Time Quartile Analysis

Abstract

A lthough investors are fond o’f using the terms “bull market” and ”bear market” rather loosely to apply to longer-term movements like the great bull market from 1942 to 1966 (+1300%) or the recent secular bear market from 1966 to 1974 ( -4O0/o), hhey would do well to pay more attention to shorter-term fluctuations that provide significant trading opportunities. A study of the relationship between these shorter-term swings and fluctuations in business activity, in fact, enables the investor to use economic information in a systematic manner for stock market forecasting. As we can see in Chart 1, the stock market does exhibit cyclical movements that clearly relate to post-World War I1 recessions and growth recessions.’ These cyclical market expansions and contractions generally occur with the same inevitable regularity as the economy’s periods of growth and deceleration. If we can determine how far a business upswing or correction has advanced through its characteristic phases and if we can relate those findings to the stock market in systematic fashion, then we can use business cycle analysis to forecast future changes in stock prices. In the discussion that follows, a bull market begins with the stock market trough anticipating the subsequent period of economic expansion; the bull market ends and a bear market begins with the stock market peak anticipating the next period of significant economic deceleration.