December 6th, 2010

Is it the Moon …. or Lucky "Rule of 7(0)"?

Another two phases of the moon’s cycle and this month it was a perfect score. In line with the theory, the Waxing phase between November 6 and November 21 resulted in a 2.78% decline; that was almost totally offset by a 2.77% increase in the Waning phase between November 21 and December 5 (if for whatever reason you may want to enlarge this, and I have no idea why you would, click on image):

Since we’re talking about inexplicable stock market phenomena (i.e., the lunar cycle), I thought I’d throw in a site called Rules of Thumb which lists 5055 rules of thumb in any of 155 categories. For example, there are 46 rules of thumb when it comes to animals, 94 rules of thumb in business and 65 in travel. Among 30 list in the “stocks” category were the following familiar ones:

  1. Cut your losses quickly. Let your profits run.
  2. Take your losses when your investment value has dropped by 12 to 15 percent.
  3. Stocks declining most during a down cycle will gain the most during the next up cycle.
  4. Never buy more of a stock when its price goes down. You only compound your losses.
  5. It’s tempting to sell out when a stock rises in price by 25 to 50 percent. But if you’re speculating on low-priced stock, look for bigger returns.
  6. Whatever the crowd does, do the opposite.
  7. Speculative investments, such as silver, should never exceed 10 percent of your investment portfolio.
  8. You’re trading too much if you turn over an average of more than one-third of your portfolio each year.
  9. The stock market rarely advances more than 10 or 12 days in a row without a minor setback. On a longer-term basis, it rarely rises more than six or seven weeks without a setback or “correction” that lasts two to four weeks.
  10. You can quickly calculate the number of years it will take to double your money by dividing the number 72 by your interest rate. For example, if your money is invested at 6 percent interest, it will take 72 divided by 6 or 12, years to double.
  11. Don’t move a substantial portion of your wealth into or out of the market at one time. Ease in, ease out.
  12. Don’t buy common stock with money you feel that you will need in less than four years.
  13. Don’t buy stock that is included in the Fortune 500 or Standard & Poor’s 500. The chances of such stocks being undervalued are virtually nil.
  14. Don’t buy stocks for a year after a presidential inauguration. For some reason, the market almost always goes down in that period.
  15. The amount of your portfolio that should be invested in stocks depends on your age. As you get older, less of your savings should be in the stock market. The conservative rule is to find the right percentage is to subtract your age from 100. A slightly more aggressive approach is to subtract your age from 120.

But it’s time for a new one: the “rule of 7(0)”. You never heard of it because I just named it; it refers to the percentage of instances in a large number of trading days that are bull (up) moves.

There have been 11,000 trading days since 1963 and the rule holds true with the market up around 70% and down 30% of the time across nearly any long sequence of those observations. For example, I tested the January rule of thumb (i.e., if the market closes up during the first week of January it will close up for the month of January; if the market closes up for the month of January it will close up for the year) and found that it holds true about 70% of the time over many years. Then there’s the “sell in May go away” rule and the mid-term election cycle, That holds true about 70% of the time also over a large number of years.

So here we are, gazing at the moon and find that since July, 2009 when I first started tracking the statistics, the market has conformed to the Lunar Cycle Theory 69.4% of the time (25 out of 36 times). Over the last 12 months, the hit rate has been 66.7%. So is it the moon or is it the Rule of 7? The bottom line is the odds are better being on the long side rather than being short, being an optimist rather than a pessimist.

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