Is Market Correction in a 7-Year Cycle Driven by Psychology or Equilibrium?

Market theories often emerge from patterns identified in historical data. While there are many theories attributing significant market events to 7-year cycles, this article delves into the validity of these claims, examining whether these cycles are driven by psychological manipulation or a natural way markets reach balance.

The Psychology of Market Theories

Many market pundits present theories by looking back at historical patterns, conveniently ignoring data that doesn't support their theory. They then spin these patterns with semi-plausible explanations, leading many to believe in the continuation of these patterns due to psychological manipulation rather than objective analysis.

A Universal Case Study: Usain Bolt and the 100m Races

To illustrate the skepticism warranted when encountering such claims, let's examine a non-market scenario. Consider the 100m Olympic races, and a hypothetical analysis suggesting that Usain Bolt wins due to his height and ability to gain more energy from sunlight. The analysis concludes he will continually win races due to his height, despite not winning in 2004 (see historical data). This example highlights how easily people can be swayed by misleading analysis and the importance of critical thinking.

Why Warrant Skepticism of 7-Year Market Cycles?

When evaluating 7-year market cycles, it's crucial to maintain a skeptical stance. The historical evidence is often cherry-picked to fit a preconceived pattern, while alternative data points are conveniently overlooked. This selective pattern-finding is a hallmark of market theories that don't stand up to critical scrutiny.

Cherry-Picking Data and Pattern-Finding

For instance, if someone claims a 7-year cycle exists in the stock market, they might point to some bull and bear market periods that fit the pattern. However, they often ignore other data points that contradict their theory. Standard statistical techniques can show that these patterns are likely just noise rather than meaningful signals.

Alternative Explanations

Instead of assuming that a 7-year cycle exists because of psychological manipulation or equilibrium, it is more reasonable to consider that these patterns are simply noise. This approach aligns with the scientific method, where explanations should be supported by empirical evidence.

Conclusion: The Importance of Skepticism

While exploitable patterns do exist in the markets, they should be rigorously tested and confirmed before accepting them. When dealing with theories about 7-year market cycles, it's essential to question the validity of these claims and seek out alternative explanations. Skepticism is a critical skill in financial analysis, ensuring that one's investment decisions are based on sound, empirical evidence rather than anecdotal or unsupported theories.

Historical Data

The 2004 Olympics saw a different winner, likely due to the non-regular Olympic cycle that may not align with Bolt's dominance cycles. Bolt's dominance can be explained through natural athletic abilities, training, and preparation rather than a 4.25-year cycle or solar energy.