My Journey Begins
I was introduced to the markets on my first Air Force assignment by
a young Captain, who later retired wealthy by using his Air Force
pay to trade the markets. As I studied the material he gave me, I
became fascinated by various theories about what caused the markets
to move, especially cycles.
I had been introduced to cycles by one of Dewey's early books, and
then by Jim Hurst's book. While I was in graduate school, I programmed
the material in Jim Hurst's book and started doing digital filtering
of cycles. I did such things as Fourier transform studies on the cycles
in the Dow. I was fascinated by the potential of applying digital
computers and engineering techniques to analyze the market. It did
help my trading, and I began to feel I could see what was going on.
At that point I had captured the state of the art of cycles knowledge. I
thought I knew it all.
I Take a Turn
But an interesting thing happened one day at lunch. The party I was
with was joined by an ex-professor of mine. He was retired and someone
asked him what he was doing now. He started telling an interesting
story. He claimed that he had extracted the orbital period of
Mercury, accurate to 5 decimal places, from the Consumer Price Index.
I was very polite, but I thought the professor may have flipped his
lid. However, I decided it was worth checking out, so I asked if I
could come over and see his mathematics. He said, "Sure."
I paid him a visit. I went through his mathematics. I found they were
ingenious, and very sound. He had developed a unique means of extracting
cycles in such a way that he did not modify the data from which they
were being extracted. This is unlike any other cycle extraction technique.
I found this breakthrough in cycle extraction techniques extremely
interesting.
It was also a breakthrough in my thinking about cycles. What he was
extracting from a financial time series were certainly planetary cycles.
The odds against him coming up with the cycle values, accurate
to 5 and 6 decimal places, by chance or by accident, were greater
than 5000 to 1. I knew that this was not absolute proof that the
planets moved the markets, but it was certainly evidence that could
not be ignored.
When I asked what the physical mechanism for this was he said it was
just the way the solar system was built. It was based on work discovered
in the 1930's by cycles researchers who were working on cycles in
weather. Clayton, Luby, Stetson and several other early researchers
had discovered that the so-called solar constant of radiation was
not constant at all, but had about a 2 per cent variation, and that
variation severely affected our weather and the earth's electromagnetic
field. The hypothesis was that the planets, as they moved, caused
tidal waves on the gaseous sun, stirring up sunspots and solar flares,
causing the variation in radiation.
I asked if there was an equation for this stirring tidal force, and
discovered that there was. So I did one of those things I frequently
do - I stuck my foot in my mouth and volunteered to write a program
to compute the stirring force. It took me a few weeks to write the
program. When I gave it to my ex-professor, he began pointing out
to me the correlation between the highs and the lows in the stirring
force and the Consumer Price Index. The correlation was uncanny. My
friend told me it was great work.
At that point I thought, "If the solar stirring force relates to one
economic series that is driven by mass psychology, it should relate
to another." My other reading had informed me that not only our weather
but our electromagnetic field and the currents that flow between earth
and the atmosphere were quite variable and could be related to this
phenomena. I found that scientists had even tracked changes in blood
PH to changes in the electromagnetic field. It made a lot of sense
to me that those electromagnetic changes and the currents flowing
through the very space in which we walk could affect the human body. I learned
that there are large electric currents, in the thousands of amperes,
flowing between the earth's surface and the atmosphere, causing such
powerful natural events as lightning. My research confirmed that it
is very scientifically proven that these changes affect such things
as the ability of homing pigeons to navigate, and the time cycles
to which people who are isolated in caves adjust their work routine.
I Find New Things
I started looking at this solar stirring force and the stock market.
One thing I did was apply digital filtering techniques to extract
a nominal 2 year and a nominal 4 year cycle out of the Dow Jones Industrial
Average. I also applied various smoothing techniques to my calculation
of the solar stirring force. When I compared the two, I made quite
an astounding discovery- the highs and lows were frequently correlated.
They were so well correlated that the odds against it happening
by chance were several thousand to one. Further, I found that this
stirring force correlated with every cycle published by Dewey in his
cycle work. This computation I now call The Master Clock. It
can be used to derive some pretty good market turning points, and
for doing one's own research. This work was published as "In Search
of the Cause of Cycles", available in my reprints.