A Little Commonality 3

Hurst’s Principle of Commonality states that financial markets around the world move with a good deal in common. What this means in practical terms is that troughs tend to form at the same times in all markets, and to a lesser extent peaks too form at the same time. However those troughs (and peaks) are not necessarily of the same magnitude in each market. Because of the harmonic ratios between the cycles, and the fact that cycle wavelengths vary, a particular trough can very easily have a different magnitude in a different market.

Here are my favorite analyses for five stock indices. I will let the pictures speak for themselves in their expression of the principle of commonality, and mention just a few of the similarities and differences.

I wrote a few weeks ago about the magnitude of the August trough, and I continue to believe that trough was of 40-week magnitude in the S&P 500:

The S&P 500

(That small purple dashed line at the top right of the chart is my VTL alert, based on the 18-month VTL as discussed last week)

In the Dow Jones Industrial Average I think the August trough was also of 40-week magnitude, even though the previous 18-month cycle trough works better in October 2013 in my opinion.

The Dow Jones Industrial Average

The Nasdaq is interesting because it presents a different picture (although showing troughs at the same times):


Notice how the trough of October 2011 which is so clearly a big magnitude trough in the S&P 500 and DJIA, is of only 80-day magnitude in the Nasdaq, with the big magnitude trough coming in a full 80-day cycle earlier. That syncopation has continued between the markets, with the most recent 18-month cycle trough in the Nasdaq phased in March 2014 (as opposed to February 2014 or October 2013). The August trough was most probably a trough of the 40-day cycle, with a possible 20-week cycle trough forming this week (while other markets formed troughs of 40-day magnitude).

Crossing over the oceans, here is the German DAX:

The German DAX

The most notable difference in magnitude here is the April 2013 trough, which is of 80-day or 20-week strength in the US markets, but of 18-month import in this analysis. The other big difference is that here the August trough was most probably of 18-month magnitude.

Finally here is the UK FTSE:


Here the 18-month cycle trough in June 2013 was of 80-day or 40-week strength in the other markets. The August trough is phased as a 20-week cycle trough, but notice the 18-month and 40-week “circle-and-whiskers” which indicate that the August trough occurred within the possible time-frame for the 18-month cycle, and so it is possible that the British are in sync with the Germans at the moment.

An interesting observation to make is that there is commonality apparent in the nest-of-lows in the first two months of 2015. The troughs formed in the different markets will probably be of different magnitude, but they will most likely occur at the same time. Peaks are less reliable, but we are seeing a fractured picture beginning to develop with new highs in some markets (the US markets) and not in others (the DAX for instance, which should make it to new highs if it is bouncing out of the 18-month cycle trough)

About David Hickson

I have been trading for over 20 years, but only had any success after discovering Hurst's cyclic principles. Unable to find any software to speed up the analysis process I created Sentient Trader software, which now pretty much does all the analysis for me. I am a film maker and a TV director, but nowadays I mostly provide consultation services to professional traders and fund managers, helping them to integrate Hurst analysis into their trading. I'm South African and live with my family in Italy.

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3 thoughts on “A Little Commonality

  • William Randall

    Hi David.

    I’m not clear on your rationale for the statement that the October 2013 low “works better” for the DJIA. You have also pinned the 4 year low (which shows an average period of almost 5 years) at the October 2011 low. Where are the two prior 4 year lows in that analysis of the DJIA?

    It appears to me that you have used three different nominal models for the analyses of the S&P500, Nasdaq100, and the DJIA. When Hurst did his comparison of the S&P500 and the DJIA in Profit Magic (appendix 2), he stated that the averages “are so nearly identical that only minor spectral signature differences are possible between them.” It is my opinion that statement is still true today. The variation in the amplitudes of the shorter waves which causes differences among the major US indices in the absolute lows based on daily data is insufficient to cause a difference in the magnitude of the the 80 week and 4 year price waves among the indices. In other words, I believe that the three US indices should be phased using the same nominal model which one feels best represents the dominant wave structure in the market.

    • David Hickson Post author

      Hi William. Thank you for your comments. I absolutely agree that the stock markets should all have the same nominal model, and in fact the only analysis shown here that has a different nominal model is the S&P 500 which has a shorter wavelength model based on your post Dynamic Nominal Model. The others all use the default nominal model as defined by Hurst in his Cycles Course (which has the 54-month as opposed to 44-month cycle) and as you point out might well be outdated, but it has worked for me for many years, and I tend to be a creature of habit and haven’t yet wholeheartedly adopted the model used for the S&P 500. I enjoy watching both analyses and observing the subtle differences, and I think I should point out that the analysis performed by ST is influenced by the nominal model, but not wholly determined by it. For instance in the above analyses it is interesting that the cycle wavelengths for the shorter cycles are found to be the same (although allocated to different cycles in the nominal model) no matter which nominal model is used; for instance the 80-day cycle in the S&P 500 is 46.0 days, and the 40-day cycle in the DJIA is also 46.0 days. The same cycles are clearly present, but they have been allocated to different cycles in the nominal model. This is because of the bandpass filter process that Sentient Trader performs in the initial stage of the analysis: it is based exactly on the process used by Hurst in the material he presented in the Profit Magic book (in fact I traced the process he used through the references mentioned in the Profit Magic book and the Cycles Course). What ends up happening is that ST uses the bandpass filter process to find evidence of cycles in the data, and then it allocates those cycles to their respective positions in the nominal model, in the same way that Hurst proposed building an Initial Cyclic Model in the Cycles Course. (I think that I should write a series of posts on how Sentient Trader does its analysis to explain all of this further. I wrote about it many years ago during the initial development of ST, but an update, or review of that might prove useful to those using ST to aid their analysis.)

      With regard to my preferring the October 2013 trough for the 18-month cycle trough in the DJIA, it has to do with way in which the shorter cycles break down. I still like to perform a manual analysis occasionally to keep my hand in as it were. I use the strips of paper recommended by Hurst in the Cycles Course, and I end up with question marks beneath the October 2013, November 2013 and February 2014 troughs. When I move down through the shorter cycles I find the analysis ends up resolving the longer trough to October 2013. Perhaps I should write a post about this as well!

      Finally that 4-year low pinned to October 2011 is not really very well considered. ST places that trough every third 18-month cycle trough, and recently that has caused a difficult issue between choosing August 2007 or March 2009 as a 54-month cycle trough. If the former then October 2011 is the next trough (three 18-month cycles later). If the latter then October 2013 is the 54-month cycle trough. To be honest the only reason I pinned the trough to October 2011 was to keep it out of the way! If it was in October 2013 then we would probably get into a long discussion about the validity of that position. I don’t believe October 2013 was a trough of the 54-month cycle, but rather than get into that discussion here I avoided the issue by pinning it away!

      The position of that long cycle trough is something I would like to discuss, probably better in a separate post. It would be very interesting to hear what you think about the position of those longer cycles. I tend not to worry too much about it personally because all the trading I do requires me to know the status of cycles up to 18-months. Longer than that does not materially affect my trading decisions, and so I often tend to shelve those cycles for “later consideration”.

      • William Randall

        Hi David. Thank you for the detailed response.

        I stand corrected with respect to the nominal models of the DOW and the Nasdaq. Upon further review I think I have a better understanding as to the cause of the phasing difference between the indices even though the same nominal model was used.

        I find it amusing that you still use manual phasing because I do the same thing! That is how I determine the average period of the price waves in order to construct my filters.

        I agree that the long waves are primarily for academic purposes (unless one is an institutional investor) and have little or no impact on short term trading. I would be very interested to learn more about how ST phases and I believe it would be very useful to ST users. I would be happy to offer my opinion with respect to the phasing of the long waves.