A cycle or a wave represents a process that tends to repeat itself in time in a more or less regular fashion.
There are many types of business cycles. Some of the most common ones are those that impact the stock market[1]. In his book The Next Great Bubble Boom, Harry S. Dent Jr., a Harvard graduate and Fortune 100 consultant, outlines several cycles that have specific relevance to the stock market. [2]. Some of these cycles have been quantitatively examined for statistical significance.
Some of the major cycles that have been examined by Mr. Dent and others are:
- The four-year presidential cycle in the USA.
- Annual seasonality, in the USA and other countries.
- "The Halloween indicator" (or "Sell in May and Go Away")[3]
- The "January effect"[4]
- The lunar cycle[5]
Many investors and market traders take recourse to these cycles and the insights they provide when making investment decisions. For example investment advisor Mark Hulbert has tracked the long term performance of Norman Fosback’s a Seasonality Timing System that combines month-end and holiday-based buy/sell rules. According to Hulbert, this system has been able to outperform the market with significantly less risk. According to him it has the best risk-adjusted performance of any system his newsletter tracks[6]. Other authors and investment advisors contend that there are four stages in any major cycle whether it is an individual stock or a market sector. These four stages are (1) period of consolidation or base building (2) upward advancing stage (3) top area and (4) declining phase. [7]
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