Planetary Forces: Its Effects On Earth and the Stock Market
Using physics, one can calculate the net forces happening on the surface of Earth. This force is known to be the direct cause of tides and other short term natural phenomenon. However, seldom anyone talks about the long term implications of this force and our ecosystem. In this piece, I am going to present an interesting look on its effects on the stock market.
Note: It is important to understand that this has nothing to do with astrology. The net planetary forces on Earth is (mostly) not about the formations of the planets in the sky. So, do not draw any conclusions before you read through the complete article.
Short Term Effects
The most well known effect of the gravitational forces on Earth is the existence of tides. Hence this force is often known as tidal force. The main celestial bodies responsible for tides on Earth are the Moon and the Sun with the rest of the near by planets contributing very minute effects.
Tides has a cyclical behaviour being mainly a function of the moon cycle. For astrology enthusiasts, no it does not align with the full moon or new moon. The highest tides within a lunar cycle do happen near full moon and new moon but they varies in different locations around the world. Geographic situations play an important role here.
This short term cyclical behaviour has an interesting correlation with short term market turns. Following is an example of Dow Jones Industrial Average plotted against the net differential forces on Earth’s surface.
Notice a new swing in the stock market index often happens right after the change in direction of the force it self.
Could this be a coincidence? Of course.
For trading purpose, even if there is a causation relationship it is not precise enough for good risk reward control. The problem with this is that short term volatility can easily overpower the weak underlying short term trend.
Long Term Effects
The long term effects of tidal force is rarely studied. Majority of research papers done on the subject focuses on potential long term effects on weather. The reason behind the idea is that tidal force moves the water in the oceans continuously. A slight changes to the behaviour in the oceans, even to the tune of 0.1% can completely alter the weather system.
Scientists know that there exists a multi-year cycle with the tidal force for a long time. Unluckily, it is not as profitable as studying something like global warming. Hence there is not much interest (nor funding) to support the study of the long term effects of tidal forces.
This is where things getting very interesting. Scientists do not really care much outside of their domain but I do. The cyclical long term climate effects affect food production, frequencies of natural disasters and economic activities (e.g. warmer weather means more people willing to go out shopping). This in turns affect the economies worldwide which happens to show up in the Dow Jones Industrial Average.
Following is the same chart as the first one, but looking from bird’s eye view since 1928.
And let’s zoom in 20 years at a time to see the correlations.
Notice stock market corrections are more easily recovered during those periods for which the tidal force is in the rising phase. When the tidal force is in the falling phase, the stock market has a more difficult time to push higher or recover from the corrections.
One of the key features of this long term cyclical behaviour is that volatility in the stock market always picks up when the amplitude is approaching the peak of the cycle. And that is what we are facing now. The cycle may not be a great predictor of major market turns but it reflects the close relationship of our cyclical weather environment and the way our economic and business cycle going boom and bust.
Maybe, on macro view basis, the core of our economies is still just a function of our natural environment. The technological advancements we have accomplished and the wild political / financial experiments done by the governments and central banks over the past 80 years did nothing to tame this simple natural cyclical behaviour.
On the other hand, I do not really understand the short term correlation myself thus I cannot offer an explanation about that. Could there be a correlation due to human short term cyclical behaviour? Of course but that is a speculation that I have no proof.
As an interesting side note, this long term cyclical behaviour is approximately half the 19 years Chinese solar lunar cycle I explained several years ago.
The Longer Term Cycles
The calculations I have done only takes into account the mass and relative position of the Sun, Earth, moon and the planets. The cyclical behaviour observed is limited to the local influence of the solar system. Since the solar system also move with the rest of the Milky Way galaxy around its center, there are longer term cyclical effects to be considered.
If these more complex factors are taken into account, longer term components can be added but the variations probably take hundreds if not thousands of years to show. Since my interest in the subject is really about trading and I do not have historical market data beyond last 100 years or so, there is no point for me to include the extended factors.
Some premium members asked how did I forecast precisely that the Volatility Index (VIX) would stay strong for couple of months back in the beginning of 2015. I explained at the time that there exists a long term cycle on volatility and commodity prices. This article is a more complete answer to the question and the methodology for which I use to identify the long term cycle and patterns.
One thing important to remember is that the long term cycle cannot be represented by a simple fixed formula. The cycles observed actually varies in length since the positions of the involved celestial bodies are not really in the exact same locations over the years.
Obviously, my interest in studying tidal forces and weather behaviour is not a random act. I was a grain and coffee trader long time ago. Knowing something about the weather can be very useful in trading these markets.