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Sunny side up

S&P soars

I don’t want to get too complacent here, mind you. More than once in the last few weeks I have had to eat my words, after the indices powered higher and then fizzled out. While it is wholly possible that this happens again, I feel the odds are tilted towards further gains. This time, the US and German indices have convincingly breached the topside of their recent ranges, rather than merely peeking above them. The DAX formed a big gap in doing so, a result of the index opening much higher than its previous day’s close. This is a clear sign of strength. I think we go higher from here.

 

DAX bursts higher

With the rain driving relentlessly against my window at the FT building, I have turned my mind to sunny thoughts in the last couple of days. This isn’t a case of wishful thinking, though. Instead, I wanted to understand better the effect of solar activity on stock-market behaviour. Several prominent market-timing commentators regularly refer to it in their work. It is especially relevant right now, as an important shift is happening in solar variation: the peak of the latest solar cycle.

 

Solar cycles

Solar cycles last between 9 and 12 years, starting from depressed levels of sunspot activity, rising to a peak and then falling back to low levels again. There are many examples of waxing and waning radiation affecting human behaviour and the world of nature. My question is whether financial-market speculation really is one of them. One suggested approach is to buy stocks at the solar minimum and then sell up at the maximum. The swing from minimum to maximum is typically 3 to 5 years long, similar to many bull markets.

Sunspot cycle

It does seem that the S&P 500 has done better between solar minima and maxima than during the converse. Since 1900, the median annualised real total return from minimum to maximum has been 11.2 per cent, and just 1.9 per cent in the reverse situation. Only twice – during World War One and in the late 1970s – were losses made between solar minimum and maximum. And in each case they were trivial. By contrast, the swing from solar maximum to minimum took in the Great Depression, as well as the late 1960s malaise and then lately the credit crunch.

This sounds promising, and might possibly make for a reason to buy Wall Street at solar minima. But how would a strategy of buying stocks at the minima and selling up and switching into interest-bearing cash at the maxima have done since the start of the 20th century? I calculate the annualised real total return from this approach to have been 5.1 per cent, against 6.4 per cent for buy-and-hold. That’s a hugely unfavourable gap over time. It did, however, halve the volatility involved. Meanwhile, the opposite strategy of buying at maxima and shifting to cash at minima returned just 2.8 per cent.

Intriguing as all this is, I wouldn’t mention solar activity when explaining my longer-term caution about US stocks. And for the moment, anyhow, I think the outlook remains sunny.