For those of us who live in Southwest Florida, the hurricane season is upon us. From June 1st to November 1st each year, we know this force of nature can come into play. And since we can’t change nature . . . we prepare for a storm’s possible arrival by making sure our hurricane shutters are in good shape, and by storing bottled water, batteries and canned food.
As traders and investors, we need to remember that occasional market “storms,” or volatile periods, are part of the overall financial climate. (They can actually be a good thing, as they always provide great opportunities when the clouds clear.)
Since the U.S. market’s V-shaped reversal to the upside in March of 2009–and even through the slight cloudiness in 2011–we’ve enjoyed a mostly “sunny climate.” The Dow, S & P 500 Index, and the Nasdaq Composite have all reveled in extended runs to the upside.
When stock prices climb higher with little interference, as they have been until recently, as traders and investors, we are wise to remember the bigger force that always comes into play: the cyclical nature of the market.
As you probably remember from your high school biology class, there are no straight lines in nature. Everything in our known universe moves in cycles. Our moon circles our Earth. The Earth revolves around the sun. Autumn, winter, spring and summer rotate through each calendar year. Tides ebb and flow. Water evaporates from our oceans and lakes, rises into the sky on currents of warm air, falls back to earth, and then evaporates, once again. And yes, in summer months, burly hurricanes churn up the oceans and occasionally storm onto land.
Editor’s Note: Is your stock truly dead or just playing dead?
We can define a “cycle” as an interval of time during which a set of recurring events are repeated. We can add that cycles format our world’s “operating system.” Indeed, cycles have been studied and observed by experts in all parts of our lives, including (but not limited to) astronomy, biology, cosmology, geology, geophysics, history, music, society, and economics.
It stands to reason, then, that as financial markets of industrialized nations progress through time, they rotate in value between expansions and contractions, depending on economic conditions in that country and around the globe.
This is an important concept for us market players to understand. Why? When we see signs of a potential market reversal ahead, we can prepare for it by adjusting protective stops on our positions, perhaps pocketing some profits, and starting a watch list of stocks we’d like to consider purchasing if they dip to lower prices.
In Figure 1, below, you can clearly see the cyclical price patterns etched by the S & P 500 Index, as the benchmark rolled through the years spanning 1997 to present in 2015 . . . expanding, contracting, and then expanding once again.
Figure 1. S & P 500 Index – Monthly Chart 1997 to 2015
Chart courtesy RealTick
Also on this chart, note the how the S & P 500 soared in during the past three-plus years. The benchmark opened in January, 2012, at 1258, and then shot up to recent (May 2015) highs of 2134—a whopping 70% gain. While it’s been a dandy “profit party”, we know that what goes up eventually comes down, at least for a period of time.
As a wise traders and/or investor, please bear in mind that the markets expand and contract in continuous cycles in both the short and long-term. That knowledge can help you plan for nearly any eventuality—sunny or stormy– so you can keep your capital and your profits safe.
Until next time, keep green on your screen!
Toni Turner is the President of TrendStar Group, LLC, is an accomplished technical analyst as well as a popular educator and sought-after speaker in the financial arena.
She is also the author of best-selling books: A Beginner’s Guide to Short-Term Trading, Short-Term Trading in the New Stock Market and Invest to Win: Earn and Keep Profits Bull and Bear Markets With the GainsMaster Approach, co-authored with Gordon Scott, CMT. Toni is also creator of How to Bottom Fish Like a Pro, an online investing course that teaches you how to find down-and-out stocks that are poised for an explosive surge to the upside.