Annual Cycles

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On 9th March 2009, the ibex35 was losing 26% for the year, and the previous year it had lost 40%. Since this date the IBEX35 has had the longest series off consecutive rises in its history: a total of 13.

It is a chance event and therefore difficult to predict, it is like predicting when lightning will strike a tree. However, the fact that it is a chance event does not mean that there are not periods in which the probability that it takes place is not greater.

Let's look at this in more detail.

If we analyse the mean evolution of the IBEX 35 over the last twelve years we observe the following:

• The longest series of consecutive rises in its history happened from days 44 to 57 of the year, towards the end of the 3rd upward phase, which runs from the end of January to early April.

• In this 3rd phase the IBEX35 has had an average profit over the last 12 years of 6% in what is less than a three month period. This corresponds to an annual profit of 30%.
  

It is as if the rainiest week of the last 12 years had been in April. Whereas it would be difficult to predict when the rainiest week of the next 12 years will be, we can see that it will more probably occur in April rather than June.

The next longest series of consecutives increases in history, like all chance events could occur during the 5th downward phase, which takes in the months of July, August, and September, even though this period has been identified as being a period of losses. However, although this is possible, it is far more likely that we will see the longest period of consecutive losses in history.

If we think statistically a moment and calculate the probability that a tossed coin turns up heads 13 times in a row, we will see that it is quite unlikely. Let's compare the probability of this same frequency occur in the 3rd upward phase or in the 5th downward phase.

In the 3rd upward phase, during the last 12 years of 612 market days 354 have closed with gains: 56.37%, an average daily gain of 0.118%, which is equivalent to an annual gain of 30%.

In the 5th downward phase, during the last 12 years of 648 market days (i.e. a period which is three days longer), the market has closed positive on 48.14% of the days with a mean daily gain of -0.14%.  
Probability of 13 consecutive days in positive in Phase 3
El mateix

So, it is 8 times more likely that this will happen in phase 3 than in phase 5, and we consider that a sample of more than 600 pieces of data is significant. Although this is a chance event, it has occurred during a period in which it was probable. We are in a storm at the end of August and lightning hits a tree, this is a probable chance event.

Conclusions

If we have an asset of cash we have the following options available to us.
Buy an asset.
Not do anything
Sell an asset

We have many criteria for taking investment decisions: TIR, solvency rating, sales increases, chart analysis, management team, fear/euphoria, etc.

If an asset is good, it is usually good even at the different prices that it has during the year. However, buying it cheap always gives us a, advantage of profitability that we will enjoy in the future. Hence, the important this is to choose an asset that fulfills all of the requirements that we stipulate for it.

We would add a new criterion that can help us to identify the cheapest moment of the year at which to buy an asset and the highest point at which to sell it.

Taking as an example the IBEX35 as the asset under examination, using the criteria of ANNUALCYCLES we observe the following in the graph:

 

The best moment to sell is:

            The third business day of the year at the beginning of January

            The sixty-sixth business day, which is in the middle of April

 

The best moment to buy is:

            The 15^th business day, which is at the end of January

            The 206^th business day, which is in the middle of October

 

Here we are talking of an index of 35 companies, which has a lateral phase that lasts until the end of June. However, if we analyse each company individually we see that the upward phase of some of these companies tends to last until the middle of June whereas for others the downward phase begins in April.

 

Having seen this, we would suggest that if your broker has recommended to you that you buy on 6^th January, after increases of over 20% from the yearly lows and after the downward phase has begun, or if you have been recommended to sell on 9^th March, in the middle of upward phase, you would be well advised to enquire as to the criteria that have been used in making this recommendation.