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CYCLES


The Cycle Of Seven

06/25/15 10:56:48 AM PST
by Slawomir Bobrowski

Does the market really move in a cycle every seven years? Let's find out.

Several studies have correlated astrological cycles to market cycles but rarely do you come across comparisons between market cycles and Shemitah or the cycle of seven years. The cycle of seven is defined in the Book of Deuteronomy, verses 5:1-2, when the ancient Israelites were instructed, "At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the Lord's release."

HYPE OR REAL?
According to the Hebrew calendar, 2015 is a Shemitah year. When you place this in the context of market performance during the past several cycles of seven, it has provoked a lot of speculation and doomsday predictions rooted in a seemingly convincing narrative.

I am referring here to the book "The Harbinger" by Jonathan Cahn, which has been on the New York Times bestseller list for more than 110 weeks. Evidently, the subject is a hot topic, given the general feelings of economic and political uncertainty around the world.

I have a database of the Dow Jones Industrial Average (DJIA) going back to 1915, so I decided to put Shemitah to test. I wanted to find a correlation between the Shemitah occurrence per the Hebrew calendar and the annual swings of the DJIA.

STARTING FROM THE NARRATIVES
Converting from Hebrew to Gregorian dates is fairly easy. However, there is some lack of overlap between the corresponding years -- Shemitah usually begins and ends in September, and the best fit in a Gregorian calendar to accommodate Shemitah can be achieved by having the last quarter from the preceding year appended to the first three quarters of the Gregorian year. Fortunately, my database has the quarterly records of DJIA, which helps when processing data using a computer program. The table in Figure 1 provides date conversions and narratives for the Shemitah years.


FIGURE 1: SHEMITAH YEARS DURING THE LAST 100 YEARS. Here you see what took place during the Shemitah years in the Dow Jones Industrial Average going as far back as September 1916.

MEASURING MARKET HEALTH
I used annual swings of the index values to measure the health of the market. The graph of annual swing bars for non-Shemitah and Shemitah years is presented in Figure 2. To comply with expectations, the Shemitah years should be marked by negative DJIA swings. Assuming the true Shemitah occurrences in a 100-year sample represent a probability of such an event, the probability p = (8/14)*100 (or eight negative swings divided by the total number of Shemitahs, which in this case is 14) is 57%. That is just slightly better than the flip of a coin. As a trader or investor I wouldn't find such a probability attractive.


FIGURE 2: NON-SHEMITAH AND SHEMITAH YEARS SINCE 1915. These Shemitah dates are as per those mentioned in The Harbinger by Johnathan Cahn. The Shemitah years should be marked by negative DJIA swings.

I will shift the cycles of seven against their traditional Shemitah locations. For each offset, I computed an average of swing summations. The results of these trials can be seen in Figure 3. Shifting the cycle of seven one year forward gave surprisingly good results: The average seventh-year swing value changed from -9.2% to -19.9%, and the probability of its occurrence during that seventh year improved to 71%. Now, this may satisfy many traders/investors. The optimized cycle of seven can be seen in Figure 4.


FIGURE 3: SEVEN-YEAR CYCLE RESULTS. Shifting the cycle of seven one year forward gave surprisingly good results: The average seventh-year swing value changed from -9.2% to -19.9%, and the probability of its occurrence during that seventh year improved to 71%.


FIGURE 4: OPTIMIZED CYCLE OF SEVEN SINCE 1915

IS THE MARKET HEALTHY?
My objective is not to prove or disprove the biblical law of Shemitah. My numerical verification is supportive of claims made by Cahn. However, the numerical results don't seem to coincide with the Hebrew calendar.

To reiterate the results of my analysis:

  • The approaching, critical seventh year of the cycle of seven is Hebrew year 5776, which translates into the Gregorian dates of September 14, 2015--October 2, 2016, instead of the Hebrew 5775 Shemitah or September 25, 2014--September 13, 2015.
  • I selected the year 2016 given its 71% probability of occurrence vs. 51% for the Shemitah 2015.
  • An average of DJIA swings (computed on a sample of 100 years of the index records) equals -19.9% for 14 seventh years in the cycle of seven (Figure 3) while an average computed for the Shemitah years for the same time span equals only -9.2%.

FURTHER READING





Slawomir Bobrowski

Slawomir Bobrowski is a California-based professional engineer. He has been working for major aerospace companies, both on civilian and military projects, since 1985. He has been trading stocks since 1991.



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