The Stock Market Secret Ending in ‘7’

You might have heard of Peter Lynch. He’s one of the world’s most famous fund managers.

Lynch managed the Magellan Fund at Fidelity Investments from 1977 to 1990. He grew the fund from US$18 mln to US$14bn over that time. The average yearly return was 29%.

Following Lynch’s departure, Jeffrey Vinik took the job. The Magellan Fund got a lot bigger. It reached US$50bn in value by 1995. Of course, the market was a lot friendlier back in those days. But Vinik still managed to outperform it.

Lynch and Vinik got a lot of credit for their success. But Magellan wasn’t run by two people. Phil Erlanger also played a massive role.

Erlanger is a Chartered Market Technician. He uses technical analysis to forecast market movements. In the early 1990s, Erlanger became the Head Technical Analyst at Fidelity Research. He worked alongside Lynch and Vinik.

Erlanger made billions betting on junk bonds, currencies and equities. He was one of the best market forecasters in the world. That’s why he started his own consultancy business five years after working at Fidelity. Today, Erlanger provides technical analysis to the world’s top financial firms. His analysis impacts over US$1 trillion in capital across the globe.

Erlanger just put out a note called ‘The Seven Year Itch’. It shows the Dow Jones Industrial Average’s seasonality with years ending in ‘7’. Remarkably, every year ending in 7 has had a mid-year pullback since 1907.

Will it happen this year?

Take a look at the images below:


Source: Phil Erlanger Research
[Click to enlarge]


Source: Phil Erlanger Research
[Click to enlarge]


Source: Phil Erlanger Research
[Click to enlarge]

Those charts paint a thousand words.

‘The Seven Year Itch’ looks extremely powerful as a trend. It would suggest that the Dow Jones may have peaked between late July/early August. That’s what the 81-year cycle shows for years ending in 7:


Source: Equity Clock
[Click to enlarge]

My colleague Phil Anderson, from Cycles, Trends and Forecasts, knows a lot about the cyclical nature of stock markets. Phil is a ‘cycles’ expert, and wrote in his stock market outlook for 2017 (my emphasis added):

Years ending in 7 have historically been years in which to keep an eye on October. Particularly if we get a July or August high for the year.

‘One of the secrets to interpreting this year 7 drop, though, is to always place the year ending in 7 in accordance with where it is in relation to the real estate cycle. That is, in the first or second half.

2017 falls in the first half of the cycle.

It is the second half “year 7” corrections that have historically been more severe. There’s one caveat with the 2017 curve this year. It’s too obvious. We won’t be the only ones to have noticed that US markets don’t do well in October of years ending in 7.

And 2017 is 30 years from 1987. Should the US markets be at, or near, all-time highs again midyear, this is going to be pointed out to you by any number of market commentators ad nauseum.

Markets never do the “obvious” once it is clearly pointed out. To get a worrisome October 2017, we’d have to see a significant midyear top.

At the time of writing, US markets most certainly look bullish. We appear to be right on track for a July or August high following the 2017 curve, as we have it above, perhaps even continuing strength past these months.

We’ll update this further as the year unfolds.

Phil’s analysis, which he wrote at the start of the year, is very convincing. I recommend checking out his latest work on where the market could potentially go over the next decade here.

I believe he’s right in saying that US markets won’t crash this year. The Dow Jones looks very strong. Remember, as discussed last week, there’s still some support around the 21,000-point area for the Dow. That still doesn’t rule out the potential for an August high. But we could easily see 22,600 points — technical resistance drawn from the 2010 and 2011 highs — before any correction.

I believe this isn’t a time to sell your stocks. There’s no major near-term fundamental reason to sell yet. The best strategy, in my view, involves buying the best stocks during any correction — stocks that offer the most near-term reward. Not every stock will pull back with the market, however. That’s why I’ve been scouring the stock market for the best opportunities.

I’ve finally found three of the best opportunities in the resources sector…

You will find out about them in a few hours. So make sure to keep an eye on your inbox.

Regards,

Jason Stevenson,
Editor, Markets & Money


Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:


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