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Stock market analysis and market projections (cycle theory)

By Jan Benestad, MSc Mathematics and Physics, NTNU Norway 1997
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One of the most successful economic forecasts of the 19th century was made not by an economist but by astronomer Sir William Herschel (1738-1822). In a paper read before the Royal Society of London on April 16 1801, Herschel called attention to an apparent relationship between sunspot activity and the price of wheat. From his studies of six periods between 1650 and 1800, Herschel concluded that in periods with little or no sunspots, wheat was scarce and hence prices were high. Conversely in periods of abundant sunspots, crops were abundant and prices low. Although his facts were too few and sketchy to justify a positive assertion, Herschel correctly predicted that the next period of abundant sunspots would be accompanied by abundant crops.

Another exponent of the Sunspot Theory was noted English economist William Stanley Jevons (1835-82), who felt that financial fluctuations might depend upon changes in the production of food. He labored for 12 years to establish a fundamental physical law of commercial fluctuations, which culminated in a paper “The Solar Period and the Price of Corn”, read before the Bristol meeting of the British Association in 1875.

In this paper Jevons stated “It is true that Mr John Mills, in his very excellent papers upon Credit Cycles in the Transactions of the Manchester Statistical Society (1867-68) has shown that these periodic collapses are really mental in their nature, depending upon variations of despondency, hopefulness, excitement, disappointment and panic. But it seems to me very probable that these moods of the commercial mind, while constituting the principal part of the phenomena, may be controlled by outward events, especially the condition of the harvests.”

Professor Jevons then made the following prophetic statements: “Assuming that variations of commercial credit and enterprise are essentially mental in their nature, must there not be external events to excite hopefulness at one time or disappointment and despondency at another? It may be that the commercial classes of the English nation, suited by mental and other conditions, to go through a complete oscillation in a period nearly corresponding to that of the sunspots. In such conditions, a comparatively slight variation of the prices of food, repeated in a similar manner, at corresponding points of the oscillation, would suffice to produce violent effects. If, then, the English money market is naturally fitted to swing or roll in periods of ten or eleven years, comparatively slight variations in the goodness of harvests repeated at like intervals would suffice to produce those alternations of depression, activity, excitement, and collapse which undoubtedly recur in well-marked succession.”

A great forward step was taken by the younger Jevons (H. Stanley Jevons), who wrote a paper entitled “The Sun´s Heat and Trade Activity”, published in the August 1909 Contemporary Review, which he summarized as follows: “The heat emitted by the Sun undoubtedly varies, increasing and decreasing in such a way that the interval from one maximum of warmth to the next is, on the average 3,5 years. Every third fluctuation is emphasized, so that there is a major variation occupying about 11 years, which harmonizes exactly with the variations on sunspots. It is not, as used to be supposed, the 11-year or sunspot period which is the important factor in determining the cycle of trade and the occurrence of commercial crises. Probably the sunspot period has some effect; but it is the 3,5 year, or `solar prominence` period with which we are primarily concerned in accounting for trade fluctuations.”

Where Jevons was unable to advance a theory for the causal relationship he had found, Dr. Carlos Garcia-Mata and Dr. Felix I. Scaffner advanced the following two theories in the Quarterly Journal of Economics, November 1934:
1-Mass psychology is influenced by waves of optimism or pessimism caused by variations in the amount of ultraviolet rays emitted by the Sun, which variations are determined by variations in sunspot and solar faculae.
2-Changes in solar activity cause changes in the electromagnetic field of the earth which affects the electrical field of humans. Dr. E. D. Adrian of Yale University (1929) and E. G. Weaver and C. W. Bray (1930) discovered through experimentation with nerve tissue the existence of electrical currents in the human body. Changes in the electrical field of humans may result in biological changes affecting the individual´s state of optimism or pessimism.