 substantial  in-vestment  gains  as  the  market  took  off  once  more  in  line  with  ourfour-year phenomenon.
Oh-oh, the turn of the century had taken place! Could, and would, thishandy dandy little pattern work in both centuries? It would suggest to ourinvestor back then to purchase stocks in 1902, four years after the 1898buy point. Unfortunately this turning point was not so spectacular—pricesdid  rally  late  in  that  year  but  came  down  rather  sharply  in  1903.  Fouryears  later  we  would  have  looked  to  step  in  again  on  the  long  side  as  abuyer in 1906. Our reward? Failure.
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THE FOUR-YEAR PHENOMENON
The year 1910 would have presented the next opportunity to see ifstock  prices  were  moving  in  phase  with  the  four-year  phenomenon.Given the prior two misses, I’m sure we would have been shaking in ourboots,  wondering  if  this  phenomenon  had  started  to  falter—becausewhile prices did rally this time it took awhile and there certainly was nospectacular up move.
Then, in gangbuster-like fashion, the four-year phenomenon started toclick in like digital clockwork; a market low came in 1914, 1918, 1922,and 1926. None appeared in 1930, but market lows reappeared in 1934,1938, 1942, 1946, 1950, 1954, 1958, 1962, and on to the present. Fouryears  after  four  years,  in  an  almost  robotlike  fashion,  the  phenomenonkicked in, working as well in the second 100 years as it had in the ﬁrst.
Clearly one can learn from the past. The lesson that I see here is to ex-pect stock market lows in harmony with the four-year phenomenon. Themarket low in 2002 (1998 + 4) just so happens to coincide with the decen-nial  road  map  forecast  for  an  important  market  low  in  the  2002–2003time period.
In  other  words,  we  have  a  kind  of  double  conﬁrmation  here—bothmajor  long-term  cyclical  reference  frames  are  telling  us  to  expect  an  upmove in stock prices at this time. While the decennial pattern is somewhatgeneral, we can most deﬁnitely focus or narrow our window of opportu-nity to a substantial degree in synch with the four-year phenomenon pat-tern, thus isolating the best of the best.
As an aside, we can also see, in that sense, a market bottom is calledfor by the four-year phenomenon in 2006, four years after the 2002 low,which  dovetails  with  our  ﬁfth  year  decennial  pattern  scenario.  This  sug-gests to me that not only will the stock market rally in 2005 but that a buypoint will be found in 2006 as well, thus indicating that some type of sub-stantial rally in stock prices is out there for us to take advantage of.
Even better may be the 2014 market low that is expected thanks to thefour-year phenomenon, which then leads into the ﬁfth year expected rallyin 2015. Should you and I both be so lucky as to still be trading at thattime, you know which side of the market I’ll be on, and you know I willhave covered my short sales.
The use of the decennial pattern as well as my four-year phenomenonis  not  some  conjecture  on  my  part,  some  bit  of  numerology  applied  tostock  prices.  Twenty  years  ago  an  earlier  book  of  mine  touched  on  thissubject. In 1981, while standing at a supermarket checkout counter, I no-ticed the then best-selling book How to Prosper in the Coming Bad Years
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23
by  Howard  Ruff.  It  struck  me  that  what  investors  needed  was  a  dose  ofgood old-fashioned optimism; it was time for a new book, a new view ofthe economy. How to Prosper in the Coming Good Years was my responseto the purveyors of pessimism.
To a large degree that book, with its bullish view, was based on whatI’ve discussed so far. I knew the decennial pattern should kick in for a lowin 1982 or 1983. I also knew that my four-year phenomenon was callingfor a low at the same time as the decennial pattern.
As  the  book  promotion  began  in  the  winter  of  1982  things  lookedvery  bleak.  Most  of  the  folks  who  interviewed  me  were  shocked  by  myoptimism, by my predictions of good times to come, and by my panningof the pessimists.
The  most  notable  experiences  were  on  the  Merv  Grifﬁn  show,  an interview by Dan Dorfman, and a never-to-be-forgotten radio talk showin Detroit.
The talk show was supposed to last 30 minutes. It began with a briefintroduction, my expression of extreme optimism that good times wouldcome  and  rather  quickly.  Then  we  went  to  the  phone  lines;  they  lit  uplike a Fourth of July night. The callers to this station were upset and an-gry with me for being so optimistic. They did not want to argue or dis-cuss  the  political  or  economic  situation,  reasons  why  things  might  getbetter; they simply wanted to shout and scream, taking out their frustra-tions  on  my  optimism.  Investors  had  just  lost  a  lot  of  money  in  the1970s market. It was no wonder; stocks had been down to sideways foryears,  inﬂation  had  been  rampant  during  Jimmy  Carter’s  tour  of  duty,and investors—even those who bought and held gold—had little to showin the way of proﬁts.
For a long time, long-term investors had only losses to show for theirefforts and risk. This condition breeds disbelief and contempt for bull mar-kets.  Such  a  condition  is  exactly  what  sets  up  the  opportunity  for  majorbuy  points.  Why?  Most  investors  think  the  coming  six  months  to  a  yearwill be pretty much like the prior six months to a year. They are overly in-ﬂuenced by the current trend; they are looking back, not forward.
The  30-minute  interview  opened  up  to  a  three-hour  telethon  thatJerry Lewis would have been proud of. People just could not accept theidea that things might get better, that perhaps the future of America wasbright, not dim.
In retrospect this was one of the all-time market calls. Wherever I wentthroughout the United States, some 32 cities in 28 days, my message was
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THE FOUR-YEAR PHENOMENON
clear: “Mortgage your house, buy stocks, then get a second mortgage andbuy more.”
Here  we  are  20  years  later—entering  a  year  two  and  year  three time frame with a four-year phenomenon kicking in at the same mar-ket juncture.
THE “STRAIGHT EIGHT” FACTOR
While I have pointed out a year seven low point phenomenon, there’s an-other part to this cycle or pattern that is important.
Simply  stated,  it’s  this:  Years  ending  in  two  and  eight  have  shown  aunique ability to start major market rallies. Usually this begins in the ﬁrstthree months of that year. It is almost as though the year seven low point,such as the one presented to investors in 1987, gets so oversold, or perhapsundervalued, that prices have easy sailing for the next year, the one endingin an eight.
Again, I’m not certain why this phenomenon exists. Some say it is dueto sun spots; some say barometric pressure; I’d say Federal Reserve activ-ity. While there’s plenty of room for discussion about the cause of this phe-nomenon, there can be no discussion about whether it exists.
In  researching  prices  back  to  1850  I  noted  that  there  have  been  15times we have seen this pattern appear. That means we have 150 years ofexperience with this intriguing year eight opportunity, which I think you’llﬁnd presents a superb buying opportunity.
Some of the most exponential moves in the entire history of the stockmarket are those that started with years ending in an eight, such as 1888,1928,  1938,  and  no  one  could  ever  forget  1998.  That  was  the  year  thatwas so strong everybody began buying every type of stock, good or bad,just  before  the  recent  market  debacle—which  came  to  light  in  1999  and2000 just when it should have!
The 1940s were the only decade that did not produce a substantial bullmarket in the eighth year. The year 1948 was not a bad time to buy stocks,just not a phenomenal one. There was a large rally off the March lows ofthat year. The March low of the Dow Jones Industrial Average was 165,serving as the base for a rally up to 195 for an 18 percent gain during theyear (the Dow closed for the year at about 177).
In using these eight year patterns it appears one should buy about the
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eighth week of the eight year. Doing so worked wonders in 1928, 1938,1948,  1958,  and  1968.  Had  you  waited  until  the  eighth  week  of  1978you  would  have  made  your  purchase  one  week  from  the  ultimate  lowpoint for the year, while in 1988 and 1998 the low came just a few weeksearlier, in January.
The study of this eighth year pattern should certainly focus our atten-tion on early buy points in the years ending with eight. Accordingly, a wiseinvestor  should  pay  particular  attention  to  2008,  2018,  and  yes,  we  caneven  forecast  out  to  2028—when  I  expect  the  market  to  have  signiﬁcantupside performance.
Table 2.1 presents the results of buying in March of each of the yearsending  in  an  eight  starting  in  1878  and  continuing  through  1998.  Theexit is on the close of the last trading day in December. While this is notthe  ideal  buy  point  every  year,  I  believe  it  does  illustrate  the  importantconsideration of looking for an early buy point to be long stocks in thissubset of years.
I am using Robert J. Shiller’s data to reﬂect the market based on the
Table 2.1 March Buys from 1878 to 1998
Year
March Price
December Price
% Gain
1878188818981908191819281938194819581968197819881998Average Gain
3.245.084.656.877.2818.2510.3114.3042.1189.0988.82265.701,023.70
3.455.245.269.037.9024.8012.6915.1053.49106.5096.11276.501,190.00
6.016.021.021.09.026.023.07.027.019.08.04.016.015.6
Data Source: Robert J. Shiller (http://aida.econ.yale.edu/shiller/data.htm).
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S&P Composite Stock Price Index starting in 1871. These monthly read-ings can be seen on his web site (http://aida.econ.yale.edu/shiller/data.htm).This is an impressive table of stock market performance, particularlywhen one considers how far back in time it goes. It illustrates that the de-cennial  pattern  has  twists  and  turns  to  it  along  the  way  that  an  investorshould be able to take advantage of.
As  I  see  it,  one  looks  for  a  low  point  late  in  the  seven  year,  and  at-tempts to hold on until late in the ninth year. Table 2.2 shows the same en-try with an exit in September.
What  we  have  here  is  a  very  important  time  when  stock  prices  haverallied on a repetitive basis. While I do not have the monthly numbers for1858–1859 and 1868–1869, you can detect those results from even a cur-sory  glance  at  the  long-term  charts  shown  earlier  (Figures  1.1  to  1.5).Those results, taking us back almost 150 years, are very similar to what wesee from the hard tabulations presented in Tables 2.1 and 2.2.
Table 2.2 Exit in September of the NineYear, 1879–1999
Year
September Price
% Gain
1879188918991909191919291939194919591969197919891999Average Gain
4.225.506.3710.199.0131.3012.7715.4957.0594.51108.60347.301,318.70
33.08.636.048.023.071.023.09.835.06.022.230.722.428.3
Data Source: Robert J. Shiller (http://aida.econ.yale.edu/shiller/data.htm).
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The data is pretty clear, regardless of how you slice or massage it; butsome  years  are  better  than  others.  And  on  that  point,  years  ending  in  athree have usually been unkind to investors or have at least presented uswith  lackadaisical  markets.  This  has  not  been  as  true  recently  as  in  thepast; nonetheless, I feel obliged to point it out to you for your further un-derstanding of future market activity.
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THE AMAZINGOCTOBER EFFECT
October. This is one of the peculiarly dangerous monthsto speculate in stocks. The others are, July, January,September, April, November, May, March, June,December, August and February.
—Mark Twain, Pudd’nhead Wilson
What Mark Twain did not know was that his in-jest saying actually nailedwhen most stock markets bottom. Figure 3.1, courtesy of Genesis Finan-cial Data Service, shows along its lower edge the seasonal pattern of stockprices  as  measured  by  the  Dow  Jones  Industrial  Average  from  1970  for-ward. The small repeated chart is an interesting one in that it averages allof  the  months  during  this  time.  (Earlier  we  averaged  the  years,  and  nowwe’re focusing on the months.) In this fashion the chart creates a seasonalpattern of how stocks have traded in the past. The overall trend is removedfrom the data so one sees the ﬂuctuations on a month-to-month basis. Weare quickly able to notice that there is a distinct tendency of stocks to rallyor decline at certain points within the year.
As Figure 3.2 shows, the majority of major stock market buying pointsin the past 30 years have begun in October. This has led to a market rallythat  has  extended,  on  average,  into  the  April–May  time  frame.  Then  themarket is most likely to stagnate or go ﬂat, or even decline. In some casesstock prices simply stall, or there might be a substantial down move intothe  next  October  lows.  This  is  an  extremely  powerful  conﬁguration  themarket has exhibited time after time, year after year. There is just no argu-ment about this. This is the way stock prices have traded for at least the
29
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THE AMAZING OCTOBER EFFECT
Figure 3.1 Seasonal Pattern of Dow Jones Industrials
Figure 3.2 October Effect
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past 30 years. The question is, of course, will stocks continue to trade inthis fashion?
Again, I don’t think that the future necessarily will unfold precisely asdid the past. Yet it is human nature, as well as most instructive, to look atthe past to see how strong this inﬂuence might be. In other words, if the in-ﬂuence exists in data before the 1970 time, and is shown there strongly, itwould suggest, to me at least, that there is something to this October effect:that in actuality investors are given a timing tool. And this tool is of a pre-cise nature.
Yale Hirsch also did work along this line to see what month’s marketswere most likely to establish bottom points. His work covered the marketsfrom 1949 to 1975. What he did was simply determine how many impor-tant turning points occurred during the individual months of the year. Inthose 26 years Yale calculated there were 65 market bottoms. The monththat recorded the fewest market bottoms and subsequent turnarounds, orrallies, was April. The month that had the largest number of market turn-arounds to the upside was October, with 10 out of the 65 market bottomsoccurring in this month. The next most frequent month for stocks to turnback to the upside was June.
Yale  concluded,  “October  was  the  bear  killer.  Every  major  postwarbear market (1946, 1957, 1960, 1962, 1966, and 1974) ended here except1970.” I would add to this that while stocks did bottom in the summer of1970, they rallied up and went sideways, seemingly going nowhere, untilOctober of that year when prices took off on a Carl Lewis sprint to newhighs. So while October did not end the decline coming into the 1970 low,it did serve as the trigger mechanism for an important buy point. In typicalOctober fashion we saw yet one more time a springboard or incubator fora gargantuan stock market rally.
There is another study Yale performed we should pay attention to. Inthis one Yale recorded what the Standard & Poor’s index did 30, 60, and90  days  after  each  month.  Those  results  are  shown  in  Table  3.1.  Pleasekeep in mind this study was done on data from 1949 to 1975; therefore,anything after 1975 is out-of-sample data. In other words, again we’re in-terested  in  seeing  how  things  work  out  in  the  future  based  on  what  weknow from the past.
The gist of all this is that October is ranked ﬁrst in performance for the30-, 60-, or 90-days-later calculation. In fact, if we go out six months afterOctober we ﬁnd an average gain of 7.2 percent. The next closest, or best
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Table 3.1 What the Market Did in All One, Two, Three, and Six-Month Periods(26-Year Record, 1949–1975)
Average Percent Change Between Any Month And
30 daysLater
60 daysLater
90 daysLater
6 monthsLater
Rank
Rank
Rank
Rank
JanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember
0.3% 951.041.111–0.312–0.880.880.4100.270.521.221.21.810.6%Average30-daychange
1.3%2.10.8–1.0–0.11.20.60.81.82.43.02.31.2%Average60-daychange
648121178105213
2.4%1.70.7–0.30.41.41.01.82.84.23.63.41.8%Average90-daychange
561012118974123
1.8% 1082.2101.8121.182.264.435.335.326.317.255.02.973.7%Average6-monthchange
Based on average monthly prices of Standard & Poor’s Composite Index. Reprinted from YaleHirsch, Don’t Sell Stocks on Monday.
month  for  buying,  would  have  been  September  with  an  average  gain  sixmonths later of 6.3 percent. The worst month for a six-month hold wouldhave been April, which showed a net gain of 1.1 percent six months afterthe theoretical buy point. March and January were not much better, withboth also showing a 1.6 percent gain.
On average, the gain of any given month, six months later, has been3.7 percent. So essentially this means that October has just about doubledthe average monthly gain of the market from 1949 to 1975. I decided totest this idea out into the period after 1975 to see what the results wouldhave been. Table 3.2 gives us an additional insight as well as conﬁdence inthis overall technique. I assumed buying the Dow Jones Industrial Averageon the last day in October and exiting on the last trading day of April.
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Table 3.2 Numbers after Hirsch Study
Year
1976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000
Oct/April % Gain
April/Oct % Gain
–4+2+80+80+23
–5.5+4+29+21+2+13
+.05
+18+9+30+10.5+15+16+21+250–2
–3–11–5–4+13–14+160+3+9+5–13+5
–.5
–8–6–4+10+6+10+8+6–5
–.5+2.2
Average gain 9.05 percent Average gain 1.1 percent
This strategy, basically that which Yale had outlined in his work, aver-aged 9.05 percent per year. You should keep in mind that this was not a12-month  hold  but  a  six-month  hold.  An  investor  who  limits  activity  tojust six months does as well as a person who is fully invested, fully exposedto risk, for a perpetual hold strategy.
The other side of this equation would be to buy the Dow Jones Indus-trial Average on the last day of April and exit on the last trading day of Oc-tober. The earlier work showed that April was the worst time to initiate a
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THE AMAZING OCTOBER EFFECT
six-month hold and it certainly did not fare well from 1975 forward. De-spite an overall substantial uptrend in stocks, such a strategy would havebarely netted an investor 1.1 percent per year—precisely the same averagegain shown in the prior 26-year study!
Does  it  make  a  difference  when  you  time  your  buys  and  sells  in  thestock market? Oh yes, you bet. In fact, you can and should bet on it. Thedata clearly shows there is a time to sow and a time to reap. When it comesto long-term investment strategy, decision making, and timing your entry,one should keep in mind above all the importance of buying in October—and looking for off-ramps in April.
The  wise  investor  who  sought  to  buy  stocks  in  October  and  exit  inApril made nine times more during the past 25 years than the investor whodecided to buy in April and exit in October. I certainly do not want to buckthose odds; I want them on my side, working for me, not against me. Andwhile it is true that the market the may not roll out exactly like that in thefuture, that is how it played out in the last 51 years—a trend I’m unwillingto buck. This is such an outrageous difference that it cannot be explainedas a statistical anomaly.
Of greater importance is that these are out-of-sample results basedon  earlier  research  that  reﬂected  this  same  bias.  In  other  words,  priorstudies could have been used by an investor. This is not Monday morn-ing quarterbacking. Table 3.2 shows what took place after the originalHirsch study.
REASON FOR THE OCTOBER EFFECT
As always, when one looks at stock market data and ﬁnds a signiﬁcant biasone wonders why it is there. Is there a reason for this to occur?
I believe there is a very strong reason why stocks do bottom in the Oc-tober time frame. It is primarily due to a combination of two inﬂuences.First,  corporations  announce  their  quarterly  earnings,  which  tend  to  besomewhat dismal this time of year. In short, they get the bad news out ofthe way and the market digests this usually with an October slide; the badnews brings sellers to the marketplace. This in turn causes the market tobecome oversold. The market always goes from one extreme, of too manybuyers, to the other extreme, of too many sellers. Bad news causes one ofthese extremes, too many sellers.
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REASON FOR THE OCTOBER EFFECT
35
Then, however, comes the good news! The Federal Reserve in its in-ﬁnite  wisdom  starts  to  either  decrease  interest  rates  or  increase  themoney supply in anticipation of Christmas sales. This is a huge dose ofeconomic stimulation. Such strong medicine impacts investors and is re-ﬂected in their emotions and buying activities. One of the strongest in-ﬂuences of stock prices is what the bond market does. When bond pricesrally and interest rates are going lower, stocks just ﬂat-out rally. That’sall there is to it!
It was summed up best by Hank Williams Jr. in his song, “A Coun-try  Boy  Can  Survive.”  The  lyrics  go:  “Interest  is  up,  stock  marketsdown,  you  only  get  mugged  when  you  go  downtown.”  Listen  to  that;you  really  don’t  need  to  go  to  the  Harvard  Business  School  to  under-stand  economics—it’s  all  in  this  song!  When  interest  rates  are  high,stock  markets  plummet  and  there  is  social  unrest.  When  interest  ratesare  low,  stock  markets  rally,  people  can  go  out  and  buy  things  likehomes  and  cars  and  they  can  invest  in  the  future—thus  they’re  happy.During these time periods we ﬁnd social advances as well as peace. It istruly amazing what prosperity can do for people.
It really gets down to this: When the Fed stimulates the economy stockprices rally. The Fed has a history and reason for doing this during the Oc-tober time period.
I believe showing you the seasonal tendencies in the bond market canbest drive home this point. Figure 3.3 uses the Genesis seasonal index re-ﬂecting  the  trading  pattern  of  the  Treasury  bond  market  from  1977through the summer of 2001.
As you can see, bonds have usually rallied (that means interest rateshave gone lower) from about the 20th of October until Christmas week.Naturally,  this  does  not