Pros & Cons of Astrology in the Financial Markets (2/2007)
In 2006 the most successful investor of all time, Warren Buffett, made a strange statement in an interview with the magazine "Forbes" (link): he said he was "wired at birth to allocate capital ". What did he mean? In my opinion, this is a clear hint of astrology (the birth as a kind of cosmic "wiring") that presumably plays a role in this work, which not only explains his success but also the failure of those who have tried to copy his apparently simple approach.
In one of his books, the well-known psychologist Max Lüscher wrote that he was lucky enough to get to know some of the richest and the most powerful men of our time, and all of them were depending on someone even more powerful, namely their astrology. Former US president Ronald Reagan is a prominent example, an indiscretion revealed that he never made important decisions before having consulted astrologer Joan Quigley before.
Astrology as a taboo
It's obvious that someone like Buffett can - if at all - mention astrology only in a roundabout way, visible just for the few who can read between the lines. Among my customers are fund managers responsible for 1 billion or more, but (almost) none of them is ready to out himself as a follower of astrologer. I always joke that adulterousness and tax evasion are admitted easier by financial professionals then their use of astrology, although there are some signs on the horizon that the situation is changing slowly. For instance, in 2006 the market expert and EUR 7+ billion (US$ 9 billion) fund manager Heiko Aschoff published a standard work (anthology) on investing with many top analysts contributing (ISBN: 978-3-89879-214-1). According to the editor, it wasn't easy to convince some of the analysts to accept my contribution on financial astrologyFinancial astrology is the use of astrology to analze and forecast the financial markets. Here financial astrology is understood primarily as an empirical-statistical discipline. The probably first financial astrologer in history was Thales of Miletus who is viewed as the father of science and philosophy (together with Aristotle). With the aid of astrology Thales foresaw an excellent olive harvest, so he hired all olive presses that he lent out with a huge profit, which made him a rich man..
What is astrology?
Astrology is the discipline examining the connection between heavenly and earthly events, financial astrologyFinancial astrology is the use of astrology to analze and forecast the financial markets. Here financial astrology is understood primarily as an empirical-statistical discipline. The probably first financial astrologer in history was Thales of Miletus who is viewed as the father of science and philosophy (together with Aristotle). With the aid of astrology Thales foresaw an excellent olive harvest, so he hired all olive presses that he lent out with a huge profit, which made him a rich man. is the application of astrology to analyze and forecast the financial markets. It's still unknown whether the asserted connection is of causal or non-causal nature, although new approaches like the ground-breaking global scaling theory by the German physicist Dr. Hartmut Müller should eventually reveal the answer. I am convinced that Müller's work will have a similar or even superior impact on our understanding of the world as Einstein's relativity theory.
University research
As long as we have no explanation model from the "hard" sciences, we have to employ and empirical approach, i.e. we should primarily analyze the impact of past constellations and project these findings into the future. This approach was initiated by the French statisticians couple M. & F. Gauquelin in the 1950ies, in the past 5 decades hundreds of empirical studies have been conducted at universities around the world. In the 90ies I worked on a diploma and doctoral thesis at the Vienna University of Economics and Business Administration (Austria, European Union), with a revised version being published as a book (ISBN 3-9805414-9-5). The diploma thesis analyzed the differences in the incorporation horoscopes of 3.528 successful companies with a good credit rating and 1.801 bankruptcies, with rather surprising results. While the results were highly significant (p<0.1%) in statistical terms, the expectations were only partially fulfilled.
Unfortunately, I have to admit that the level of the astrology practiced today is rather low, the typical newspaper horoscope is nothing but humbug, and you can't be satisfied with astrology that claims to be serious either. Of the newly published books (according to some sources, up to 1% are dedicated to astrology) I read very little or almost nothing (with the exception of a handful of good authors) because the theories advocated are almost never supported by objective research, so what is true or not is anyone's guess. Luckily, in financial astrologyFinancial astrology is the use of astrology to analze and forecast the financial markets. Here financial astrology is understood primarily as an empirical-statistical discipline. The probably first financial astrologer in history was Thales of Miletus who is viewed as the father of science and philosophy (together with Aristotle). With the aid of astrology Thales foresaw an excellent olive harvest, so he hired all olive presses that he lent out with a huge profit, which made him a rich man. the situation is light years better because with the vast amount of historical data at hand it's easy to test claims immediately. When I started doing these tests I was shocked because I realized that very little would hold up.
Application of astrology
On its website, the Bank of Japan states (link) that, "the market has to be analyzed from the standpoints of various areas ... and even astrology ". I have to concur wholeheartedly, the unique strength of astrology is the timingIn the Amanita prognostications, timing is almost always more important, reliable & precise compared to prices. The standard window for all time projections is +/- 1 week, with the exception of the Amanita pivots (+/- 1-2 days)., nevertheless technical and fundamental analysis are still necessary especially to analyze trends and calculate price targets. I work a lot with non-astrological cycleA cycle is a recurring event in the markets.s that are a quite powerful instrument, and in addition with ElliottElliott waves are an instrument of technical analysis to forecast the financial markets. The theory was developed in the late 1920s by Ralph Nelson Elliot in the US. waves and the traditional technical and fundamental methods. Neither does astrology allow you to skip the market basics (e.g. solid money management) nor will you earn millions over night. Still it's possible to create an edge.
Horoscope example Google
A horoscope is a schematic delineation of the sky with the zodiac signs, planets, houses, and aspects (angles between the planets), set for a specific time and a place. This is the horoscope of Google (Nasdaq:GOOG) that started trading on August 19, 2004, at 11:38 EDT in New York:
So Google's sign is Leo which means that at the time of the first trade the sun was in the sign Leo. Please note that the sun is just one of dozens or even hundreds of factors to take into consideration. The horizontal line in the middle determines the so-called ascendant on the left-hand side (which is known among laypeople), in this case in the sign Scorpio.
Taurus and the Bull Markets
Bill Meridian, formerly a very successful fund manager in the United Arab Emirates, now operating out of Vienna, Austria, has examined 800 stocks and found out that "Taurus stocks" (with the sun in Taurus in the first-trade chart which is app. April 20-May 20) eclipse all others signs: 17% of the outperformers (beating the benchmark S&P 500) had a Taurus sun as opposed to the underperformers that only had a Taurus sun in 7% of all cases (average 8.2%). So Taurus stocks are likely to outperform the other signs and a simple "Taurus strategy" would already beat most of the actively managed funds and would also offer the advantage of low managing fees. However, you should be aware that these effects could be temporarily overruled for 1-3 years, e.g. by Saturn transiting through the sign Taurus. The 2 largest exchanges in the world (New York and Tokyo) were both founded under the sign Taurus, too.
This simple example demonstrates that even newspaper astrology with its simple division into the 12 signs (Aries, Taurus, Gemini, Cancer, Leo, Virgo, Libra, Scorpio, Sagittarius, Capricorn, Aquarius, Pisces) - and neglecting all other factors - has in some parts a scientific-empirical base. Among the Dow stocks, American Express (NYSE:AXP) is a Taurus stock for example (first traded on May 18, 1977).
The influence of the moonThe moon has a major impact on the markets, the full moon is more important than the new moon.
Even someone absolutely clueless about astrology has usually heard about the influence of the moonThe moon has a major impact on the markets, the full moon is more important than the new moon.. For the stock markets, an excellent research paper from the University of Michigan Business School is available on this subject, the title "Are Investors Moonstruck? Lunar Phases and Stock Market Returns" (text link, PDF link). The conclusion is:
This paper investigates the relation between lunar phases and stock returns for a sample of 48 countries. We find strong global evidence that stock returns are lower on days around a full moonThe moon has a major impact on the markets, the full moon is more important than the new moon. than on days around a new moonThe moon has a major impact on the markets, the full moon is more important than the new moon.. Constructing a lunar trading strategy, we find that the magnitude of this return difference is roughly 4.2 percent per annum. Since lunar phases are likely to be related to investor mood and are not related to economic activities, our findings are thus not consistent with the predictions of traditional asset pricing theories that assume fully rational investors.
Performance gain 4.2%
Creating an alpha of 4.2% for a very simple strategy (and reducing volatility and risk at the same time) is quite useful. The chart below (source: Bill Meridian) for the Dow Jones Industrials Average over 80 year depicts the lunar effect: 0% on the x-axis is the new moonThe moon has a major impact on the markets, the full moon is more important than the new moon., 25% equals the first moonThe moon has a major impact on the markets, the full moon is more important than the new moon. quarter, 50% is the full moonThe moon has a major impact on the markets, the full moon is more important than the new moon. and 75% the last moonThe moon has a major impact on the markets, the full moon is more important than the new moon. quarter. On average, the Dow is lowest 2-3 days before a new moonThe moon has a major impact on the markets, the full moon is more important than the new moon. and highest 3-5 days afterwards. The time around new moonThe moon has a major impact on the markets, the full moon is more important than the new moon. is bullish, around full moonThe moon has a major impact on the markets, the full moon is more important than the new moon. bearish.
How can you implement these insights? One shouldn't use it stand-alone but only combined with other (technical or astrological) factors. E.g. you could sell shortly before the full moonThe moon has a major impact on the markets, the full moon is more important than the new moon. and buy shortly before the new moonThe moon has a major impact on the markets, the full moon is more important than the new moon. if this is backed by a simple chart analysis. The next new moonThe moon has a major impact on the markets, the full moon is more important than the new moon.s are 2/17 and 3/18-19 (depending on the time zone), the next full moonThe moon has a major impact on the markets, the full moon is more important than the new moon. is 3/3.
intermediate-termintermediate term means a time horizon of 1-3 months. forecast for precious metals
I want to present some analyses for gold (daily data available since 1975) and silver (data available since 1970) that have been created with the software "Market Trader" by Alphee Lavoie. Of great importance in astrology are the so-called aspects (special angles between the planets), the trine (120°) and the sextile (60°) are considered harmonic (soft) and the square (90°) and the opposition (180°) critical or hard (and partly also the conjunction 0°). With this concept you can test the past and scan for significant bullish or bearish constellations.
Saturn-Neptune aspects and the gold price
I start with the hard aspects between the planets Saturn and Neptune, on 2/27/07 we have an exact opposition (angle of 180°). Interestingly, each time gold was lower 52 days after the aspect date compared to 19 days after the aspect which means that the odds are about P=70-80% that gold will be lower on 4/20/07 than on 3/18/07.
This chart explains the best bearish strategy for Saturn-Neptune aspects in gold. The sub-chart at the right-hand side in the middle shows the average behavior of the price of gold in a window of +/- 3 months, the red oval highlights the most bearish influence 19 to 52 days after the exact aspect. The bottom window suggests a trading strategy: sell 3/18/07, buy 4/20/07.
The average probability that gold was falling over a 33-day period 1975-2006 was P=49%, so the odds that this effect can be attributed to chance is less than one in 1:1000 (p<0.1%). In science, this is the most stringent yardstick to distinguish true from false hypotheses with the aid of statistics.
Jupiter-Uranus angles and silver
There is another major constellation: from the perspective of the sun (heliocentric) Jupiter and Uranus are in a hard angle (90° square) to each other on 6/16/07. From 1970 through 2007 silver rose in each case from the 67th day before to the 45th before (on average by 5%), i.e. silver is likely higher on 5/2/07 than on 4/10/07.
Combination of both aspects
Gold and silver are very highly correlated, that's why I use gold as a proxy for silver and vice versa. Both constellations combined project the precious metals weaker between mid-March and April and then rising into May. Other astrological and cyclical factors fine-tune the intermediate-termintermediate term means a time horizon of 1-3 months. bottom to be expected already in the 1st half of April.