Saturday, February 11, 2017

The Sunspot Cycle and Stocks | Robert R. Prechter, Jr. and Peter Kendall

Robert R. Prechter, Jr. and Peter Kendall (2000) - Some effects from solar radiation are well documented. Sunspots disrupt satellite systems, radio transmissions and electric power grids. In the realm of mass human activity, the sun’s role has been a source of speculation since the dawn of civilization. In 1926, Professor A. C. Tchijevsky traced the sunspot activity back through 500 B.C. and found that it produced nine waves of human excitability per century. “As sunspot activity approaches maximum,” Tchijevsky found, “the number of mass historical events taken as whole increases.[...] the Wave Principle and unconscious human herding behavior as a function of the human limbic system, which is the gatekeeper of emotion within the human brain. However, the limbic system is not necessarily independent of outside forces. As the radiating center of our solar system and the wellspring of practically all the energy on the planet, the sun is certainly an intriguing contender for some degree of external mass mental influence.

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]