tends to produce some realrock-and-roll upside markets. Table 1.1 shows the average gain of eachindividual year of the decade. At the time his book was written we had11 decades under our belt for study. What we see is that in 11 out of 11times the ﬁfth year in the decade produced a rally or a market-up move,making it the strongest year in the 10-year pattern. Years ending in eightshowed  winners  in  8  out  of  10  occurrences.  The  poorer-performingyears were those ending in seven and those years ending in a zero, as theEdgar Lawrence Smith’s work had suggested.
That is well and good, but of greater importance to an investor is howmuch money was made in a year, not simply whether the year was up ordown. Without a doubt the ﬁfth years of the decades have been where thebulk  of  wealth  has  been  made.  Yale’s  work  showed  a  total  gain  of  254percent in the ﬁve years, making them head and shoulders above even thesecond-place eight years, which came in with a 164 percent gain.
What  Yale  had  no  way  of  knowing  was  what  would  happen  in the  1990s.  It  was  unknown  at  that  time  how  1995  would  perform.
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THE “PHENOMENAL FIVE” YEARS
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Table 1.1 The 10-Year Stock Market Cycle: Annual Percent Change in Standard &Poor’s Composite Index Past 100 Years
Year of Decade
Decade
1st
2nd
3rd
4th
5th
6th
7th
8th
9th 10th
1881–18901891–19001901–19101911–19201921–19301931–19401941–19501951–19601961–19701971–19801981–1990Up yearsDown yearsTotal % change 25% 32% 27% 64% 254% 47% –74% 164% 41% –36%
— — —–20118–19116–1431–320748–18–47216–15–371518–1327–1912101813–7487623
–143147–1214–2413–29–15–1202011–411–1–141126— —3872
920–213163325232839–1033423–119321826 —71130
–713–33–3126–34–2–1317–10—37
—–325–919–2143913–32064
–21937163613–233122—82
Based on average December prices.
Would it follow this tradition? Or would it break the consecutive stringof the 11 winning years ending in a ﬁve? And how about that eight yearin the pattern—would it also produce gains similar to those as it had inthe past?
Years ending in a ﬁve from 1885 through 1985 had produced an av-erage gain of 23 percent; years ending in an eight had produced an aver-age gain of 14.9 percent. Keep in mind that the 1881–1990 data shows atotal gain of 254 percent for the ﬁfth year, or an average of 19.5 percentper year.
The  year  1995  produced  a  spectacular  gain  of  33.5  percent  by  theDow  Jones  Industrial  Average  while  1998  produced  a  gain  of  14.9  per-cent, making these the two best-performing years of the 1990s. Just think,the gains of 1995 and 1998 were right on schedule according to the pat-tern  detected  generations  earlier.  Keep  in  mind  that  forecast  was  essen-tially  locked  into  iron  shackles  in  1960,  yet  was  able  to  correctly  pointinvestors to the two most proﬁtable years in the 1990–2000 bull market.
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THE 10-YEAR PATTERN IN THE UNITED STATES STOCK MARKET
Perhaps, just perhaps, the stock market is a little bit easier to understandthan you ever thought.
I  suggest  you  take  a  great  deal  of  time  to  look  at  and  restudy  thelonger-term  charts  presented  in  this  book  in  order  to  get  a  sense  of  thisphenomenon and perhaps pick up the cadence at which the market moves.
THE “SURE THING SEVEN” YEARS
Clearly,  some  years  are  better  for  buying  than  others.  The  focus  of  mywork  has  been  to  ferret  out  the  best  years,  the  most  explosive,  the  oneswith  the  greatest  odds  of  having  signiﬁcant  upside  action.  Sure,  you  canbuy and hold for 20 years and make money—no brilliance there. What Iwant is to make my wagers when the dice are loaded.
The addition to our knowledge of the 10-year pattern means that thereis yet one more place to look to buy stocks. Is it just coincidence that the1960 road map, which suggested a major buy point at the end of any yearending in seven, scored with big wins in 1977, 1987, and 1997? Each ofthose years provided investors with excellent end-of-year buy points. I sus-pect it is not just coincidence. I suspect there is something going on in thegeneral  economy  or  business  cycle—call  it  what  you  may—because  thispattern is simply repeated too many times, too often, to be just some ran-dom ﬂuctuation of numbers.
It’s  now  time  for  you  to  restudy  the  Axe-Houghton  index  of  stockprices  from  1854  forward  (Figure  1.1).  The  same  phenomenon  can  befound  to  occur:  In  late  1857  stocks  bottomed,  then  almost  doubled  inprice. The fall of 1867 produced an equally spectacular rally that contin-ued all the way to the 1869 market high.
Wouldn’t  you  know  it?  When  1877  rolled  around,  stocks  again  bot-tomed about midyear, and then later in the year a two-year bull market be-gan. That takes us to 1887, when again, in the fall of the year, stock pricesbottomed before beginning a two-and-a-half-year bull move.
The year 1897 saw pretty much the same thing: Prices bottomed earlyin the year, followed by a summer run-up, a pullback in the fall of the year(the  seven  year  buy  zone),  and  then  another  two-year  bull  market.  The1907  bottom  came  late  in  the  year,  about  December,  just  before  anothertwo-year bull market. The year 1917 was almost a replica of 1907; againprices  got  hammered  at  the  end  of  that  year  before  they  took  off  on  an-other two-year bull market.
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THE “SURE THING SEVEN” YEARS
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Then  there’s  1927.  What  more  can  one  say?  There  appears  to  be  nomajor low here—prices went straight up. But if you look closely you see inthe fall of 1927 where prices stabilized brieﬂy, pulling back off the year’shigh before another two-year bull market surged to the 1929 top.
Well,  that  brings  us  to  the  Moore  Research  data  and  1937,  a  yearstocks  declined  with  a  vengeance,  bottoming  in  the  ﬁrst  of  quarter  1938before another two-year bull market began. (This time the seven year phe-nomenon was off by about three months.) In fact, that’s pretty much whathappened 10 years later in 1947, when the average moved sideways mostof the year, came down in the fall, and bottomed in mid-February 1948.No two-year bull market followed, though; prices simply had a huge, one-year run-up in 1948.
In 1957 stocks followed the model perfectly. There was a run-up in theﬁrst  part  of  1957;  prices  then  crashed  coming  into  an  October  low  or  abottom, to begin one more substantial up move in the U.S. stock market.This was in perfect harmony with the seventh-year price pattern.
Ten  years  later  yet  one  more  wonderful  buy  point  was  presented.Stocks rallied during the ﬁrst part of 1967, then took a tumble into the fallof that year, bottoming in February 1968 and starting not a two-year bullmarket, but a strong rally for the rest of 1968. Clearly, history shows therewas a very nice buy point in late 1967 and early 1968.
Does it appear to you there is something to this phenomenon? It doesto me. Is there an explanation for it? I can come up with some explana-tions, but I’m not certain they prove a point any more convincingly than astudy  of  the  ﬁve  years  and  the  seven  years  as  well  as  the  two  and  threeyears in terms of historical precedent. The charts don’t lie. The phenome-non is there, and it’s up to us to learn how to exploit the past so our invest-ments might be better in the future.
Of course what we’re talking about here is just timing. We still have toget  into  the  issue  of  selection—what  stocks  to  buy.  However,  most  in-vestors have a pretty good idea of companies they want to purchase; theyjust don’t know the right time to do so. Buying or selling at the right timedoes make a huge difference. As an example, on balance, if you purchasedstocks at the start of the sixth year of the decade, you had to wait only un-til the eighth year to make money. If you purchased stocks in the years end-ing  in  nine,  you  had  to  wait  almost  ﬁve  years,  on  average,  before  yourstock showed a proﬁt. So timing your entries and exits in the stock marketis critical. I believe following the 10-year price pattern is one way to gainan advantage in this business of speculation.
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THE 10-YEAR PATTERN IN THE UNITED STATES STOCK MARKET
It  would  seem  unreasonable  to  expect  stock  prices  to  follow  somemythical  and  perhaps  even  mystical  road  map  observed  in  the  1960s  onout into eternity. Yet, that is precisely what has taken place, by and large,which raises the question, will markets of the twenty-ﬁrst century continueto follow this road map? That is a question that will not be answered untilthe time period is over. However, we can watch during the ﬁrst 10 years,from 2001 to 2010, to see how closely this pattern is repeated. I suspectthat it will be repeated, and more closely than you might imagine. The acidtest comes sometime after 2005. If 2005 is another rip-roaring bull marketyear and the overall price pattern follows the 10-year road map, I think itwill give even more validity to this concept and investors should have moreconﬁdence in using it as a general guideline of investment activity for years,or perhaps decades, to come.
The  market  appears  to  have  repetitive  tendencies  to  how  it  unfoldsover the years. The frame of reference does indeed seem to be the decennialpattern. Within that framework there are particular times that one shouldlook for optimal buy (and sell) points.
The ﬁrst would be years ending in twos and threes, followed by the in-credibly strong ﬁve years. The next opportunity to look for a buy point isin the fall of any year ending in seven.
Finally,  a  long-term  investor  should  never  forget  that  most  majormarket highs have come in years ending in nine and zero, such as 1929,1969, 1999, and of course 2000.
I look upon this decennial pattern as the most logical road map thatprices will follow. I certainly do not expect prices to match this price pat-tern  precisely  each  year,  or  each  decade.  It  wouldn’t  be  any  fun  to  tradestocks  if  it  were  that  easy.  But  we  are  given  excellent  guidelines  here  ofwhich turns in the road to take, as well as when to take them.
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2
THE FOUR-YEAR PHENOMENON
Future wealth is purchased with scrutiny of the past.
Thanks  to  the  writings  of  Edson  Gould,  Edgar  Lawrence  Smith,  An-thony Gaubis, and Yale Hirsch, we have a pretty good idea of when toexpect signiﬁcant stock market highs and lows within the decennial pat-tern. It is a wonderful general road map of what is most likely to happenin the future and alerts us to each decade’s ﬁfth and seventh year buyingopportunities.  But  we  need  something  more  speciﬁc.  After  all,  we  allwant to know not only the precise week or day but also the exact time ofday  to  buy  or  sell  our  stock.  I  think  that’s  a  stretch,  but  with  variousmarket tools we can get a whole lot closer to determining the best timeto buy or sell.
The next bit of market knowledge I’d like to share with you is some-thing I stumbled across in 1970 that is the next key ingredient in my fore-cast for 2002. The bear market of 1970 had been good to me. I’d made myﬁrst so-called killing in the markets, about $300,000—not much now, butback then it counted to a 28-year-old kid, and gave me a hefty dose of ayoung man’s cockiness.
My  attitude  of  being  so  smart  as  to  ﬁnd  the  bear  market  and  sell  itshort  also  convinced  me  to  stay  short  after  the  low.  I  gave  some  of  themoney  back,  and  was  still  nibbling  on  the  short  side  in  October  of  that
15
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THE FOUR-YEAR PHENOMENON
year  when  stocks  rallied  through  the  roof.  Ouch!  That  hurt  the  pride  aswell as the pocketbook.
I eventually wised up and went long. Late one night as I was lickingmy wounds and staring at old charts, I saw something that changed my en-tire perspective on longer-term timing.
What I noticed on my charts was the four-year space from the low of1962 to 1966 to 1970. That got me to wondering whether there was somerepetitive pattern at work here that no one had told me about. My fatheralways  advised  me  that  what  little  success  I  would  have  in  life  would  bedue  more  to  hard  work  and  luck  than  intelligence.  With  that  thought  inmind I began poring over all the old charts I had collected.
And there it was: Going back in time from 1962 there had been an im-portant market low four years earlier, in 1958! That got me excited, so Inext looked back four more years to 1954 and there it was—the start ofanother bull market. By now my heart was pumping. Had I found some-thing here? What happened in 1950? It was back to the charts and back tothe start of another bull market.
I was impressed! But it didn’t make sense to me that we would havemarket lows with such repetitive accuracy. What’s more, why didn’t theyteach me this stuff in college or why hadn’t I read about it in a book? I hadnever  seen  this  in  print.  It  was  a  sleepless  night  for  me—I  couldn’t  stopthinking about the powerful effect of market low after market low everyfour years. It was one of those things that just seemed too good to be true.Was it possible this phenomenon would work in the future?
FEAR SETS IN
Market  information  of  this  nature  plays  tricks  with  one’s  thinking.  I had  pretty  well  proven,  to  my  satisfaction,  the  power  of  the  four-yearphenomenon—but  then  reasoned  that  if  I  knew  it,  then  it  would  notwork in the future. On top of that, my reactive mind added the idea thatI needed more examples out of the great unknown of the future to vali-date my discovery.
So  I  waited  with  fear  and  trepidation,  hoping  no  one  knew  my“dirty little secret,” to see how this four-year “whatever it was” wouldpan out in the future. Along came the market low of 1974, and again in1978 there was a decent buy point, considering the stagnant market wehad been in.
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FEAR SETS IN
17
I had now collected two out-of-sample instances of the phenomenon.In some uncanny way stocks had continued bottoming in phase with thisfour-year cycle.
If that’s all you knew about the stock market back in 1978 you wouldhave been waiting for the next buy point to come four years later in 1982.And that is exactly when the longest-lasting bull market in the history ofmankind began. Add four years to 1982 and you get 1986 as our next pro-jection. Even a cursory glance of the charts shows yet another wonderfulbuy point in the fall of that year.
My conﬁdence in this phenomenon had increased to a marked degree.To  think  that  observations  made  in  1970  were  still  having  tremendousmarket success 16 years later was proof to me of the validity of what I hadseen late that night when I was licking my wounds from being bearish toolong. Necessity is certainly the mother of invention.
Figures  2.1A  and  2.1B,  again  from  Moore  Research,  break  marketactivity  down  to  give  you  a  better  view  of  what  has  taken  place  from1900  forward.  I  have  marked  off  the  four-year  phenomena  and  lowpoints  for  you  on  the  charts.  I  ogle  these  charts  like  a  14-year-old  boyeyeballs his ﬁrst copy of Playboy magazine. They can greatly add to your
Figure 2.1A Dow Jones Industrial Average Decennial Pattern 1970–1999Source: Moore Research Center, Inc.
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THE FOUR-YEAR PHENOMENON
Figure 2.1B Dow Jones Industrial Average Decennial Pattern 1900–1999Source: Moore Research Center, Inc.
understanding of major cyclical moves and help you build conﬁdence onyour own so you can take action when the time is right.
SO EASY A KID CAN DO IT
This  four-year  phenomenon  is  so  simple  that  even  a  kid  can  do  it!  Wesimply add four years to the October buy point in 1986, and our imagi-nary  14-year-old  kid  can  expect  to  call  for  a  market  low  in  the  fall  of1990. At the ripe old age of 18 he watches a year-and-a-half bull marketbegin.  Imagine—we  have  kids  beating  the  pros  with  a  market  timing system  so  easy  to  follow  all  it  needs  is  four  ﬁngers.  Throw  away  therocket-science  math,  and  leave  your  laptop  at  home—you  don’t  need a computer!
Our hypothetical kid investor now adds four years to the low in 1990and makes this outrageous forecast that stocks should bottom in the fall of1994. He’s not a kid any longer—he’s now 22, and beats the pants off theWall Street experts when in the fall of that year one of the most dramaticprice increases mankind has ever seen begins, an exponential rally similarto that leading to the high in 1929. Not only does the Dow Jones IndustrialAverage  go  up,  but  virtually  everything  rallies—junk  stocks,  tech  stocks,
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THE MEANING OF 2002
19
blue chips, small caps. Everyone makes money following the kid investor’sforecast to buy stocks in 1994.
As our kid investor approaches the ripe old age of 26 he’s looking foranother market bottom four years after the one in 1994. He has made akilling in the ensuing market rally, so he’s got plenty of cash to plunk into amarket buying opportunity. Fortunately, he did not go to Harvard BusinessSchool, or the Wharton School of Finance. He’s smart enough not to listento analysts, watch ﬁnancial programs on television, or read the Wall StreetJournal.  He  just  has  this  thing  about  every  four  years  there  should  be  amarket bottom.
Our hypothetical investor is a little perplexed once 1998 rolls around.By now he is aware that the vast majority of analysts are calling for a ma-jor stock market crash. He kind of thinks that might happen as well (be-cause every four years he has seen early and midyear weakness leading to alow). In the summer of that year prices take a terrible beating. Many in-vestors  think  this  is  the  slide  that  in  reality  would  come  two  years  later.The air is thick with bearishness; you can slice it with a knife in October1998. That is precisely when our rapidly maturing kid investor decides tobelly up to the bar and buy stocks one more time. The entry point is sim-ple; it is four years after his 1994 wealth-making foray in the marketplace.His ignorance or lack of market understanding, college degrees, and allthat pays off in spades as stocks begin another 18 months of an almost ver-tical market rally. His timing could not have been more impeccable! Oncemore our inexperienced, uneducated, but by now fabulously wealthy kidinvestor has hit it right on the button.
He has done what the pros—the fund managers, brokers, and invest-ment advisers—were not able to do. He outsmarted them all with his an-nual four-year forecast.
THE MEANING OF 2002
Let’s see if we can get this straight now; every four years we ex-pect a market bottom. The last one was in 1998, so if we simplyadd four years to 1998 we should then expect the next buying op-portunity. If my math is correct, 1998 plus four more years callsfor a major buying opportunity in 2002. Since the 1998 low camein October of 1998, I would expect a market low to occur aboutthe same time of year—the fall of 2002.
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THE FOUR-YEAR PHENOMENON
That is from the original manuscript written for this book in the fall of2001. Sure enough, the 2002 buy point came. But was this just a rally in abear market? The history of these four-year buys suggests to me that 2002was a major buy area, not just a bleep before a crash to lower price levels.Incidentally, one should also be looking for signiﬁcant market bottomsin 2006, 2010, 2014, 2018, 2022, 2026, 2030, 2034, 2038, 2042, 2046,and 2050.
There  it  is,  my  forecast  for  the  next  50  years  of  market  activity.Many things will happen in the next 50 years. There will be huge changesin society, in business, in communications, even religion and politics, yet Isuspect the four-year phenomenon will continue to be the clockwork ofthe marketplace.
I say that not because this four-year phenomenon has done such an ex-ceptionally good job of forecasting prices from 1962 forward, but becauseit also did such a good job of forecasting prices prior to 1962.
One of my studies was to do a count of this cycle for all years of mar-ket activity from 1858 forward. I found that 86 percent of the time stocksbottomed in perfect harmony with this four-year repetitive pattern. Accu-racy like this is extremely difﬁcult to ﬁnd in the stock market, and certainlysuggests that something beyond random activity is involved. The mere factthat the four-year phenomenon has been so inﬂuential for so many yearssuggests  rather  strongly  to  me  that  it  will  continue  performing  for  manyyears yet to come. It is ironic to think that something as simplistic as thisfour-year pattern has done a better job of calling major market lows thanvirtually  any  of  the  fancy  indicators  and  investment  strategies  we  havecooked up with elaborate mathematics and econometric models.
Some  people  suspect  this  has  something  to  do  with  the  presidentialelection cycle, which does neatly dovetail with this four-year phenomenon.Others I have shared it with think it has something to do with the planetMars (I have eclectic friends). Some say it is part of the decennial pattern.The very few people who know of this pattern seem to think it may be anatural cyclical response to human activity or is perhaps somehow inﬂu-enced by Federal Reserve activity.
I really don’t know. I can come up with some conclusions and reasonsto explain why the phenomenon occurs, but does it make a difference? Thefacts speak rather well for themselves. The market has had way too manybottoms  coming  in  way  too  often  at  the  right  time  for  me  to  monkeyaround much with the data. I would rather just accept it. What is, is. Tome it’s as simple as that.
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142 YEARS OF MARKET SUCCESS
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142 YEARS OF MARKET SUCCESS
I have stock market prices as far back as 1854 (shown in Chapter 1). It ap-pears this four-year phenomenon began operating in 1858, when the mar-ket was close to an important low (which actually came in 1859). The nextindication was four years later, in 1862, early in one of the strongest bullmarkets of the entire century. Fast-forward to 1866, where we can ﬁnd alow  point  established  in  the  fall  of  that  year  marking  the  beginning  of  atwo-and-a-half-year bull market.
You  know  the  drill;  we  add  four  years  to  1866  and  come  up  with1870  as  a  buy  point  in  the  stock  market,  which  was  exactly  on  target(Michael  Jordan  was  never  more  accurate).  Four  more  years  produces1874, which did start a nice up move into 1875, eventually leading to oneof  those  long-lasting  bull  moves  investors  dream  of.  Our  next  buy  zonewould, of course, be 1878, which was a spectacular one in that the equitymarket  danced  to  the  bull’s  tunes  in  perfect  synchronization  with  ourfour-year phenomenon.
This of course meant we would next be looking for a buying opportu-nity in 1882. This one did not work at all; prices continued going downuntil 1884. However, any money lost at that buy point, and certainly an in-vestor would have used stop-loss orders, was recouped four years later as1886 heralded in another bull market than did not culminate until 1893.
Our  next  four-year  phenomenon  buy  point  was  scheduled  for  1890.Interestingly enough the fall of that year did present a wonderful buy pointfor a bull market that lasted into the winter of 1893. Again, the four-yearphenomenon scored a major victory. The averages rallied.
The next call was for a low in 1894. This one was a bit premature.Yes, prices did rally off the low of the year of 1894, but the real marketlow came in 1896. Our patient investor awaited the next buying oppor-tunity  to  occur  in  1898.  That  patience  was  rewarded  in