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June 27, 2005
Cycles Explained, Mon., June 27, 2005, 10:28 AM
The "Focus" this week is on Trend & Cycles Analysis (stock cycles, business cycles, interest rate cycles, forex cycles) for market timing. Before I get into the subject of time series analysis of financial data, however, let me explain the different cycles. Better still, let wikipedia provide the background.
What is a cycle?
What is cycle synchrony (i.e., sychronicity, which is a term I use)?
According to wikipedia, Edward R Dewey gave the name "cycle synchrony" to his discovery that certain commonly reported cycle periods from different disciplines also often had the same phase. Wikipedia, btw, is a marvellous resource. I use it almost as much as Google.
What is a cyclic phase?
A major driver of capital market prices is the business cycle, which is also called the economic cycle.
A major driver of the business cycle is the interest rate, which has its own cycle. Business cycle phases can be in sync or, depending on the choice of variable such as bond prices instead of interest rates, opposite.
What is an interest rate?
Stock market cycles are all about bull markets and bear markets, which are in effect trends within a very long-term market cycle.
Trends and cycle phases in capital market prices are studied by time series analysis.
Tools for investigating time-series data include the study of stochastics. There are many stochastic processes, but the ones found to be most useful in the prediction or forecasting of capital market prices are the Relative Strength Index Indicator, and the Moving Average Convergence/Divergence (i.e., departure) Indicator, in combination with other technical indicators.
Here is an interesting article on Stochastics, pointed out by wikipedia.
There are also a number of books on technical analysis recommended by wikipedia:
ﾃつｷ Technical Analysis of Futures Markets, John J. Murphy, New York Institute of Finance, 1986, ISBN 0-13-898008-X
ﾃつｷ The Profit Magic of Stock Transaction Timing, J.M. Hurst, Prentice-Hall, 1972, ISBN 0137260180
ﾃつｷ New Concepts in Technical Trading Systems, J. Welles Wilder, Trend Research, 1978, ISBN 0894590278
ﾃつｷ Reminiscences of a Stock Operator, Edwin Lefﾃδｨvre, John Wiley & Sons Inc, 1994, ISBN 0471059706
Another book that I recommend is:
ﾃつｷ Technical Analysis Explained, Martin J. Pring, McGraw-Hill, ISBN 0071396128
In fact, I recommend you buy the Pring/Murphy bundle at Pring.com.
At the end of the day, as you venture out into the world of technical analysis, you will at some point realize that you have journeyed within.
You will come to see that the capital markets are about us, the owners of the capital. You will see that all this literature is based on human actions, and the most important person, with respect to your capital, is you.
Before you can understand capital markets, you must understand yourself, human nature and the laws of nature. To gain such an understanding can be quite a journey.
Happy reading.
Posted by Posted by Bill Cara on June 27, 2005 10:28:23 AM | Category: Trend & Cycle Phases
A friend passed your sight onto me. What a great read. I appreciate your knowledge, and your willingness to pass it on. There is so much garbage in the investment press that laymen do not fully comprehend. There are very few investment analysts that I read or trust. But your column gives educated insight, and not hot stock tips. I am a healthcare professional and have been doing my own investments for about 10 years. I have done lots of reading, and always look for a good book on investment insight. I use trend following systems, mostly multiple moving averages and some other simple criteria. I found if you use too much interpetation, they muddy the water. I also found that there is no greater way of learning about your strengths and weakness, as thbe market will find it soon enough. A good book I recommend is The Disciplined Trader By Mark Douglas.
PS I am a bit of a gold bug and have been following gold for about 20 years, I have mining stocks and bullion. I would like to know where I can find out which companies are sshorting the market or selling forward. I am also a follower of silver and am presently getting killed in that mqrket. I do think that silver will follow gold up. I am foolishly still holding my shares in CDE.
I would appreciate any comment you have. I hope you do not mind but I will keep in touch
Keep up the good work
Jack from Toronto
Posted by: jack at June 27, 2005 9:48 PM [link]