using technical analysis to navigate the business cycle · pdf filedj ubs commodity index...
TRANSCRIPT
Using Technical Analysis to Navigate the Business Cycle
Martin J. Pring
Market Technicians Association May 2012
1
2
3
4
1900-2012 US Stock Prices
These look like trading ranges.
Deflated S&P Composite
Trading ranges in nominal terms bear markets in reality.
1
2
3
4
Deflated US Stock Prices (1900-2012 )
Causes of Secular Bear Markets in Equities
• Structural
• Psychological
• Unstable Commodity Prices
Deflated S&P Composite
Excess manufacturing. In 1929 US car industry capacity was 6.4million yet best sales year was 4.5. Policy mistakes
Inflationary pressures from WW War I.
Inflationary pressures from failure to finance Viet Nam war.
Tech &housing bubble, deficit.
Deflated US Stock Prices (1900-2012 )
ECRI Weekly Leading Indicator
Secular Bear
Secular Bear
Secular Bull
ECRI Weekly Leading Indicator 1967-2012
Causes of Secular Bear Markets in Equities
• Structural
• Psychological
• Unstable Commodity Prices
Deflated S&P Composite
Shiller Real Earnings
Deflated US Stock Prices versus Shiller Real Earnings(1929-2012)
19-years/ 69% decline/ 6 recessions
19-years/ 67% decline/ 4 recessions
16-years/ 62% decline/ 4 recessions
12-years/ 60% decline/ 2 recessions
CPI Adjusted S&P Composite
Shiller P/E
?
Deflated US Stock Prices versus Shiller P/E Ratio
Causes of Secular Bear Markets in Equities
• Structural
• Psychological
• Unstable Commodity Prices
CPI Adjusted S&P Composite
Commodity Prices
Deflated US Stock Prices vs US Commodity Prices (1830-2012)
Commodity Momentum
CPI Adjusted S&P Composite
Still rising
Deflated US Stock Prices vs US Commodity Momentum (1830-2012)
May 2017
US Stock Prices 1800-2012
1965
2000
1929
1982
1947
Arrows flag the 17.5-year cycle.
US Govt Bond Yields (20-30-year)
96-month EMA vs 9-month EMA
Trendline and MA at 4.5%.
US Government Bond Yields 1865-2012
Green plot when 9-EMA of yield is above the 96-month EMA.
9-month EMA
96-month EMA
Average secular trend =27-years
31-years
The Business Cycle
Composite Economic Indicators (Momentum)
Leading
Coincident
Lagging
Composite Economic Indicators (Momentum)
Leading
Coincident
Lagging
Station
Engine: Liquidity
Stock
Prices
Master Economic Indicator (Smoothed)
S&P Composite
Master Economic Indicator
Master Economic Indicator (Smoothed)
Master Economic Indicator Confidence indicator
(Government/Moody’s BAA Yield momentum)
Bonds
Commodities
Stocks
Are all part of the business cycle sequence.
Contraction
Growth
Idealized Business Cycle
B
S
B
C
S
C
S&P Composite
Coincident Indicators (1/9 trend deviation)
S&P Composite vs Coincident Indicator Momentum (1955-81)
S&P Composite
Coincident Indicators (1/9 trend deviation)
S&P Composite vs Coincident Indicator Momentum (1980-2012)
Contraction
Growth
Idealized Business Cycle
B
S
B
C
S
C
S&P Composite
Coincident Indicators (1/9 trend deviation)
S&P Composite vs Coincident Indicator Momentum (1955-81)
S&P Composite
Coincident Indicators (1/9 trend deviation)
S&P Composite vs Coincident Indicator Momentum (1990-2012)
Economy growing
Economy contracting
Approximately 41-months between cyclic lows
Growth declines but does not go
negative.
B S
C
B
S
C
B S
B
C
Double Cycle
The Double Cycle
Introducing the Six Stages
S
2 S
5
Idealized Business Cycle
1
B
C
6 3
C
B
4
Commodities Stocks
Bonds
Barclays 20-year Trust (TLT)
Bond Barometer
Barclays 20-Year Trust vs the Bond Barometer
Green and red highlights indicate bullish and bearish periods.
S&P Composite
Stock Barometer
S&P Composite vs the Stock Barometer
CRB Spot Raw Industrials
Commodity Barometer
CRB Spot Raw Industrials vs the Commodity Barometer
If the stock market discounts the economy then ……
.…individual stock market sectors should discount the economic sector they represent!
The Market’s Discounting Mechanism
Homebuilders lead housing Capital goods stocks lead capital spending
Capital spending stocks
Capital spending
Housing
Homebuilders
How Market Sectors Lead Economic Sectors
Home Builders
Housing Starts
Home Builder KST Housing Start KST
Homebuilders vs. Housing Starts
Home Builder KST
Housing Start KST
Homebuilders vs. Housing Starts
Utilities
Food Producers
U.S. Treasuries
Technology
Banks
Consumer Discretion
Technology
Transports
Oil Drillers
Diversified Metals
Energy
Oil Drillers U.S.
Treasuries
Diversified Metals
Healthcare
Stage I Stage VI Stage V Stage IV Stage III Stage II
Putting it all together with the Dow Jones Pring Business Cycle Index
(DJPRING)
DJ Pring Business Cycle Index (DJPRING) 1956-2012
Dow Jones Pring Business Cycle Index (DJ PRING)
US Government Bonds
DJ UBS Commodity Index (Spliced) S&P Composite
Less Risk
Better return
www.pringturner.com
Two Ideas to Take Advantage of Opportunities Offered by the Cycle
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.
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.
Formula Research Test Results 1955-2011
• 1. 1955-2011 return 10.59% vs S&P 9.91%.
• 2. Maximum drawdown 16.4% vs S&P 54.7%.
S&P Composite
S&P Composite and the 120% Rule
Green highlights show a bullish model
Inflationary
Deflationary
Idealized Business Cycle
Inflation/Deflation Ratio and ROC Momentum
Inflation/Deflation Ratio Inflationary
Deflationary
ROC (24)
Inflation/Deflation versus IGE/XLP Ratio
Inflation/Deflation Ratio
IGE/XLP
Inflationary Deflationary
Substitute for the Inflation/Deflation Ratio
Goldman Sachs Natural Resource ETF (IGE)
Spider Consumer Staples (XLP)
divided by
Inflation/Deflation versus IGE/XLP Ratio
Inflation/Deflation Ratio
IGE/XLP
Breakdown
Inflationary Deflationary
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
The End
Pringturner.com Pring.com
Pringturner.com Pring.com