How to trade decennial cycles
29/08/11 10:47 AM
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Glossary
How to trade decennial cycles
Alex Jamieson unravels the mystery of the decennial cycle and how to trade
them successfully.
To understand a market cycle can provide you a framework to construct a forward forecast of what might happen in the
future. A cycle is a pattern that has consistently repeated itself over a period of time. While some cycles only last for a
matter of months, other more reliable cycles have tracked through time with an uncanny level of certainty.
In essence, cycles can be thought of large beacons on the future providing directional indicators of what might occur at a
future date in time.
For example, since 1886 the market has followed a natural cycle with a fair degree of accuracy every 10 years – commonly
referred to as the decennial cycle.
The decennial cycle has had an amazing track record in forecasting recessions, share market crashes and periods of
abundant growth. Essentially the decennial cycle looks at the market in 10-year blocks such as from 1900-1909, 1910-1919,
1920-1929 and so on until you reach the current year 2011.
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Once the 10-year block has been formed it will then look at each year in isolation. So for example, it can then reveal what
has been the average performance of year “7” in each set of 10 years – i.e. 1907… 1987… 2007 and so on.
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The decennial cycle is only interested in one year's performance, so was the year “7” on average a positive year or a
negative year since 1886? What is interesting about the decennial cycle is that it tells us about the past and how can we
apply this to the future. So what does a decennial cycle look like?
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On average, years 0, 1 and 7 are generally the worst periods to an investor if you are trying to go long in the market via an
index exposure, but far more beneficial if you are trying to short the market or profit from a falling market. You only have to
think about years such as 2007, 1987, 1907 for prime examples of fallen markets or crashes.
Did you also know that in most cases recessions on average occur around the start of the decades like 1930, 1981, 1990,
2001? This make sense then that the share market performance during these periods of times tends to be flat to poor for an
upwards or bull market orientated investor. In these instances, one needs to be far more nibble in which assets they hold in
the pockets of opportunity as opposed to the total market.
So how would one make money out of this period of time? Well from a traders perspective range trading would possibly by
an ideal strategy during this particularly time period for 0 and 1 year. Possibly also looking at short or taking advantage for
falling markets will also need to be a strong focus in ones kit bag of tricks. For long only investors focused only on the
upside, one would need to be in pockets of opportunities rather than just an index exposure to maximise potential upside
opportunities.
The safest periods of time to invest for an investor focused only on the upside would be from years 2 to 6. In fact, between
2002-2006 this held very true with strong upwards movement up year after year. The best year on average has been year 5
with the bulk of the 10-year performance being made in just this year alone. This year would be one not to be a sleep at the
wheel and have all your guns blazing to capitalise on these easy pickings.
Generally around these times you also feel like a superstar investors or trader so it is important to keep your emotions in
tact and not get too carried away.
Like most long-term cycles sometimes they may start a year or two later or earlier, but these indicators are an excellent
file:///Users/suzyj/AJFP/How%20to%20trade%20decennial%20cycles.webarchive
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How to trade decennial cycles
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measure to park on your desk and look at when you decide to enter the market.
2010 in the Australian market pretty much followed through on a similar pattern to the “0” being negative marginally, and
2011 is looking at this stage to be a similar outcome once the calendar year closes out. One will have to wait to see how
the rest of the decade will pan out according to the decennial pattern, but at least you will have a road map of what has
occurred historically on average for the past 125 years.
Good luck with your investing!
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YTEmagazine: Alex Jamieson unravels the mystery of
the decennial cycle and how to #trade them
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YTEmagazine: YTE blogger @mariosingh on how
#traders need to understand #currency pairs in relation
of one currency from another. http://t.co/LsSCGzl
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traders need to understand #currency pairs in relation
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