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Theory versus reality. It’s a never-ending battle. Consider the word “patience.”  The dictionary defines patience as follows:

“The ability to endure waiting, delay, or provocation without becoming annoyed or upset, or to persevere calmly when faced with difficulties.”

This is just a bit different than the average man on the street nowadays who defines patience as:

“Something I lost a long time ago.”  Or even more succinctly as, “You’re kidding, right?”  

Oh well, just another clash between theory and reality. And what a shame. I think we can file this under the category of “be careful what you wish for.”  For the longest time investors said “If only I had access to information at my fingertips.”  And poof – along comes the Internet. Now we can easily access more information than we could possibly digest in a dozen lifetimes. So is this a good thing?  It kind of depends, don’t you think?  More and more it seems like “patience” has been replaced by the need for “instant gratification.”  If we can’t get what we want and we can’t get it right now, then darn it, that’s just not good enough. Which is interesting. When I started in this business there were these people known as “long-term investors.”  I forget the exact definition of “long-term investor” but I’m pretty sure it was someone who never used words or phrases such as “scalping,” “round-turn,” preset orders” or “tick data.”  As I recall they seemed like a fairly rational group of folk. Wonder whatever became of them. Probably grew old and died. 

Anyway, I mention all of this because I have received some compliments recently that something that I stumbled upon a number of years ago is apparently “working again,” after a seeming eternity of “not working so well.”  In May of 2003, I first wrote about the 40-week cycle in the stock market that I had heard about and been following for about 12 years prior. And what a track record this phenomenon had amassed. So of course I just had to go and write about it. And so then, of course, Murphy’s Law being what it is, the whole theory kind of stalled. So for about the past four years, this “great, wonderful, you can’t lose proposition” actually underperformed the market as a whole. Likewise, the periods that were supposed to be bearish actually outperformed the periods that were supposed to be bullish. All this of course after a number of investors had added the 40-week cycle to their trading arsenal at my behest. 

Finally, just when all appeared lost, March 2^nd, 2007 rolled around. This marked the start of the latest “bullish 20 week phase” – i.e., the first 20 weeks of each new 40-week cycle. Since that time the stock market has rallied sharply and the cumulative return achieved during the “bullish phases” has run to a new all-time high. 

Chart 1 displays the growth of $1,000 invested in the Dow Jones Industrial Average during the first 20 weeks of each new 40-week cycle (i.e., the bullish phase) starting on 4/21/1967 and extending through 9/19/2003. Chart 2 displays the growth of $1,000 invested in the Dow Jones Industrial Average during the second 20 weeks of each 40-week cycle (i.e., the bearish phase) starting on 4/21/1967 and extending through 9/19/2003. The results pretty much speak for themselves. 

Chart 1 – Growth of $1,000 invested in Dow Industrials during 20-week bullish phase from 4/27/67 through 5/19/03

Chart 2 – Decline of $1,000 invested in Dow Industrials during 20-week bearish phase from 4/27/67 through 5/19/03

Clearly, the bulls had had the upper hand during the bullish phase. But Chart 3 displays the results during the various bullish and bearish phases since 5/19/2003. And as you can see, for about three and a half cycles the “bullish” phase did nothing, and in fact underperformed the supposedly “bearish” phases. Finally, during the latest market run, the bulls have once again overtaken the bears. 

Chart 3 – Growth of $1,000 invested in Dow during “bullish” phases (blue line) versus bearish phases (purple line) from 5/19/03 through 3/2/07

Now the first reaction of many might be to dismiss the 40-week cycle as some arcane relic or at the very least to put it aside as a tool and say “I’ll look at it again when it starts to work again.”  But therein lies one of the problems faced by all investors. Once something “doesn’t work” for awhile, we feel the powerful yearning to dump it and replace it with something else. Never stopping to remember that nothing in the markets works all the time. Never stopping to remember that in the market, just when something seems like it’s not coming back, it can turn on a dime and surprise everyone. 

Chart 4 - Growth of $1,000 invested in Dow Industrials during 20-week bullish phase from 4/27/67 through 6/1/07

As one peruses the equity curve in Chart 4 rocketing to new all-time highs it is easy to ask “What was I worried about?”  

To paraphrase a popular old adage, “Patience, people, patience.”

To search for previous articles written by Jay Kaeppel, please click here.

Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site

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