A study of American history reveals a very clear (average) 18-year cycle in US real estate prices, measured from trough to trough or peak to peak. Stock market investors and traders should be aware of this because towards the end of every real estate cycle, the US stock market has broken into all time new highs and formed a major top, then, shortly thereafter, collapsed and lost a minimum 50% of its value, but usually more. Every 18 or so years, since 1800. This seems to catch everybody by surprise, despite the fact that the event is as regular as clockwork. The stock market recovery from the eventual bottom is always slow and drawn out (though faster now than it was prior to the Second World War and the then belief in government inactivity) and takes years (at least ten years) before they climb back up to approach previous all time highs. This can be helpful to know, since:
Gann’s Financial Time Table
There is actually very little information around to show traders how to recognize a major market top, but even more important, how to exit before the dramatic fall which inevitably follows. Identifying a major stock market top can, therefore, help traders / investors to avoid large capital losses, or, indeed, short almost any stock on the way down, especially banks.
It may help investors “time” the market better, both at the top and at the ultimate final (higher)low before the new bull market, and
Present a way for traders to have the strength to actually do the opposite to the herd, always so thunderous at momentous market peaks like the one recently seen in 2007 / 8.
One of last century’s great traders, W.D. Gann, suggested an exact 18.6 year cycle (18 years and 8 months) is present in the US stock market, which he published as a chart, in 1909.
Gann suggested it was his “most important ever discovery”, though he went on to say that about several other things as well. Nevertheless, the discovery involved “time”, the first time Gann ever mentioned the fact, and since cycles are time based, perhaps it is worth a look. Study in particular the years as marked with a ‘k’. It was my study of US real estate collapses that first drew me to this Gann Financial table many years ago. 1914, 1933, 1952 and 1970: all subsequent major stock market lows. Remember, Gann published that in 1909!
W.D. Gann also observed what he came to call “the decade cycle”. In his many commodity and stock market courses, he described the decade cycle this way:
By studying the yearly high and low chart and going back over a long period of time, you will see the years in which bull markets culminate and the years in which bear markets begin and end. Each decade, or 10-year cycle, which is one-tenth of 100 years, marks an important campaign… In referring to these numbers and these years, we mean the calendar years. To understand this, study 1891 to 1900, 1901 to 1910, 1911 to 1920, 1921 to 1930 and 1931 to 1939. The ten year cycle continues to repeat over and over, but the greatest advances and declines occur at the end of the 20-year and 30year cycles, and again at the end of the 50-year and 60-year cycles, which are stronger than the others…
Year
- A year in which a bear market ends and a bull market begins. 1901, 1911, 1921.
- The second year is a year of a minor bull market, or a rally in a bear market will start at some time. 1902, 1912, 1922, 1932.
- Starts a bear year, but the rally from the second year may run to March or April before culmination, or a decline from the 2nd year may run down and make bottom in February or March, like 1933. 1903, 1913, 1923.
- The fourth year is a bear year, but ends the bear cycle and lays the foundation for a bull market. Compare 1904, 1914.
- The fifth year is the year of Ascension, and a very strong year for a bull market. See 1905, 1915, 1925, 1935.
- The sixth year is a bull year, in which a bull campaign which started in the fourth year ends in the Fall of the year and a fast decline starts. See 1896, 1906, 1916, 1926.
- Seven is a bear number and the seventh year is a bear year because 84 months or 840 degrees is 7/8ths of 90. See 1897, 1907, 1917, but note 1927 was the end of a 60 year cycle, so not much of a decline.
- The eighth year is a bull year. Prices start advancing in the 7th year and reach the 90th month in the 8th year. This is very strong and a big advance usually takes place. Review 1898, 1908, 1918, 1928. (2008 did not follow this pattern, which is where a little real estate cycle knowledge was helpful in this instance.)
- Nine is the highest digit and the ninth year is the strongest of all for the bull markets. Final bull campaigns culminate in this year after extreme advances and prices start to decline. Bear markets usually start in September to November at the end of the 9th year and a sharp decline takes place. See 1869, 1879, 1889, 1899, 1909, 1919 and 1929, the year of the greatest advances, culminating in the fall of that year, followed by a sharp decline.
- Ten is a bear year. A rally often runs until March and April; then a severe decline runs to November and December, when a new cycle begins and another rally starts. See 1910, 1920, 1930.
Putting all that together, we can expect US stock markets to have a year with a downward bias, for 2010,with probable lows later in the year, around October / November, then a decent rally into 2011, into the Northern Hemisphere summer, with then further (higher) lows in 2012. By then, the recent GFC will be but a distant memory and the US will be well into its next – inevitable – real estate cycle: inevitable because the underlying structure of the economy has not been altered. Indeed, the current President has done all he can to preserve it, laying the basis for the non interruption of these cycles and patterns.
Gann’s Financial Timetable is a fraction out now, as originally published by Gann, but, for reasons I will not go into here, if you replace ‘1989’, with 1991, and count forward, this will give you something VERY interesting to follow over coming years.
Phil Anderson
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