|By Robert R. Prechter, Jr. and Peter Kendall, originally published in the September 2000 Elliott Wave Theorist.|
In the early 1930s, statisticians Felix Shaffner and Carlos Garcia-Mata set out to refute economic theories (by W. Stanley Jevons in 1867 and others) suggesting a correlation between the 10.3-year sunspot cycle1 and changes in agricultural and business activity. They commented, “Indeed this evidence was so striking that we thought it necessary to conduct further investigations to prove the resemblance accidental. In this we were unsuccessful.” Their research appeared in the November 1934 Quarterly Journal of Economics. Based on a study of five sunspot cycles back through 1875, Shaffner and Garcia-Mata found that industrial production repeatedly peaked before the number of sunspots did. With respect to the stock market, they also looked at the turns in 1929 and 1932 and found a high degree of correlation. Charles Collins, R.N. Elliott’s original Wall Street benefactor and one of the great stock market students of the time, extended the stock market correlation with a longer-term analysis in the 1960s. Collins related 93 years of sunspot data to the trends of U.S. stocks over the same span and concurred that important stock market peaks consistently precede sunspot cycle maximums. His findings, “An Inquiry into the Effect of Sunspot Activity on the Stock Market,” appeared in the November-December 1965 issue of the Financial Analysts Journal. By anticipating the eventual peak in the sunspot cycle, Collins asserted that investors could avoid the most serious stock market declines.
Sunspot counts range from a low of near 0 at the bottom of the cycle to 100 to 200 at their peak. One of the final contributions of Collins’ long career as an investment counselor and writer was the following early warning signal: “An important stock 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.” Once the annual mean climbs above 50, Collins added, the largest percentage decline of the stock market cycle usually follows. Based on a 1964 bottom in the sunspot cycle, Collins speculated that 1967 would bring the count above 50 and thus indicate trouble ahead for the market. The threshold was, in fact, breached in 1967, which was fair warning of the speculative peak in 1968. In 1978, Collins’ sunspot indicator marked another important high that was followed by a sideways market over the next four years (which was a decline in PPI-adjusted terms). The next signal came in May 1988. The 1987 crash had already occurred, so the warning was late. However, stocks had a second selloff in 1990 that brought the Value Line index back to its 1987 low (see Figure 2 on page 3), so the sunspot threshold did signal a period of relative weakness. Despite minor anomalies, then, Collins’ observations have remained applicable. Figure 1 shows the history of the sunspot count, the stock market and those recessions most closely associated with sunspot maximums.
The current sunspot cycle began in October 1996 and appears to be adhering closely to the typical pattern. In the first two years of the cycle, the Dow Jones Industrial Average did not experience any significant stock market corrections as it gained 32%, slightly below the century-long average of 37% for this phase of the sunspot cycle. The annual sunspot mean of 50 was reached in 1998. Considering the succession of peaks in all the major market indicators and indexes, from the advance/decline line in April 1998 to the NASDAQ in March 2000 (see chart in the July 2000 Elliott Wave Financial Forecast), the sunspots and the market appear once again to be very much in line with historical observations. Once Collins’ fair-warning sunspot signal has been given, the market may go to new highs, but it has entered a window of vulnerability that has been followed by stock market weakness in every instance over the course of the 20th century. The end of the time zone for a market top is just before the maximum monthly sunspot number, which is shown as a dashed line in the chart. Sunspot maximums have come 1 to 15 months after peaks in stocks. The average is 8 months. According to solar scientists, the next peak is due in December 2000, which matches the average duration over the last century. The declines that commenced in January (DJIA) and March (NDQ) 2000, then, are within the window for a turn. At this point, the stock market’s decline almost certainly has further to go because a two-month loss of 17% (to early March low) would be shorter in time than any corresponding decline and shallower than all but that of 1978, when stock prices were already depressed.
Stock market weakness associated with sunspot maximum tends to run several years, averaging 4 years and 4 months. In terms of return, the least bearish event (see table, page 2) was that of cycle 6 in the 1950s and early 1960s, when the Dow edged out a gain of 1.5 points over a period of almost 6 years. How much decline should we expect this time? The largest bear markets have come off sunspot maximums that are below the prior maximum. As you can see in Figure 2, the current sunspot cycle is doing exactly that. As with the sunspot cycles associated with the market highs in 1929 and 1968, which were followed by the two biggest bear markets of the century, the current sunspot cycle is topping out at a lower level than that of 1990. The recent bunching of the monthly sunspot count and the already-registered peak in the rate of change (see Figure 4) suggest a lower maximum sunspot in this cycle.
Outlook for the Economy
Links between sunspots and economic activity have been documented as far back as the 1720s. The shaded areas in Figure 1 show that every sunspot maximum this century has had a corresponding recession. In most cases, the recession begins when sunspots peak, which is after the top in the stock market. Only in 1938 and 1946 did the closest recession precede the sunspot maximum, but in the latter case, a second one occurred in 1948-49, roughly at the normal time. At this point in the current cycle, sunspots are approaching a peak, and a bear market in stocks is developing. The century of history shown here says unequivocally that today’s economy should be heading into the early stages of a recession or depression within a matter of months.
The stock market has never bottomed in this progression until a recession occurs. Thus, another reason to expect today’s new bear market to continue is that there has been no recession.
Generally speaking, the periods from immediately before to immediately after each sunspot cycle maximum account for almost all of the major financial disruptions of the last century. In addition to the average of 4.4 years of stock market weakness, a sunspot cycle maximum and subsequent decline is generally followed by a financial crisis and another recession. At the beginning of the century, there was also a third recession at the sunspot lows.
Timing the Next Major Market Bottom
By the time of the sunspot cycle minimum, the most severe turmoil for stocks and the economy is almost always past. In fact, buying opportunities have presented themselves ahead of the minimum point in every cycle since 1910. The dotted lines in Figure 3 show the same relative position of the sunspot frequency at important market bottoms. These bottoms, which include the start of Supercycle ) in 1932, Cycle III in 1942 and Cycle V in 1974, occurred when the rate of change in monthly sunspot counts decelerated to an average of 26.5% of its prior level (using a four-month moving average to smooth sunspot volatility). This bottom is due next in July 2004. Based on an average market effect of 4.4 down years, the current stock-market contraction should see a preliminary low in the first half of 2004. These dates fit The Elliott Wave Theorist’s cycle and Fibonacci studies calling for a bottom in 2003-2004 (see July issue). Given the potential, this headline from the July 17 USA Today strikes us as optimistic:
Solar Storm’s Disruptions Mostly Over
More than likely, the disruptions have just begun, at least in the social sense.
A Broader Application?
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.” Part II of The Wave Principle of Human Social Behavior describes the basis of 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. Figure 4 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? So far, the answer is “yes,” as the Dow topped a month later and the more speculative NASDAQ peaked in March. A ninth straight correspondence will not prove the case, but it will add to the empirical evidence.■
1 10.3 years is the average duration of the sunspot cycle in the 20th Century. From the mid-18th through the 19th century, the cycle was 11.7 years (peak to peak)
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