Using Technical Analysis to Navigate the Business Cycle

Transcription

1 Using Technical Analysis to Navigate the Business Cycle Martin J. Pring Market Technicians Association May 2012

2 US Stock Prices 4 These look like trading ranges

3 Deflated US Stock Prices ( ) Deflated S&P Composite Trading ranges in nominal terms bear markets in reality

4 Causes of Secular Bear Markets in Equities Structural Psychological Unstable Commodity Prices

5 Deflated US Stock Prices ( ) Deflated S&P Composite Inflationary pressures from WW War I. Inflationary pressures from failure to finance Viet Nam war. Tech &housing bubble, deficit. Excess manufacturing. In 1929 US car industry capacity was 6.4million yet best sales year was 4.5. Policy mistakes

6 ECRI Weekly Leading Indicator ECRI Weekly Leading Indicator Secular Bear Secular Bull Secular Bear

7 Causes of Secular Bear Markets in Equities Structural Psychological Unstable Commodity Prices

8 Deflated US Stock Prices versus Shiller Real Earnings( ) Deflated S&P Composite Shiller Real Earnings

9 Deflated US Stock Prices versus Shiller P/E Ratio CPI Adjusted S&P Composite 19-years/ 69% decline/ 6 recessions 19-years/ 67% decline/ 4 recessions 16-years/ 62% decline/ 4 recessions 12-years/ 60% decline/ 2 recessions Shiller P/E?

10 Causes of Secular Bear Markets in Equities Structural Psychological Unstable Commodity Prices

11 Deflated US Stock Prices vs US Commodity Prices ( ) CPI Adjusted S&P Composite Commodity Prices

12 Deflated US Stock Prices vs US Commodity Momentum ( ) CPI Adjusted S&P Composite Still rising Commodity Momentum

13 US Stock Prices Arrows flag the 17.5-year cycle May

14 US Government Bond Yields US Govt Bond Yields (20-30-year) 31-years Green plot when 9-EMA of yield is above the 96-month EMA. Trendline and MA at 4.5%. 96-month EMA Average secular trend =27-years 96-month EMA vs 9-month EMA 9-month EMA

15 The Business Cycle

16 Composite Economic Indicators (Momentum) Leading Coincident Lagging

17 Composite Economic Indicators (Momentum) Leading Coincident Lagging

18 Stock Prices Engine: Liquidity Station

19 Master Economic Indicator (Smoothed) S&P Composite Master Economic Indicator

20 Master Economic Indicator (Smoothed) Confidence indicator Master Economic Indicator (Government/Moody s BAA Yield momentum)

21 Bonds Stocks Commodities Are all part of the business cycle sequence.

22 Idealized Business Cycle S B C Growth Contraction C B S

23 S&P Composite vs Coincident Indicator Momentum ( ) S&P Composite Coincident Indicators (1/9 trend deviation)

24 S&P Composite vs Coincident Indicator Momentum ( ) S&P Composite Coincident Indicators (1/9 trend deviation)

25 Idealized Business Cycle S B C Growth Contraction C B S

26 S&P Composite vs Coincident Indicator Momentum ( ) S&P Composite Coincident Indicators (1/9 trend deviation)

27 S&P Composite vs Coincident Indicator Momentum ( ) S&P Composite Coincident Indicators (1/9 trend deviation)

28 The Double Cycle Double Cycle B S Growth declines but does not go negative. C B Economy growing Economy contracting C B S C B S Approximately 41-months between cyclic lows

29 Introducing the Six Stages

30 Idealized Business Cycle B 4 S 5 C 6 B S Bonds C Commodities Stocks

31 Barclays 20-Year Trust vs the Bond Barometer Barclays 20-year Trust (TLT) Green and red highlights indicate bullish and bearish periods. Bond Barometer

32 S&P Composite vs the Stock Barometer S&P Composite Stock Barometer

33 CRB Spot Raw Industrials vs the Commodity Barometer CRB Spot Raw Industrials Commodity Barometer

34 The Market s Discounting Mechanism If the stock market discounts the economy then. individual stock market sectors should discount the economic sector they represent!

35 How Market Sectors Lead Economic Sectors Homebuilders lead housing Capital goods stocks lead capital spending Homebuilders Housing Capital spending stocks Capital spending

36 Homebuilders vs. Housing Starts Home Builders Housing Starts Home Builder KST Housing Start KST

37 Homebuilders vs. Housing Starts Housing Start KST Home Builder KST

38 Utilities Banks Technology Food Producers U.S. Treasuries Technology Consumer Discretion Transports Oil Drillers Oil Drillers Diversified Metals Diversified Metals Healthcare U.S. Treasuries Energy Stage I Stage II Stage III Stage IV Stage V Stage VI

39 Putting it all together with the Dow Jones Pring Business Cycle Index (DJPRING)

40 DJ Pring Business Cycle Index (DJPRING) Dow Jones Pring Business Cycle Index (DJ PRING) DJ UBS Commodity Index (Spliced) S&P Composite US Government Bonds

41 Better return Less Risk

42 Two Ideas to Take Advantage of Opportunities Offered by the Cycle

43 S&P Composite and the 120% Rule 1. Buy when the 3-month commercial paper yield is below its 12-month MA and 2. when the S&P Composite is above its 12- month MA.

44 S&P Composite and the 120% Rule 1. Declining rates tell you monetary policy is easy and 2. The S&P above its MA tells you equities are responding to an easy money policy.

45 Formula Research Test Results return 10.59% vs S&P 9.91%. 2. Maximum drawdown 16.4% vs S&P 54.7%.

46 S&P Composite and the 120% Rule S&P Composite Green highlights show a bullish model

47 Idealized Business Cycle Deflationary Inflationary

48 Inflation/Deflation Ratio and ROC Momentum Inflation/Deflation Ratio Inflationary Deflationary ROC (24)

49 Inflation/Deflation versus IGE/XLP Ratio Inflation/Deflation Ratio Inflationary Deflationary IGE/XLP

50 Substitute for the Inflation/Deflation Ratio Goldman Sachs Natural Resource ETF (IGE) divided by Spider Consumer Staples (XLP)

51 Inflation/Deflation versus IGE/XLP Ratio Inflation/Deflation Ratio Inflationary Deflationary IGE/XLP Breakdown

52 Review Main Points The direction of the secular trend determines the characteristics of the primary trend. The business cycle is a set series of chronological sequences. Turning points for stocks, bonds and commodities are part of that sequence. That gives us the Six Stages. In order to take advantage of the investment opportunities offered by the cycle each stage requires a different asset mix

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