Debunking the Myth of the Efficient Markets Hypothesis

In the way of a refresher course, the efficient markets hypothesis (EMH) proposes that global financial markets are efficient in terms of the information available to investors and traders that drives prices. Another way of looking at the efficient markets hypothesis, which has influenced much of the investment thinking around the world in recent decades, is that based on the information available, you cannot achieve risk-adjusted returns in excess of the average market returns over time. The efficient markets hypothesis is the sister hypothesis of the random walk hypothesis, which essentially states that the direction of prices in markets cannot be predicted.

Many have taken issue with both the efficient market hypothesis and the random walk hypothesis. Of course, the most notable is Warren Buffet, who said. “I’d be a bum on the street with a tin cup if markets were always efficient.” Clearly, Buffet’s performance has demonstrated that markets are not efficient, as he has consistently beaten the averages. His $5 billion dollar bet on Bank of America may help him revert closer to the average, but here we digress. 

What Buffet is suggesting is that there are methods of analysis that allow an investor to beat the market, and have allowed him to do so handily. Buffet applies methods of value investing analysis, and good gut instincts on management, to beat the averages. It was Warren Buffet’s mentor, the world-renowned value investor Benjamin Graham, author of The Intelligent Investor, who advocated investors develop what he called “formula timing plans”, to determine optimal times to enter and exit value-based investment selections. The following is what Benjamin Graham had to say about formula timing plans:

“I am more and more impressed with the possibilities of history’s repeating itself on many different counts. You don’t get very far on Wall Street with the simple, convenient conclusion that a given level of prices is not too high… In recent years certain compromise methods have been devised by which the investor can take some advantage of the stock market’s cycles without running the risk of an unduly long wait or of “missing the market” altogether. These are known as Formula Timing Plans.”

Benjamin Graham is clearly suggesting that market cycles be used to identify opportunities to buy and sell, and the mounting evidence in the field of market cycle dynamics suggests he is correct. He was clearly referring to applying various methods of technical and fundamental analysis that allows the identification of what Ecclesiastes refers to as, “A time to buy and a time to sell.” Benjamin Graham proposes a formula timing plan in addition to applying principles of value investing. This idea runs highly contrary to the concepts behind the efficient markets hypothesis.     

Value investors have clearly been punished along with all other investors in recent years for not recognizing the market cycle dynamics at work. The question for all investors, and certainly traders, is whether there are methods of technical analysis that allow you to identify entry and exit opportunities in price and time consistently enough to allow you to beat the averages. Technical analysis essentially proposes that there are in fact methods that can be added to various investment approaches to create a formula timing plan to beat the averages.

PQ Wall was fond of saying, “Pattern is the sunlight of the mind.” Technical analysis basically proposes that there are patterns at work in markets that allow an investor or trader to anticipate and identify market turns in advance. Technical analysis recognizes that there are technical patterns that can override the fundamentals of a market or specific security.

There are an almost unlimited number of methods of technical analysis applied by both investors and traders seeking to improve their odds of beating the market averages. There is tick, trend, Fibonacci ratios, Elliott waves, Gann fans, advances/declines, accumulation, moving averages, moving average convergence/divergence (MACD), and the list could go on. Many technical analysis practitioners have proven to apply technical methods to beat the averages with different formula timing plans. 

Investors and traders should identify and develop a formula timing plan that suits their investing style and philosophy. It should be a plan that has proven over time to identify opportunities to buy and sell on a consistent basis. After studying the technical market masters for decades, I have developed Market Cycle Dynamics (MCD) formula timing plan as a relatively straightforward method with the goal of identifying when to buy and when to sell. It can be applied by both long-term investors and short-term traders.

MCD uses 1) price, 2) time and 3) sentiment to anticipate turns in any global market or security. For price, MCD uses new Fibonacci methods and drill-down price grids to identify high probability multi-year or intraday price target turns. This is similar to the Wyckoff method that identifies support and resistance lines, only MCD uses Fibonacci grids and price targets. Specific Fibonacci grid targets provide specific and clear entry, exit and stop loss prices. However, time can be just as important as price. MCD uses a new method of time cycle analysis based on ideal time cycle lengths and their Fibonacci ratios, which have been studied and documented for years. For market sentiment, MCD uses stochastics, which can identify when a market or security is making a high probability high or low.

When a market index or a security is approaching an important Fibonacci price target in a “hot” Fibonacci price grid that has identified turns in the past, you should always pay attention. If this is occurring in a time cycle window where you are looking for a top or a bottom you need to pay closer attention. If price and time has your attention and stochastics are indicating that the sentiment of investors and traders is overbought or oversold, you have an opportunity to take action and beat the averages. Can you do it on every investment or trade? No, but a solid formula timing plan will help you preserve your capital, increase your risk adjusted returns, and you can do it often enough to beat the averages.

Global markets are in the final business cycle of the Kondratieff long wave. The chart below is an example of price, time and sentiment in the rally since the March 2009 lows. You can clearly see where price, time and sentiment converge to trigger a high or low in the market at an important turn. These targets are where the MCD formula timing plan provides you with an opportunity to buy or sell. The chart demonstrates the unfolding cycles tracked by the MCD formula timing plan. Note the high and low levels in the stochastics as the S&P 500 approaches Level 1 Fibonacci grid targets. Mr. Market is currently trying to put together a rally in the latest Wall cycle, but this is Wall cycle #6, and is expected to be a third last and weakest cycle that tops early and dies hard. It will be a short cycle unless QE3 comes to the rescue.  

SPX Since March 2009 

Applying the MCD price, time and sentiment approach to an individual security is demonstrated in the chart below of Proctor & Gamble (PG), a large cap global franchise company with a higher dividend than most companies. The chart demonstrates an ideal Wall cycle in time, the Fibonacci Level 1 and Level 2 price grid, and investor and trader sentiment in the daily 55 period stochastics. The low in August created a buying opportunity, but the rally from that low met resistance at the Level 1 76.4% target price of $63.62 with stochastics approaching overbought status again. In light of the larger cycles putting downward pressure on global markets, long-term holds are generally not advised at this time.



Just looking at the business cycle and the smaller cycles is not enough. There are now forces in play in the current global economic crises that are much larger than the business cycle, name the long wave winter season. They are putting great downward pressure on the business cycle and global markets. Great caution is advised for investors and traders.  

While we are on the subject of the efficient markets hypothesis and the random walk, the chart below of Australia’s ASX is of interest. The chart is a 1-minute intraday chart of the Level 3 and Level 4 grids. These grids are generated using the 1991 Level 1 low of 1202.54 and the 2007 high of 6873.20 and drilling down to the Level 3 and 4 grids. That price action and the 21 period 1-minute stochastics don’t look very random to me. It looks like a combination of natural Fibonacci forces and computer programs. This is an intraday version of what happens in the larger cycles.

 Intraday ASX



If market price movements are efficient and random, and their direction cannot be predicted, why is the ASX finding support and resistance turning intraday on the Level 3 Fibonacci grid prices with precision? The answer is twofold. First, Fibonacci ratios are a natural occurrence in markets, and second, the quantitative analysts “quants” that write the computer programs use the Level 1 highs and lows and Fibonacci ratios in their algorithms. MCD provides quant-busting power to investors and traders by drilling into the Fibonacci price grids.

Finally, the DAX is of particular interest for the MCD approach. It is remarkably oversold due to the European sovereign debt crisis. Most markets held earlier August lows, while the DAX has dropped through the Level 1 golden at 5542, which was critical support and is now critical resistance. If the DAX falls through the Level 2 76.4% target at 5161 and then the 61.8% golden ratio target at 4926, the European debt crisis may envelop the world sooner rather than later. Alternatively, price, time and sentiment suggests the DAX is spring loaded for the Wall #6 rally. Either way, investors and traders have specific prices for entry, exit and stop losses to take action. If the DAX rallies here, Wall cycle #6 is expected to die young, hard and fast.    



Investors tracking large cycle turns and traders tracking small cycle turns to buy or sell can apply the MCD approach of price, time and sentiment to any global market or security. Tracking the market cycles in price, time and sentiment as an investor or trader can increase your odds of beating the averages, debunking and helping send the efficient markets hypothesis to the dustbin of history.


David Knox Barker is author of Jubilee on Wall Street; An Optimistic Look at the Global Financial Crash, Updated and Expanded Edition (2009). He is the founder of, and the publisher and editor of The Long Wave Dynamics Letter, and creator of Market Cycle Dynamics (MCD) software. Permission is granted for this article to be reprinted if credit is given to the author and a link is provided to

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