How to Time the Market’s Biggest Moves

One of the great dilemmas of any investor is timing the market.

I’m not talking about the very short-term ups and downs. Nor am I recommending the kind of quick in-and-out trading that merely racks up more commission revenues for your broker.

Rather, the question I want to address today is how to anticipate some of the biggest, most dangerous — or most profitable — swings in the market that can last many months or years.

A Roadmap for Time Travel

For a preview, take a moment to travel with me back in time to some of the worst years of the Great Depression. I was not there. But my father was. And ever since I was a child, he would tell me the story of those days.

The year is 1931. The U.S. economy has contracted a staggering 25 percent. Millions of workers have lost their paychecks. Consumers are hoarding money, delaying all but the most essential purchases.

Every month, more manufacturers, wholesalers, and retailers are failing, pushing unemployment ever higher and intensifying America’s economic agony.

President Herbert Hoover could not have dreamed of a more adverse environment to begin planning his re-election campaign — not even in his worst nightmares. His popularity has plunged. He fears, rightfully so, that he will be a one-term president.

The public and the press demand to know who or what was to blame for this catastrophe. To survive, the Hoover administration would have to give them answers.

But the president knows that just any answer will not suffice. Only a credible, exhaustively documented, scientific answer could have a chance of restoring the public’s faith in his administration and in the U.S. economy.

And so, Hoover turns to a scientist he trusts — an economic analyst in his administration named Edward R. Dewey.

Later, Dewey will create a nonprofit foundation. And with this foundation, he and his successors will continue a 78-year quest for the forces that drive the economy and investment markets. He will be joined by many of the best minds from Harvard, Yale, Princeton, Oxford, Temple University, Western Reserve, and other globally-respected institutions.

The foundation’s mission is championed by men at the very pinnacle of the scientific establishment — Charles Greeley Abbott, Head of the Smithsonian …William Cameron Forbes, Chairman of the Carnegie Institution … Wesley Claire Mitchell, Founder and Director of the National Bureau of Economic Research …

A former Vice President of the United States — General Charles G. Dawes — joins Dewey’s Foundation …

Also joining are Senator Everett M. Dirksen and Michael G. Zahorchak, Vice President of the American Stock Exchange …

America’s greatest industrialists, philanthropists, and investors finance Dewey’s quest: Men like W. Clement Stone of AON Insurance … Clarence Coleman of the Coleman Corporation … Ned Johnson, the founder of Fidelity Investments … and Alanson Bigelow Houghton, a distinguished congressman, U.S. ambassador, and the chairman of the Corning Glass Works.

In the years that follow, the time-tested tools for timing the markets developed by Edward R. Dewey and the distinguished scientists who continued his research are used by major corporations, banks, brokers, and investment analysts worldwide.

Today, that nonprofit foundation — the Foundation for the Study of Cycles — is the repository of one of the longest term databases in the world. Its historical information goes back as much as FIVE THOUSAND years; its market data, more than 300 years. Its scientists and contributors have made the study of this data their lives’ work.

After poring over the economic and market data leading up to the Great Depression, they learned something that came as a surprise to economists of that era — and also a SHOCK to economists of THIS era.

They learned that, back in the 1920s, before the Crash of ’29, if a serious researcher had examined the historic data objectively, and if America’s political leaders had dropped their agendas and biases, they might have forecast the Great Depression well ahead of time.

How? By simply recognizing the patterns of history.

Indeed, Dewey discovered a very simple reality — that in modern, industrialized nations, economic expansions and contractions occurred in regular, largely predictable cycles.

You might ask: If the pattern was so predictable, why did the Crash of ’29 and the Great Depression come as such a shock to virtually everyone?

The answer: For the same reasons they were so shocked by the financial crisis of 2008 … and why they continue to be surprised by the massive foreclosure crisis in the housing market, die-hard high unemployment, and continually sinking consumer confidence:

Reason #1. In the 1930s, no one with any influence in Washington was looking back at the LONG-TERM historic data. And today, most data series that economists use in their econometric models begin in the first year after World War II, at the earliest. But history didn’t start in 1946! Moreover, the critical precedents for today’s era ALL occurred BEFORE 1946!

Reason #2. Like today, even some of the smartest people in the world often believed only what they WANTED to believe — that good times go on forever … that the government has the power to permanently reverse the economic tides … or that printed money ALONE can paper over bad times.

Reason #3. People know that bad times can lead to major political changes. But what they don’t realize is that the reverse is not necessarily true: Political changes are usually not enough to reverse the bad times! No matter who controls Congress and no matter who is in the White House, they still must deal with the same powerful, real-life problems and historical forces — massive build-ups of debts, deficits, and entitlements … huge inventories of unsold assets (such as empty, foreclosed homes) … and more.

Big Clues That Were Missed in the 1930s

Going back to the 1930s, take a look at the pattern Dewey first saw. We don’t have the exact chart he was looking at, but if you create a chart going back to 1789 (140 years prior to the Crash of ’29), here’s what you’d see …

This is simply the rate of growth and contraction of the U.S. economy.

And the first important cycle Dewey discovered was a major peak in the economy hitting regularly every 20 years (the red line).

Sometimes the actual peak came a bit earlier, sometimes a bit later. But the overwhelming bulk of the decline phase coincided almost exactly with the decline predicted by the cycle.

Specifically, the 20-year cycle predicted a major peak in 1906, and sure enough, the economy began weakening in 1906. And the 20-year cycle then predicted another major peak in 1926.

In addition, analysts living in the 1920s could have known not only that the economy would decline in the late 1920s, but also that the decline would be one of the worst in history. And they could have done so by looking at the longer term 60-year cycle (the blue line in chart above).

This 60-year cycle predicted that:

• We would have a Great Depression in the economy.
• The Great Depression would hit its bottom in the mid-1930s.
• After the Great Depression, the economy would enjoy a massive, long-term boom for years thereafter.

Imagine how different the lives of so many people would have been if only they had some of this knowledge at that time and in this format! Unfortunately, they didn’t.

But today, we do. It does not predict an exact repeat of the Great Depression. There are too many things that have changed. But it does predict a long, protracted decline, probably not hitting bottom until 2012.

What about the Federal Reserve’s promise to launch another round of money printing, commonly dubbed “QE2”? It can certainly drive money into gold and other contra-dollar investments.

But it will not change the long-term direction of the economy. At best, the Fed’s efforts can introduce temporary rallies and recoveries, diminishing the average pace of the decline and stretching it out beyond 2012.

The main reason: The Fed can pump money into the banking system. But it cannot persuade banks to lend to consumers — let alone persuade consumers to borrow and spend the way they used to.

The same was true back in the 1930s.

Go back again to the period before the Crash of ’29. If you were an analyst in those days, and you could have looked at the Foundation’s charts I showed you earlier, you might have realized that a massive economic decline was imminent.

BUT … with the euphoria of the Roaring ’20s all around you, you might have had a tough time BELIEVING that a Great Depression was around the corner — and an even tougher time convincing your family and friends.

The key back then, as now, was the consumer! And to support your theory, you could also have had data predicting the collapse in consumer spending.

Consumer spending was vital to the economy back then. (And at roughly 70 percent of the U.S. economy, it is even MORE critical today!)

With just one exception — in the late 1800s — the declines anticipated by the cycle analysis coincided with the actual declines in consumer spending.

Look at how accurately it forecast the great decline in the 1860s. And look how closely it matched the decline in the 1920s and 1930s!

No indicator is perfect, mind you. There’s always some variation. But despite major wars that you’d think might disrupt the cycle, the periodicity — the time between each cycle — was actually quite consistent.

How Long-Term Cycles Also
Anticipated the Crash of ’29

If you were an investor in the late 1920s and you used strictly these economic indicators, you would have probably taken your money off the table too soon.

You would have done a lot better if you could have also analyzed the historic pattern in the stock market itself.

The challenge: You would have needed to look back in time far beyond the most recent bull and bear markets. And you would have needed more than just the history of the Dow Jones Industrials.

Instead, you would have needed to compile a composite of the Dow and other stock indexes in the U.S. and the UK going back to the late 17th century, shown here …

As you can see, from the 1700s through the 1920s, there were FIVE major booms and busts (plus two more by the late 1930s).

And with this data, Dewey, the founder of the Foundation for the Study of Cycles, saw several different cycles:

He saw the 20-year and 60-year cycles, which we mentioned earlier, about for the economy. Plus, he saw a shorter term 40-month cycle, known today as the Kitchin cycle. He then created a composite of these to develop a bigger picture overview, which, in turn, could have predicted the Crash of ’29.

Needless to say, all this analysis is easier done with 20-20 hindsight. But I find it extremely valuable nonetheless. It helps you see the big picture. And more importantly, it can save you from major losses. A case in point:

Back in 2007, while Wall Street was having a grand party, when the Dow was making new all-time highs at 14,000, and when most investors expected that party to continue forever … the Foundation had pinpointed a major cyclical peak in the stock market at September 2007.

This is not a peak they published after the fact. Nor is it one they talked about just a short time before. It was clearly specified in their publications three years earlier! Further, similar analysis was posted on Barron’s online in 2007. Thus …

• An investor who had $100,000 in Dow stocks at their peak in 2007 could have simply looked at this chart — right there on Barron’s online — spotted the coming decline, sold near the top, and kept all or most of his $100,000.
• In contrast, another investor who had the same amount in the same stocks — but did not see or believe this chart — might have held his stocks and lost about 55 percent of his money.
• And still ANOTHER investor could have bought an inverse ETF on the Dow at that time — and more than doubled his money.

Now, the Foundation has a whole new series of post-election forecasts which we will be sharing with readers LIVE tomorrow at noon Eastern Time.

But today is your last day to register! So unless you’ve already claimed your free ticket, I would urge you to do so now by clicking over to our registration page.

Good luck and God bless!

Martin

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