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The Benner Cycle: Sure Thing or an Illusion?

Photo by Alesia Kozik

We tested the performance of the Benner Cycle and also examined its philosophical underpinnings. Is the cycle the “sure thing”, as its inventor claimed, or an illusion? How is the profitability of market analysis tools changing over time?

The Benner Cycle chart is posted frequently on social media. Samuel Benner came up with the chart in 1875 on a business card. It was an attempt to predict future cycles in the stock market.

The chart depicts the years of hard times (C), the years of good times (B), and the years of panic (A) in the stock markets. Benner suggested buying during C and selling during B.

In testing the performance of the Benner Cycle model, we will first assume buying at the beginning of the years of hard times (C) and selling at the end of the years of good times (B). We call this the BHEG model: buy hard times, exit good times.

We immediately notice that the BHEG model suffered a large drawdown during the Great Depression due to hard times extending into 1932. Depending on whether the entry signal was at the beginning or end of the hard times in 1931, the BHEG model had a maximum drawdown ranging from 50% to 79%. In other words, the BHEG model failed, but we should not expect a model based on cycles to forecast a depression. Instead, we will look at the performance of the Benner Cycle model in the S&P 500 index from 1950 to 2020, when the last panic peak was indicated to occur.

As it turns out, the model accurately predicted the 1999 “irrational exuberance” panic. It has also accurately predicted the peak in the stock market before the 2020 pandemic crash. However, it did not predict the excessive stimulus and free money that drove stocks to new all-time highs by the end of 2021. Again, we should not expect a deterministic model to predict stochastic human behavior.

The question here is not whether the Benner Cycle Model correctly predicted the two most recent panic peaks, but whether it has provided any value to investors who followed it. To answer this question, evidence-based analysis is required, and this is what we also do in this blog. After all, no one would be still discussing this model had it not predicted some cycle tops correctly, but maybe a different model. Therefore, we may be dealing with survivorship bias.

Below is the performance of the BHEP model, i.e., buying at the beginning of the years of hard times (C) and selling at the end of the years of panic times (C), because, in hindsight, this results in the best performance.

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Specific disclaimer: This report includes charts that may reference price levels determined by technical and/or quantitative analysis. No charts will be updated if market conditions change the price levels and/or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.

Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

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