Using Technical Analysis to Navigate the Business Cycle · PDF fileDJ UBS Commodity Index...

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