Economic DNA: Real or Imagined?

By Jake Bernstein

Economic DNA: Real or Imagined?

By Jake Bernstein, FSC Board Member

rulesbasedtrader@gmail.com

Traders and investors have long debated the possible existence of, for lack of a better term, “economic DNA.” It is impossible to debate the existence of any entity, whether physical or theoretical, whether actual or hypothetical, without knowing exactly what it is that’s being discussed. Consequently, I will offer a definition which we can then debate or decide to accept as reality. 

The implications of what we decide are far-reaching and overarching. History shows that the deeper we dig into the subject of DNA, the more answers we get and the more questions we get. 

While this holds true in the biological sciences, could it also be a significant underlying factor in economics and other social sciences? As always, the true answers are to be found in the data as opposed to the opinions. Even though these opinions may be based on the data, interpretation is always a slippery slope. 

In my experience, the analysis of cycles in economic data – in particular price, history and price patterns – strongly supports the opinion that, yes, there is indeed a substructure of market DNA that supports the vast majority of market movements. 

As an example, and a significant one at that, consider the tendency of U.S. stock markets to rise from the beginning of each calendar year through the end of each calendar year. Clearly this does not mean that the pattern will repeat every year, but it does suggest an underlying bias or, for lack of a better term, genetic tendencies in price trends of stocks and commodities.

Looking at the Data 

As you know, data and predictability are the final determinants of scientific discovery. The process is simple. The mathematics, however, can range from the elementary to the highly sophisticated. Since I am not a mathematician or a true scientist, please do not hesitate to take my assumptions and/or conclusions with several grains of salt. 

I offer you the following normalized price chart of the Dow Jones Industrial Average dating back many years.

The chart has normalized the data – by which I mean I have mathematically converted the high price of each year to 100 and the low price of each year to zero. This process has stripped away any individual year and replaced it with the underlying structure of the market, or what I am calling market DNA. 

You might want to do a little experiment yourself by examining any individual year in terms of its trend to the normalized graph shown below. Do you see that each individual year is somewhat similar to the chart’s genetic DNA? 

Therefore, I reach the conclusion, at least initially, that this chart clearly shows an underlying genetic trend. 

Of course, it could be and should be argued that the secular trend of stocks since the mid-1800s has been in the upward bias, which is what accounts for the so-called DNA. Does this negate the existence of that DNA?

The development trend of humans has been upward for thousands of years. Does that negate its validity? 

Let’s think about that until the next installment of my little Gedankenexperiment. I am open to all suggestions and questions.

Jake Bernstein, FSC Board Member

Jake Bernstein has been publishing Jake Bernstein's Weekly Futures Trading Letter since 1972 and trading futures and stocks since 1968. His forecasts and opinions are quoted regularly in the financial press and on financial websites, and he is frequently interviewed on radio and television throughout the U.S. and Canada, including Wall Street Week, CNBC, JagFN.TV, and WebTV.com. In addition to speaking extensively in the U.S., Canada, Europe, and Asia, Bernstein is a consultant for investors, traders, industry, financial institutions, short-term traders, brokerage firms, and commercial firms. Floor traders, professional traders, money managers, hedgers, and traders, both new and experienced, subscribe to his market advisory services. Bernstein is based in California, U.S.