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Riding the Market's Rhythmic Waves
Wall Street has a secret that few casual investors recognize: the stock market dances to predictable rhythms that have persisted for decades. Jeffrey Hirsch's "The Little Book of Stock Market Cycles" might seem like just another market timing guide, but it represents the culmination of nearly 50 years of meticulous research started by his father Yale Hirsch, founder of the Stock Trader's Almanac. This book has gained cult status among professional traders who rely on its seasonal patterns to guide billions in investment decisions. Warren Buffett reportedly keeps a copy in his office, while hedge fund titans like Ray Dalio have praised its insights. What makes this slim volume so powerful is its ability to cut through market noise and identify the underlying patterns that have consistently governed market movements since record-keeping began. As financial historian Peter Bernstein once noted, "The elegant simplicity of Hirsch's work is that it reveals how human behavior, not random chance, creates predictable market movements." In a world obsessed with complex algorithms and high-frequency trading, Hirsch reminds us that understanding human psychology and historical patterns remains the surest path to investment success.
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Bull and Bear: More Than Just Market Mascots
A rising tide lifts all boats, and most stocks perform well in bull markets. Conversely, economic recessions and bear markets drive stocks down collectively. As John Kenneth Galbraith wisely noted, "Financial genius is a rising stock market" - a reminder not to confuse brains with a bull market.
Being in a bull or bear market has the single greatest influence on stock prices and portfolio value, making it critical for investors to identify which market they're in. During 2008, most investors saw their portfolios cut in half unless they moved early to bonds and cash. Beyond determining whether you're in a bull or bear market, understanding what type it is proves equally important.
The terms "secular" and "cyclical" describe different market timeframes. Secular markets typically last 10+ years, while cyclical markets last under 10 years, usually less than 5. Secular bulls span years when markets produce successive new highs and higher lows, while secular bears often coincide with protracted military campaigns and financial crises when markets fail to reach significant new highs.
Since 1896, the market has experienced eight secular periods - four bulls (1896-1906, 1921-1929, 1949-1966, 1982-2000) and four bears (1906-1921, 1929-1949, 1966-1982, 2000-present). Cyclical bulls have averaged 105.4% Dow gains during secular bull markets - 60% greater and nearly twice as long as in secular bears. Cyclical bears are 50% worse and about twice as long in secular bears.
Since 2000, the Dow has experienced four cyclical bear markets (29.7%, 31.5%, 53.8%, 16.8%) and three cyclical bulls (29.1%, 94.4%, 95.7%). The 95.7% bull move from March 2009 to April 2011 was substantial but doesn't necessarily signal a new secular bull trend.
The next big secular bull market won't emerge until there's an extended period of relative peace. This war-market connection has been consistent in previous secular bear periods: 1906-1921 (World War I), 1929-1949 (World War II), and 1966-1982 (Vietnam). War isn't necessarily what starts secular bears, but new secular bulls don't begin until wars end and post-war inflation kicks in.
Additionally, all previous secular bull trends accompanied major paradigm shifts from enabling technologies or cultural changes: railroads connecting coasts by 1896, "talkies" and trans-Atlantic flight in the Roaring Twenties, post-WWII consumerism and the baby boom, and the information age powering the super bull of the 1980s-1990s.
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When War Drums Beat, Markets Retreat
War is the single most important enduring influence on stock markets. Throughout American history, whenever the nation has been engaged in significant military combat operations, the stock market has failed to make meaningful progress. This relationship has persisted for centuries and creates a predictable pattern that savvy investors can leverage.
During wartime, markets become range-bound because the government empties its treasury and focuses on foreign or war-related issues rather than domestic concerns and the economy. This creates sustained inflation. Only after the economy settles and the country refocuses on domestic issues does the stock market soar to new heights.
Human history follows cycles of economic booms and busts and the rise and fall of societies. For millennia, complex civilizations produced massive structures and technological innovations only to eventually collapse. Even our tremendous technological advancements haven't shielded modern civilization from volatility, with war and financial panics shaping humanity throughout the twentieth and twenty-first centuries.
The Dow has never achieved a lasting high during wartime, with breakout attempts consistently thwarted by negative war-related events. The war machine establishes a market floor near pre-war lows through government spending, bargain hunting, and patriotism. When World War I began in 1914, the Dow dropped 6.9% but never revisited that low until the Great Depression. Similarly, the 1938 pre-WWII low was barely breached in 1942 after Pearl Harbor.
Markets react strongly to early wartime news but become more callous as conflicts drag on. They anticipate war's end by moving to high-water marks before the inevitable post-peace selloff. Wartime presidents shape political decisions around election cycles, making unpopular choices after reelection while creating positive news before elections.
Since 2000, markets have been trapped in a trading range, missing the 500+ percent moves that historically occur between major wars. These massive rallies typically follow inflation - World War I's 110% inflation preceded the 1920s' 504% market rise; WWII's 74% inflation was followed by a 523% Dow increase; and Vietnam-era inflation of over 200% preceded another super bull market.
Based on war-peace-inflation market cycles, the Dow will likely remain range-bound until 2017-2018, when major U.S. combat operations should conclude and relative world peace emerges. As inflation peaks and levels off, some yet-undeveloped technology will transform society like cars, TV, and microprocessors did previously.
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A Century of Market Rhythms
Examining the twentieth century's financial history provides valuable perspective on today's economic challenges. While history never repeats exactly, our current situation resembles aspects of three previous busts with some new elements. The next boom will likewise contain characteristics of earlier expansions plus unforeseen developments.
The twentieth century began with financial turbulence. A 31.5% Dow bear market from 1899-1900 welcomed the new century as European immigrants flooded America. After a brief bull market, the Panic of 1901 crashed stocks during railroad control battles. The Rich Man's Panic of 1903 and subsequent recession drove the Dow down 46% to its century low.
Bulls then ruled for two years (1903-1906) with a 144% gain as Henry Ford founded his company and the Wright brothers achieved flight. Real estate values soared while antitrust battles raged. The 1906 San Francisco earthquake and the Banker's Panic of 1907 slashed the Dow nearly 50%.
World War I's outbreak closed the NYSE for four months in 1914. When trading resumed, a bull market began as America maintained neutrality while supporting the Allies. One of the century's ten worst bear markets followed, dropping the Dow 40% over 13 months as Germany attacked neutral ships and began unrestricted submarine warfare. America declared war in April 1917, and when Wilson took control of railroads in December 1917, the bear market bottomed.
A 2,500% increase in government spending from 1917-1919 drove prices up 110% from 1915-1920. As inflation settled, the economy and stock market played catch-up, with the Dow surging 504% from 1921-1929. President Harding's promised return to "normalcy" ushered in nine years of artistic creativity, social liberalization, and financial speculation.
Mass production made automobiles affordable to average Americans, creating the most significant cultural paradigm shift. Movies and radio flourished while government funded new roads and highways. This expansion created an air of invincibility that fueled rampant speculation. For six consecutive years (1923-1929), the Dow climbed 344.5%, with investors buying stocks on 90% margin. It all crashed on October 28-29, 1929, with the Dow falling 23% in two days.
The Great Crash of 1929 was just the beginning. After a brief five-month bull market fizzled in April 1930, ethical abuses and financial scandals surfaced on Wall Street, triggering widespread bankruptcies, business closures, frozen credit, job losses, and bank failures. A major drought beginning in 1930 devastated agriculture, eventually destroying 100 million acres as the Dust Bowl.
World War II officially began when Germany invaded Poland on September 1, 1939. The war's beginning caused three consecutive losing years for stocks from 1939-1941. Once the United States fully entered the war in 1942, the Dow bottomed at 92.99 on April 28, 1942, before rallying 128.7% over the next four years as Allied victories lifted spirits and the war machine stimulated the economy.
After a post-WWII bear market and recession from mid-1946 to mid-1947, the economy found its footing. The Marshall Plan rebuilt Europe while the Truman Doctrine combated Communism. By 1949, the post-war consumer boom launched the economy and stock market on a 16-year upward trajectory.
Despite the Korean War, stocks kept rising through the 1950s and 1960s. Urbanization and mass production fueled corporate profits, sending the Dow 523% higher from 1949 to 1966 on a wave of peace, prosperity, and middle-class growth as it caught up with post-war inflation.
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The Political Market Pulse
What happens on Wall Street is inextricably linked to Washington politics. For five decades, the Stock Trader's Almanac has tracked the four-year presidential election/stock market cycle, which has proven remarkably reliable. While history never repeats exactly, these patterns should keep investors' radar perked up for significant market movements tied to the political calendar.
Presidential elections profoundly impact the economy and markets. Wars, recessions, and bear markets typically begin in the first half of presidential terms, while prosperity and bull markets emerge in the latter half. The pattern is compelling - since 1833, the last two years of 44 administrations produced a total market gain of 724.0%, dwarfing the 273.1% gain during the first two years.
Presidents typically implement painful initiatives early, then prime the economic pump before elections. This manipulation is evident in fiscal measures designed to increase disposable income before elections: increased deficits, government spending, social security benefits, interest rate reductions, and accelerated funding. Federal spending increased 29% more in election years than non-election years during 1962-1973. Social Security increases were 100% higher in presidential than midterm election years.
Political alignment matters too - the Dow performs best (19.5%) with a Democrat president and Republican Congress, while the worst scenario is a Republican president with Democratic Congress (4.9%).
Post-election years often bring painful economic consequences as newly elected officials implement unpopular decisions postponed during campaigns. This "Post-Election-Year Syndrome" has historically been brutal - in the past 25 post-election years, three major wars began (WWI, WWII, Vietnam), four devastating bear markets started (1929, 1937, 1969, 1973), and numerous lesser market declines occurred.
Midterm election years consistently provide excellent buying opportunities for investors. After the midterm congressional election - which invariably results in seat losses for the president's party - presidents typically adjust fiscal policies to boost federal spending, disposable income, and social security benefits while pushing down interest rates and inflation before the next election.
Preelection years have been remarkably bullish, with no down years for the Dow since war-torn 1939's modest 2.9% decline. The only severe preelection year loss in a century was during the Depression in 1931. This consistent performance stems from administrations doing everything possible to stimulate the economy before voters head to the polls. The Dow has gained an average 48.6% from midterm lows to preelection year highs since 1914.
Election years show distinct patterns based on whether incumbents retain power or are ousted. When parties keep the White House (17 times since 1900), the Dow gains 15.3% on average, versus a 4.4% loss when "ins" are ousted (11 times). Markets perform better when incumbents win reelection (6.9% average gain) versus when they lose (0.9%).
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The Seasonal Market Calendar
Market seasonality reflects cultural behaviors and institutional patterns that create reliable trading opportunities. Summer vacations pull traders away from markets, while fourth quarter institutional window-dressing, holiday shopping, and year-end bonuses drive markets higher. The New Year brings optimism and anticipation of strong earnings, followed by declining summer trading volumes and September sell-offs.
The Best Six Months Switching Strategy - investing in the Dow between November 1st and April 30th, then switching to fixed income for the other six months - has delivered consistent returns with reduced risk since 1950. November, December, January, March, and April rank as top-performing months, with February completing the strong six-month period. These six consecutive months gained 14,654.27 Dow points over 62 years (up 37 times, down 25), while May through October lost 1,654.97 points. A $10,000 investment compounded in the November-April periods would have grown to $674,073, while the same amount in May-October periods would have lost $1,024.
NASDAQ shows an impressive eight-month run from November through June, with a $10,000 investment gaining $384,337 since 1971 versus a $3,196 loss during July to October. NASDAQ consistently outperforms the S&P by about two-to-one or more during favorable periods.
Fourth-quarter market performance delivers the most consistent and substantial gains of the year, with the first quarter running a respectable second. This pattern emerges from elevated cash inflows, trading volume, and buying bias during these periods. Market psychology peaks during the holiday season, while professionals drive prices higher with year-end portfolio adjustments.
Combining the Best Six Months strategy with the Four-Year Presidential Election Cycle creates a powerful investment approach requiring just four trades every four years to nearly triple the results of the Best Six Months alone. The strategy involves buying and selling during post-election and midterm years, then holding from October 1 in the midterm year until sometime after April 1 in the post-election year-approximately 2.5 years.
Though markets fluctuate, they typically follow the same cyclical pattern annually, with most gains occurring from November through April. Beyond just a trading tactic, understanding these seasonal patterns helps inform better overall investment decisions.
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Triple Witching and Market Magic
Options expiration has profoundly impacted the stock market since the late 1960s. Like the moon affects tides, the expiration of options and futures contracts pulls the market into cycles that drive stock price directions through cash flows.
Triple Witching-when stock options, index options, and index futures expire simultaneously on the third Friday of March, June, September, and December-creates significant market volatility and trading volume. Despite newer developments like single-stock futures ("quadruple witching") and weekly options, the quarterly Triple Witching cycle remains dominant.
Triple-Witching Weeks have grown more bullish in recent years, while following weeks have become more bearish, especially in the second quarter. A striking pattern shows that since 1991, of 29 down Triple-Witching Weeks, 21 following weeks were also down-the opposite of the previous decade's pattern.
The strongest Triple-Witching Weeks occur during the Best Six Months (November-April), while the weakest fall during the Worst Six Months (May-October). Fourth-quarter Triple Witching is most favorable, with 16 of the last 21 weeks positive and 15 of 21 following weeks also positive.
Market performance on Mondays before Triple Witching and on expiration Fridays offers significant insights into market direction. March Triple-Witching Monday has been up 15 of the last 22 times while Friday rose only 11 times. September shows Monday before Triple Witch up 14 of 21 occurrences and Friday up 13 times. December experiences the most bullishness, with Monday advancing 12 of 21 years and Friday gaining in 13 years.
The quarterly cycle of Triple Witching creates one of the most discernible patterns in the stock market due to the massive money transfers by major financial institutions. Investors generally benefit from adding long positions the week after Triple Witching and taking profits during Triple-Witching Week. Both the week of and after Triple Witching are especially volatile during June and September, with a distinctly negative bias.
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Autumn Planting for Spring Harvest
Market gains are predominantly sown in late summer and early fall, then harvested in winter and spring. Eleven of the last 19 bear market bottoms since 1950 have occurred in August, September, or October, with six of the last eight since 1982 ending in these months. These autumn months typically offer the best opportunities to establish new positions or add to existing holdings at attractive prices.
August has transformed from the best stock market month (1901-1951) to one of the worst. This shift parallels the decline in farming population from 37.5% in 1900 to less than 2% today. August has become the worst S&P 500 month in the past 15 years.
September holds the dubious honor of being the worst month of the year, particularly brutal from 1999-2002 after strong performance during the dot-com bubble. Post-election Septembers are prone to large declines, with nine of the last 15 taking significant hits. Fund managers tend to clean house as the third quarter ends, causing nasty month-end sell-offs.
October evokes fear on Wall Street due to crashes in 1929, 1987, and other major drops, earning the term "Octoberphobia." Yet it has become a turnaround month-a "bear killer"-with twelve post-WWII bear markets ending in October (1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002, and 2011). Since 1997, October has been the second-best month, up 11 of 14 years.
A perfect storm creates buying opportunities from August to October: reduced trading volume during August vacations removes buyers from the market, political conventions and elections distract investors, and end-of-third-quarter portfolio adjustments create selling pressure. This combination explains why so many bear market bottoms occur during this period, making it the best time to buy stocks.
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Winter's Wealth and Holiday Profits
November, December, and January form the best three consecutive months of the year, delivering staggering gains compared to other months. The Dow and S&P 500 have averaged 4.3% gains since 1950 during this period, while NASDAQ and Russell 2000 rack up 6.4%. When this three-month span fails to deliver gains-as in 2007-2008-it serves as a red flag warning that other forces are at work.
November marks the beginning of the Best Six Months for the Dow and S&P, and Best Eight Months for NASDAQ. It ranks third or fourth among months depending on the index and timeframe. Fourth-quarter institutional cash inflows drive November to lead the best consecutive three-month span. The week before Thanksgiving is generally strong, with options expiration day showing a bullish bias (up 15 of the last 22 years).
December ranks second on the Dow and first on the S&P 500 since 1950, averaging 1.7% gains each. Trading is holiday-inspired with a buying bias throughout, though the first half tends to be weaker due to tax-loss selling. The market becomes consistently bullish after December Triple-Witching Week. Christmas surrounding days have been strong, with the Dow up 5 years straight on the day before.
The "Santa Claus Rally" spans the last five trading days of December through the first two of January, with the S&P 500 averaging 1.5% gains during this period since 1953. When this reliable seasonal pattern fails to materialize, it often signals bear markets or significant corrections ahead. Yale Hirsch discovered this phenomenon in 1972, coining the phrase "If Santa Claus should fail to call, bears may come to Broad and Wall."
January, named after Janus, the Roman god of doorways, hosts numerous important market indicators and events. The "First Five Days" indicator has been remarkably accurate when positive, with 84.6% of up First Five Days since 1950 followed by full-year gains averaging 13.6%. The "January Barometer" (as January goes, so goes the year) has registered only seven major errors since 1950, achieving an 88.7% accuracy rate.
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Timing the Market's Heartbeat
The investing landscape is filled with failed traders who either lacked a sensible methodology or abandoned it. Whether you manage your own funds or hire professionals, understanding market cycles helps make better decisions. Modern strategies make it clear when cycles are setting up well for trades and when technical indicators signal action.
In earlier eras, implementing trading strategies based on patterns and cycles was limited to large institutions, wealthy investors, and sophisticated traders. The advent of ETFs revolutionized this landscape, giving individual investors tools to trade virtually any index, sector, or asset class. These exchange-traded products provide the diversification of index funds with the flexibility to trade intraday, sell short, buy on margin, and trade options-all with lower expense ratios than mutual funds.
The most statistically sound market strategy is the Best Six Months Switching Strategy, rooted in the adage "Sell in May and go away." This approach recognizes that most market gains occur from November to April. Conservative investors can implement this by switching between stocks and cash/bonds, while more active traders might take a defensive posture during weak months by raising stop losses, limiting new buying, and implementing hedging strategies.
Technical indicators like MACD (Moving Average Convergence/Divergence) help confirm seasonal buy and sell decisions. MACD uses three exponential moving averages to reveal overbought and oversold conditions while generating signals that predict trend reversals. Buy signals occur when the MACD line crosses above the signal line in oversold territory, while sell signals happen when it falls below the signal line in overbought conditions.
Throughout nearly half a century of research, the Stock Trader's Almanac has proven that the beginning, ending, and middle of months, weeks, and days have market significance. This reflects human behavior-we place emphasis on starts and finishes in all aspects of life, and this carries over into market activity.
Since 1990, Monday and Tuesday have been the most consistently bullish days for the Dow, gaining 11,992.54 points, while Thursday and Friday combined for a loss of 2,677.45 points. Traders have become reluctant to stay long into weekends. In bear markets, Friday is typically worst with Monday second worst, while in bull markets, Monday performs best with Friday second.
Half-hourly data since 1987 reveals distinct intraday patterns: early morning and mid-afternoon weakness with end-of-day strength. Typically, retail investors sell in the morning after overnight deliberation, while institutions position for the close. The market flattens from noon to 2pm during lunch, then often falls from 2-3pm before institutions drive prices higher in the final hour.
Successful trading requires establishing that the market or security is tracking relevant patterns and setting up well for the trade. Common sense must confirm the trade is fundamentally sound given current market conditions and valuations. Only then should the trade be executed using simple technical indicators. These techniques can be applied to individual stock selection, sector analysis, and general market timing to build assets while protecting your portfolio.
