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The Curse Of Years Ending In Seven

August 12, 2017

Ok, maybe it is not fair to call years ending in seven a curse. But years ending in seven have had a checkered record. Since 1830, the Dow Jones Industrials (DJI) has recorded nine up years and nine down years ending in seven. Years ending in seven have the second worst year record for the DJI. The leader or, in this case, the biggest loser is years ending in three. Its record is nine up years and ten down years. As to the biggest winner, well, that honour goes to years ending in five with a record of sixteen up years vs. three down years.

Years ending in seven are the leader in one category. They have the most losses totaling 20% or more. The total is four. 1857 saw the DJI lose 31%, in 1907 the DJI was down 37.7%, in 1917 the DJI dropped 21.7%, and finally in 1937 the DJI fell 32.8%. Years ending in seven have also been, overwhelmingly, associated with stock market panics and crashes. Note the following:

Year	Panic Or Crash	What Happened
1837	Panic of 1837	A financial crisis, major recession/depression deflation, bank collapses, high unemployment. The panic was triggered by a collapse of speculative lending, the bursting of a land bubble, and a collapse in cotton prices. Lasted from about 1837 to 1844. The Mexican-American war followed from 1846–1848.
1847	Panic of 1847	This panic was short-lived. It centered mainly in Great Britain and was associated with the end of the 1840s railway boom. It was also triggered by a change in banking that required banks to shore up their reserves with gold and silver. The panic shattered a vast number of businesses.
1857	Panic of 1857	The first worldwide financial crisis. Businesses failed, banks collapsed, railways declined, thousands lost their jobs. The collapse was triggered after the sinking of the SS Central America that was carrying an important shipment of gold needed to shore up currencies. A major trust company collapsed which triggered a series of bankruptcies. The American Civil War followed from 1861–1865.
1907	Panic of 1907	The Panic of 1907 was also known as the Banker's Panic or the Knickerbocker Crisis. Stock markets fell almost 50%. There were runs on banks and trust companies. Many state and local banks and businesses went bust. It was started by a failed attempt to corner the market by the United Copper Company. NYC's third largest trust, the Knickerbocker Trust Co., was at the heart of the panic. The panic was saved by J.P. Morgan who led bankers to shore up the financial system. The panic led to the formation of the Federal Reserve in 1913. WW1 followed from 1914–1918.
1937	Crash of 1937	The stock market crash of 1937 was a secondary collapse within the context of the Great Depression. The DJI fell about 40% in 1937/1938. It was triggered by a negative reaction to Roosevelt's New Deal. A weak stock market persisted until 1942 when the final bottom was seen. WW2 followed from 1939–1945.
1987	Crash of 1987	October 19, 1987 was known as "Black Monday." The stock market peaked in August 1987, up some 44% from the previous year's close. Rising interest rates and a growing US trade deficit helped trigger the crash, but program trading exacerbated it. The expectation was it was going to result in another Great Depression. It didn't, and by 1989 the DJI had recovered its 1987 high. The Gulf War followed in 1990. The DJI lost upwards of 40% in the crash, but 1987 ended the year with a small gain.
1997	Asian financial crisis, October 1997 mini-crash	Overheated stock markets and the busting of currency pegs in Asia triggered an Asian financial crisis, starting with the collapse of the Thailand Bhat and subsequent stock market crashes in Thailand, Indonesia, South Korea, and Philippines as well as Hong Kong. The DJI followed with a mini-crash in October 1997, but the year 1997 ended in the black for the DJI. A bigger mini-panic was sparked in 1998 with the Russian financial crisis. This resulted in huge liquidity injections into the financial system to prevent a collapse, leading directly to the dot.com bubble that culminated in 2000 leading to the High-Tech/Internet collapse of 2000–2002.
2007	Financial crisis of 2007–2009	No, there was not a financial panic in 2007, but the genesis of the financial panic of 2008 was sown in 2007 in July with the collapse of some hedge funds managed by Bear Stearns because of collateralized sub-prime mortgage loans. The market peaked in October 2007. In 2008, the financial panic saw markets fall over 50%.
Source: David Chapman

An interesting side note to the above panics dating from the 19th through to the 21st century was the famous tulip mania panic which ended in 1637 after four years of sharply rising tulip prices. There was also a panic in 1797 after the collapse of a land speculation bubble in 1796. Numerous merchant firms collapsed in both the US and Britain. Panics and crashes are words that could easily be associated with years ending in seven.

Gold too seems to respond to years ending in seven. While gold's free trading history commenced only in the 1970s, it is interesting to note that of thirteen times gold saw gains of 20% or more in a year, three of them occurred in years ending in seven—1977, 1987, and 2007. And while gold has had only four years where it lost more than 20%, one of them naturally occurred in a year ending in seven—1997. Gold thus far in 2017 is up around 12%. Could gold see another 20% plus gain in 2017? Time will tell. So far, every year ending in seven since the 1970s has seen gold make a 20% or more move up or down.

Given the years ending in seven and their propensity for panics and crises, it might not be a surprise that seasonality also plays a role. According to research carried out by Don Vialoux and Jon Vialoux of Equity Clock and Timing the Market www.equityclock.com, www.timingthemarkets.com the markets' ten-year cycle seasonality for years ending in seven is quite negative. The two charts below draw this phenomenon quite nicely.

Source: www.equityclock.com

The pink line on both the DJI and S&P500 chart is normal seasonality for an average year. Markets tend to rise in the early part of the year until May and then over the next four months the markets tend to be choppy (sell in May and go away?) August tends to see tops and the market sells off and is weak into October/November before regrouping and starting another rise into the first few months of the New Year. Remember, seasonality is an observation over a long period and there are years where it might not work.

But when the seasonality is applied to years ending in seven, things have a tendency to get "nasty" following the July/August top. It ends up being a free fall into the October/November period. Again, this is not an "every year ending in seven" occurrence. But there is strong tendency for the markets to react negatively in years ending in seven. Given our history of panics, crashes, and financial crisis in years ending in seven the seasonality of years ending in seven does not seem to be much of a surprise.

So here we are in a year ending in seven in August and we have two world leaders threatening to blow each other and the world to smithereens. Madmen we say? Time will tell. But if the tale of the tape is correct, expect a market sell-off that could take us into October/November before we find a low. The sell-off may already be underway.

If our wave count is correct, this should only be a minor wave 4 up from the February 2016 low. The February 2016 low was, we believe, an intermediate wave (4) up from the major low of March 2009. Intermediate wave (2) was the 2011 EU crisis. If this is correct, then we know we are now in intermediate wave (5). Following a correction now for wave 4 we should then have one more run-up to new highs. That could be a blow-off top that carries us into the first quarter of 2018. But it could also be a feeble rise to a small new top or a double top scenario as we saw in 2007 following the initial breakdown in July of that year. We presume it would get underway with an easing of world tensions and the madmen not blowing each other (and us) to smithereens. Saner heads prevail (we hope). Once the fifth wave is complete, however, a major bear market could well get underway. But that is not expected until sometime in 2018.

Source: www.stockcharts.com

A normal correction now could take us down to at least 21,165 or the uptrend line from the February 2016 low currently near 20,750. A worst-case scenario could drop us to 19,525, the Fibonacci 61.8% retracement level of the move from the November 2016 low to the recent top. Something bigger would be in play if we took out the top of wave 1 at 18,167. But we doubt that at this time. It is, however, a consideration.

We also note that this is the first year of the Presidential cycle and the first year tends to be the weakest in the four-year Presidential cycle. Not helpful is the failure to see any major legislation since Trump took office in January, the looming US debt limit, budget and tax reform that also could prove difficult to pass given the record to date. Add in the ongoing conflict with North Korea that is grabbing the headlines and the markets could see a rough ride into the fall.

So, are years ending in seven a curse for the stock markets? Well, the record is not good. Panics, crashes, and financial crises have been frequent. The seasonality is negative, more negative than average seasonality. One might even say the market reaction is "the same as it ever was."

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David Chapman regularly writes articles of interest for the investing public. David has over 40 years of experience as an authority on finance and investments via his range of work experience and in-depth market knowledge.