Stock market observers have attempted to discern patterns in stock markets from very early days. Charles Dow pioneered the work with the Dow Jones Industrial and Transport Averages, and looked for confirmation or non-confirmation of trends between the two. Other technical analysis tools such as trend-watching, cup and handle formation, double-bottom, head and shoulders and other patterns have since emerged as tools of choice. Stock market cycle is yet another tool in the arsenal of the technical analyst - but does it really work? Should a wealth builder care about this?

Stock market cycle followers indicate that stock markets tend to follow multi-week, multi-month and multi-year cycles - in fact some cycles tend to stretch across multiple decades with the possibility of even larger cycles existing. The most prominent and widely followed stock market cycle is the four year cycle, often coinciding with the presidential election year in the US. The stock market is expected to make a low at the end of each such cycle, and a peak somewhere in the middle of this cycle. However, even this cycle is not very reliable and its timing can often be way off. At a time when you may be most relying on this indicator, it will fail you without notice. As Richard Russell puts it - "Where are cycles when you need them?" However, as a broad trend, the four year cycle has been observed to exist more often than not - and hence has become part of a generally accepted principle in stock market investing.

Shorter term cycles are said to exist as well, including some as short as four and eight week cycles. Twenty week cycles are quite popular as well, and as the length of the cycle increases, its effects are said to be more powerful and longer lasting. Short term cycles are notoriously difficult to call, and seem to get disrupted far more easily by external events. On the flip side, multi-decade cycles such as the Kondratieff waves are said to work over periods such as seventy years or more. But there is much controversy that surrounds these long-term wave cycles as well. Some debunk it as mere data-fitting over the past, while others look at it as powerful predictive patterns. The jury is out on them.

But if these cycles do exist, where do these come from?

From pure observation of human behavior, you can see that we are creatures of habit. We tend to wake up and sleep at roughly the same time, take our vacations at similar times, and are collectively affected by societal happenings that shape our lives. For example, summer is a great time for vacations since children are out of school at that time. Patterns of rainfall dictate sowing time for agricultural products and the heat or cold dictate our energy usage patterns. On a larger scale, as prosperity in a society increases, leisure time builds up leading to a rise in culture and learning. On the other hand, rise in military power may lead to arrogance that breeds enemies while creating a false sense of infallibility - thus sowing the seeds of destruction at the very height of power.

Sometimes these patterns of behavior get so well established that they last long after the actual reasons for that behavior may have disappeared. These thus get reflected into the stock market. For example, for no good apparent reason, the stock markets behave much better from October through May then June through September. One of the explanations is that it stems from the sowing season in agriculture - but 97% of the people are no longer dependent on agriculture for their livelihood - but the pattern seems to continue.

However, these reasons alone cannot explain all the various cycles that enthusiasts of this tool follow. Shorter term cycles are especially hard to find explanations for - but at the same time, those are the most fallible.

So, as a wealth builder, should you care about these cycles?

The answer depends on your investing style. If as we generally suggest, you base you investing on investment newsletters that stick to fundamentals as well as very broad trends in the economy, you do not have to give stock market cycles another thought. However, an awareness of these cycles can sometimes add a useful data-point in your overall analysis. But more often than not, stock market cycles tend to be a nice distraction rather than a friend in your investing journey.

A good book on this subject is Stock Cycles by Michael Alexander.