Market Cycles

excerpt from The Longwave Analyst
In November 1928, W. D. Gann published his ‘Outlook for 1929’ for his subscribers. What follows, are the opening three paragraphs of this publication.

“This year occurs in a cycle which shows the ending of the bull market and the beginning of a prolonged bear campaign. The present bull campaign has lasted longer (1921-1929) than any other previous campaign in the history of this country. The fact that it has run longer and prices have advanced to such abnormal heights means that when the decline sets in it must be in proportion to the advance. The year 1929 will witness some sharp, severe panicky declines in many high-priced stocks.”

“During the year 1928 the public have entered the stock market on the largest scale ever known in history. Foreigners have bought our stocks more than at any time since or prior to the outbreak of the World War. The American public is no longer making safe investments in stocks. They have the gambling fever and are buying everything regardless of price, simply buying on hope that stocks will continue to go up. This is a dangerous situation and has always resulted in a big decline. There will be no exception in this case.”

“As long as the public believes that everything is all right, they will hold on and hope, but when public buying power has exhausted itself and the largest number of stock gamblers in history lose confidence and all start to sell, it requires no stretch of imagination to picture what will happen.....Gamblers do not think: they always gamble on hope and that is why they lose. Investors and traders must pause and think, look and listen, and get out of stocks before the great deluge comes.” W. D. Gann, Outlook for 1929.

I think you’d have to agree that it was a pretty impressive call. The accuracy of Mr. Gann’s prognostication is a testament to his unique skills in his interpretation of cycles. He died in 1955, but his exceptional trading skills, based upon his financial cycle knowledge, is likely never to be surpassed.

What Mr. Gann did demonstrate, time and time again, is that the correct interpretation of economic and financial cycles is an exceptional method of determining the most probable course of future events.

The most important thing to understand about financial and economic cycles is that they are just like their counterparts in the natural world. They are as predictable as are the tides, the moon phases, the annual seasons and, yes, a human lifetime.

Like a human lifespan, financial and economic cycles follow a similar path from birth to death. The Long or Kondratieff Wave follows this path over 60 or 70 years, which is typically a meaningful human lifetime. In the cycle, spring is the birth of the economy. In winter, the economy dies. It dies because it is overcome by too much debt. During winter, most of the debt is purged from the economy, which enables its rebirth in the following spring.

All cycles are natural phenomena; financial and economic cycles are also. This means that man is powerless to intervene. Nature must take its course. “There is no power, Divine or human that can oblige a stream to flow back to its source.” Le Bon. Gann wrote in November 1928 in his Outlook for 1929, “When the time cycle is up, neither Republican, Democrat, nor our good President Hoover can stem the tide. It is natural law. Action equals reaction in the opposite direction. We see it in the ebb and flow of the tide and we know from the full bloom of summer follows the dead leaves of winter.” He was right; there was nothing that anyone could do to halt the vicious stock bear market or the economic depression. Here we are again; current world leaders think that they can stop the natural course of events that follow a debt bubble that is unprecedented in scale. They and we are to be hugely disappointed. Spring doesn’t occur until winter has run its course. In the Long Wave, these leaders think they have the power to circumvent winter. They don’t.