This post introduces a study I'm conducting with the main objective of understanding the cycles and sub-cycles that the S&P500 Index has.
Why am I studying the S&P500? Because it is the most relevant index in the world. There is not any other economy in the world that gets close to the returns of the US stock market as a whole, and also, we have a massive amount of data back from more than 100 years ago. So with all that said, let's start.
The fundamental view I have regarding the market is that the price has moved between periods of fear and optimism through history, on a cycle that never stops. There is either Fear or Optimism, in other way impulses and corrections. On this chart, we can go through periods of optimism and fear caused by multiple factors, different governments, different geopolitical situations, massive crises, changes in interest rate; you name it, all of them are on this chart, the dot com bubble, the subprime crisis, the missile crisis with Cuba, wars, oil crisis, 1929, etc.
The first conclusion I can make at first glance is that despite what was causing it, fear and optimism tend to have characteristics that we may be able to understand. This is a strong base for technical analysis as a discipline. Fear looks the same through several situations, and the same applies to optimism. That's why understanding the price is a powerful element to conclude where we are on the cycle. So what is the price telling us?
In this post, we will not only go through the big cycles, but also we want to understand the smaller ones. Now I will put my main conclusions regarding the information I have found.
THE BIG CYCLE: -------------------- Impulse 1: 1877 - 1881 = 4 Years / 152% from bottom to top.
Correction 1: 1881 - 1897 = 16 Years / -41% from top to bottom. -------------------- Impulse 2: 1897 - 1902 = 5 Years / 144% Fromb bottom to top.
Correction 2: 1902 - 1921 = 19 Years / -40% from top to bottom. -------------------- Impulse 3: 1921 - 1929 = 8 Years / 400% from bottom to top.
Correction 3: 1929 - 1933 = 4 years / -84% from top to bottom. --------------------
Here we can observe a clear change in behavior regarding impulses. Until 1933 we observe short impulsive periods and long corrective periods. From 1933 until now, this trend reversed, we have long impulsive periods and short corrective periods compared to the past.
-------------------- Impulse 4: 1933 - 1969 = 36 years / 2106% from bottom to top.
Correction 4: 1969 - 1974 = 5 years / -48% from top to bottom. -------------------- Impulse 5: 1974 - 2000 = 26 years / 2500% from bottom to top.
Correction 5: 2000 - 2009 = 9 years / -58% from top to bottom. -------------------- Impulse 6: 2009 - present = 13 years / 600% from bottom to top.
In PART 2 of this series of posts, I will go through the sub-cycles we observe from 1933 until now. My main objective is to understand the similarities between these impulsive situations (impulse 4,5 and 6)
Here I give you a snapshot of what will be coming:
Impulse 4 with sub impulses and corrections:
Impulse 5 with sub impulses and corrections:
Impulse 6 with sub impulses and corrections:
Here you can see the Days and % decline of each correction inside the impulses. Thanks for reading! I will be updating this soon.
@OptimoomFX, Thanks mate! Great to know it's useful.
TradingAlchemist
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hallo everyone
Solldy
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Thank you for posting this idea
dwbosch2735
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Interesting analysis, though as the saying goes, past performance is not indicative of future results. :D I do believe this analysis is consistent with the ideas of dollar cost averaging, etc which are staples of investment strategies. Also reinforces the idea that market timing is rarely profitable over the long haul...
cantremeber
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Well done so far, and excited to see what's to come
Thanks for your work