Tuesday, August 7, 2012

Sunspots & Stocks

There is a correlation between the Sunspot Cycle and the Stock Market: Since 1933-34 all bull market highs (= start of a bear market) occurred 0-13 months after the peak of the Solar Cycle (List):
  • HIGH of Solar Cycle #17 in 4/1937 = bear market starts in the Dow Jones 8/1937 (+4 months)
  • HIGH of Solar Cycle #18 in 5/1947 = bear market starts in the Dow Jones 6/1948 (+13 months)
  • HIGH of Solar Cycle #19 in 3/1958 = bear market starts in the S&P 500 8/1959 (+6 months)
  • HIGH of Solar Cycle #20 in 11/1968 = bear market starts in the S&P 500 12/1968 (+1 month)
  • HIGH of Solar Cycle #21 in 12/1979 = bear market starts in the S&P 500 11/1980 (+11 months)
  • HIGH of Solar Cycle #22 in 7/1989 = bear market starts in the S&P 500 7/1990 (+12 months)
  • HIGH of Solar Cycle #23 in 3/2000 = bear market starts in the S&P 500 3/2000 (+0 month)
In early 1968 the quasi gold standard was more or less abolished, which lead to the inevitable expansion in money supply and inflation. Since that time every solar top made a bubble burst, in 3 of the 4 cases even in the same or following month which is incredibly precise:
  • HIGH of Solar Cycle #20 in 11/1968: stock market bubble bursts 12/1968 (the S&P 500 high of late 1968 was only exceeded nominally but not in real terms for decades)
  • HIGH of Solar Cycle #21 in 12/1979: commodity bubble bursts 1/1980
  • HIGH of Solar Cycle #22 in 7/1989: Japan bubble (stocks & real estate) bursts 12/1989
  • HIGH of Solar Cycle #23 in 3/2000: stock market bubble bursts 3/2000
The more sun-spots, the more important for financial markets. The solar super-storms of 1859, 1921 and 1989 went along with inflation peaks (Credits: Manfred Zimmel):
  • September 1-2, 1859 (highest inflation 1810-1910).
  • May, 1921 (highest inflation 1860-1940).
  • 1989 (highest inflation since mid 1960s).

The Peak of the current Sunspot Cycle #24 is projected for spring 2013 (HERE). More related online resources: Solar Cycle Progression - Monthly SSN - Calculated annual average SSN - Solar Cycle start – end months, mid-point

In 1965 Charles J. Collins presented his investigation on "The Effect of Sunspot Activity on the Stock Market" (reprinted in the March 1966 of the 'Cycles' Magazine). His theorem is (briefly stated) the following:
(1) An important market peak has been witnessed or directly anticipated when, in the course of each new sunspot cycle, the yearly mean of observed sunspot numbers has climbed above 50.
(2) In each solar cycle, the largest stock market decline, in terms of percentage drop, comes after the sunspot number, on an annual basis, has climbed above 50.


Another pattern of stock market tops about 2.5 years before the Sunspot Peak is based on a 11-year smoothing of the data yielding slightly different highs compared to nominal prices (HERE):

Jeffrey Owen Katz and Donna L. McCormick  developed a profitable Trading System based on Sunspot numbers (HERE & HERE p. 198 ff.):
Like  seasonality  and  lunar phasesolar  activity  appears  to  have  a  real  influence  on some markets, especially the S&P 500 and Minnesota Wheat. As with lunar cycles, this influence is not sufficiently strong or reliable to be a primary element in a portfolio trading system; however, as a component in a system incorporating other  factors,  or  as  a  system  used  to  trade  specific  markets,  solar  activity  is  worth attention. We personally do not believe solar influences directly determine the market.  We  do  suspect  that  they  act  as  triggers  for  events  that  are  predisposed  to occur, or as synchronizers of already-present market rhythms with similar periodicities. For example, if a market is highly over-valued and unstable, as was the S&P 500 in October 1987, a large solar flare might be sufficient to trigger an already-imminent crash.

The observation that sharp down-turns can occur after solar flares has been supported.

Flares are the most powerful and explosive of all forms of solar eruptions, and the most important in terrestrial effect. Large flares release energy equivalent to the explosion of more than 200 million hydrogen bombs in a few minutes' time, sufficient to meet mankind's energy demands for a 100 million years (HERE - HERE - HERE).