Why does the stock market typically peak before sunspots do? One very plausible explanation is that the collective tendency to speculate peaks out along with the rate of change in sunspot activity. If sunspots affect humans’ positive-mood excitability, that appears to be the point of maximum effect. When we explored this possible explanation, we found something additionally interesting.
The figure above shows that as the solar radiation thrown off by the sun increases to a maximum rate (shown by our optimized 39-month rate of change in sunspot numbers), the human urge to speculate in general hits a fever pitch. Two months after the rate-of-change peak in 1916, the stock market established an all-time high that was not materially exceeded until the sunspot count was accelerating again in the mid-1920s. The next rate-of-change peak in October 1926 preceded the final stock market high by a full three years, but the speculative fever that accompanied the Florida land boom ended almost coincidentally, about two months earlier. The next peak was a double top that finished in February 1937, one month before a major stock market high. In 1947 and 1967, the rate of change peaked within 13 months of major stock peaks. In 1957, the peak coincided with with the all-time high in the advance-decline line, which stands to this day. The September 1979 peak was four months before a century-long high in precious metals prices. The August 1989 peak accompanied the all-time high in the Nikkei and the end of a big real estate boom in California and Japan. Since scientists’ grasp of the sunspot cycle is based on empirical observation rather than an understanding of what causes it, there is no way to verify that a rising rate of sunspot activity is behind these outbreaks. However, the speculative fall-off in the wake of every peak since 1916 is itself strong evidence of an effect. The latest peak rate of change came in December 1999, and that sets up a test. Will this peak in sunspots mark the end of the greatest mania in the history of the stock market?
|"Lower sunspot cycle maximums portend the largest bear markets."|
|"Shortly before a sunspot cycle hits bottom, stocks turn up." [Chart HERE]|