to just have the market correct, shake it off and have it over with? Most recoveries have been pretty swift, none taking more than 5 years to get to pre-crash levels.
Chart source: http://stockcharts.com/charts/historical/Print/djia1900print.html
Dear Pu, it’s no big secret that the economics/stock markets have their fundamental and “historycal” cycles.
Even by learning from entry level clichés of The Elliot’s Wave Theory, you can get enough rules for the quick analysis of most market positions.
There are seven-waves-movements, Fibonacci retracement levels, etc.
“A recapitulation of the typical 10-year cycle could soon pose a thorny problem for domestic stockholders. That’s because, except for the 1920s and 1990s, U.S. stocks established concluding bull market tops in either the 6th or 7th year of every decade in the 20th century, including all 4 occasions when the bull sprang to life from a 2nd-year low. Over the past century, the 6th year marked the end 6 different times (1906, 1916, 1946, 1956, 1966, 1976), the 7th year twice. Bull markets off 2nd-year bottoms tend to last longer than most, and then fall harder once they’re done. Waterfall declines in the S&P averaging 35% following the market tops of 1987 and other years (1937, 1946, 1966) preceded by second-year bear market lows offer the likeliest indication of what’s in store at the conclusion of the present bull market.”
http://partners.futuresource.com/fbp/2006/1006.htm
True enough, but I also believe with the speed of *everything* increasing, we go through the cycles much quicker, so they won’t necessarily fall for year 2007.
Plus, in a lot of cases data is made to match the theory, not the other way around. And if you look long enough, you’ll find enough data to reconfirm any theory. In the end, it all may become a self-fulfilling prophecy (if enough people believe in something, it will happen for sure because they all are ruled by that once concept).
There’s plenty of people on both sides of the fence: those saying we’re entering a secular bear market and those that say we’ll shake it off and keep moving on up.
I have no particular opinion, but I belive these scenarios are likely (and I’m quoting someone, don’t know the author):
“Scenario 1: The Fed sticks to its assertion that the risks for inflation and growth are now in balance, does not cut rates any further, and the U.S. economy grows past its credit crunch. If this happens, it would be massively bullish for the U.S.$, massively bearish for gold and potentially bearish for Hong Kong and Chinese equities (which are now anticipating more rate cuts). It would also be very bearish for U.S. Treasuries and government bonds around the world. Additionally, we would also most likely see a rotation within the stock markets away from commodity producers and deep cyclicals (which have been leading the market higher for years) toward the more traditional “growth” sectors, such as technology, healthcare, consumer goods, and maybe even Japanese equities.
Scenario 2: The Fed sticks to its guns, does not cut rates, and the U.S. economy really tanks under the weight of the credit crunch. In essence, the U.S. would move into a Japanese-style “deflationary bust.” In this scenario, equities around the world, commodities, and the U.S.$ would collapse, while government bonds would go through the roof.
Scenario 3: The Fed ultimately cut rates, but this fails to rejuvenate the system and get growth going again. This would likely mean stagflation. As such, gold and other commodities would do well, while stocks and the U.S.$ would struggle. Excluding bonds, this is increasingly what the market is pricing in today.
Scenario 4: The Fed ultimately cuts rates, and succeeds in reigniting the economy. This would be good news for equity markets, commodity markets, and the U.S.$ (as world trade and foreign buying of U.S. assets would again expand, increasing the need for U.S.$s). Of course, this scenario would be terrible news for bonds.”
I’m heavily invested in resource stocks at the moment, and there’s hopefully more than one case in which it should play out well for me 😉 But of course there’s no place for “hope” in the market. I did my due diligence though.