Blog Title: Manager Musings - Business Cycle & Stock Markets
So many interesting things came across my desk the last two weeks. Markets are continuing higher and so many commodities are hitting important support and resistance levels.
First lets take a look at the current market levels on the S&P 500:
You may recognize the chart from the previous post, but notice how the recent action has broken out of the resistance levels. Hard to 'dis' the strength of the market no matter what your views are. If it's going up, you want to be long. It's as simple as that. The blue line level is 1680, so that is a line in the sand for the S&P at this point for the near term. *** Note: Started writing this blog on the 15th of August and on the 16th it broke this resistance. The near term upside breakout has failed. This may be systematic of what is to come, but we will see soon enough.***
I recently just listened to a podcast from Micheal Covel (Trendfollowing.com) and he had on Jon Boorman as a guest who is a CMT (Chartered Market Technician). It was an entertaining listen, and Jon echoed many of my beliefs. One was that there are always so many people trying to 'predict' the top or bottom or direction. What is critical to any good trading strategy is to always go with the price based trading. This means that for the most part to make money you want to have positions that are in line with the movement of the price of the security that you are dealing with. If you are wrong and loosing money, get out. Period! Seems so obvious, but it's hard to execute with the 'monkey brain'.
Saying that, it is always 'entertaining' to review what is and what can be. Martin Pring is a guru when it comes to business cycle analysis. He wrote in February that we were in what he calls stage 4 of the cycle. If the business cycle is indeed in stage four, this means that bonds are selling and their yields are increasing. This does seem to be the case because since May 2012 Bonds have been selling off and yields are increasing:
You can see how the yields bounced from the low that was set in 2008/09. We still have a little bit of headroom if the yields want to continue higher (higher highs resistance trendline is coming down).
So, 'check'... bonds are selling. So in this sense Mr. Pring is correct and this does have the attributes of being in a stage four. Intermarket analysis states that commodities in general normally leads and follows the same direction as bond yields. *Tangent*- Intermarket analysis is such a horrible word associated to this study as it requires OUTSIDE (external) data, rather than internal data... Why wouldn't they call it outermarket analysis? Blarg... *Tangent*
Ok, so lets look at bond yields and commodities:
Commodities have not been keeping up. So what's the deal? The US dollar that's what. Whenever you look at commodities you MUST be aware of what the US dollar is doing.
Here is a ratio of the USD to the Dow Jones Commodities Index.
The USD has been slowly making a bottom and set a low in the middle of 2008. This is the hidden commodity bugaboo. It is obvious though if anyone takes the time to look that when USD moves up, commodities go down or sideways (for the most part).
Point is that the stage 4 theory still applies.
Lets look at the VERY long term market trend now:
Visually we are running near the top of the long term channel that has the potential to provide resistance. This resistance may coincide with Mr. Pring's assertion that we may be ripe for a August 2013 pullback in stocks that will take us into stage five of his business cycle. What is critical to what I 'believe' and what is actually happening though is that even if I do 'believe' that the markets are ripe for a pullback, the fact is that it is in an uptrend and there will be AMPLE and OBVIOUS warning of a break of this trend.
Regardless, utilizing my magical 'predictive' techniques. It does appear placing a long term Fibonacci graph over the price action lines up with existing resistance and support levels. If we are to move higher we really need to breakout of 15,500 level for the Dow Jones. Then we can see a pop to the 18,500 level (20% increase). If of course resistance levels and cycles are proven correct then we may see a 7 to 22% decrease. What's interesting to see is that this is a very healthy correction for a long term bullish market that has another 10 years to go before it has the potential of reaching the 18,500 level if it stays within this price channel.
I am all about empirical evidence. Business cycles and intermarket theory have been discussed and theorized for many decades. I am very excited that Mr. Pring at least has created the Dow Jones Pring US Business Cycle Index. This means we are seeing money being put where the mouth is so to speak. There are unfortunately only two years of history for this index, but so far it has been working well. The problem though is that we do not really know when the Pring Index will change their levels of allocations when they move from stage four to five. This may be very informative for the public (or trader like myself) after a few more years of activity. Let's say the Pring Index continues to exhibit a channel type quality of price action for many years, then lets further say that the price has been trending toward the top of this channel. Could we possibly utilize this as a trading mechanism so that if we know the Pring Index is reducing their allocation of stock, maintaining their commodity allocation, and increasing their cash position that we could basically short their index?
The real problem with the Pring Index is that it does not completely remove the stock portion of the portfolio as it should (In my humble opinion). Business cycle states that in stage five we should see a reduction in the price of stocks. So why have a portion allocated toward stocks at all? Well this is due to the fact that what they are doing is employing a sector rotation strategy that would allocate their capital into ETF's that better mirror a sector that would do better within this business cycle. It is a good system, and so far it is working, but it would be interesting if Mr. Pring had an index or returns that exactly mirror the business cycle (as I thought it should be interpreted).
Anyway, it appears in my opinion we may be moving into stage five of the business cycle from looking at different sources here (I have posted just a few examples obviously). As I always state, protect yourself!
Next Month: Systematic long term ratio trading examples.
So many interesting things came across my desk the last two weeks. Markets are continuing higher and so many commodities are hitting important support and resistance levels.
First lets take a look at the current market levels on the S&P 500:
You may recognize the chart from the previous post, but notice how the recent action has broken out of the resistance levels. Hard to 'dis' the strength of the market no matter what your views are. If it's going up, you want to be long. It's as simple as that. The blue line level is 1680, so that is a line in the sand for the S&P at this point for the near term. *** Note: Started writing this blog on the 15th of August and on the 16th it broke this resistance. The near term upside breakout has failed. This may be systematic of what is to come, but we will see soon enough.***
I recently just listened to a podcast from Micheal Covel (Trendfollowing.com) and he had on Jon Boorman as a guest who is a CMT (Chartered Market Technician). It was an entertaining listen, and Jon echoed many of my beliefs. One was that there are always so many people trying to 'predict' the top or bottom or direction. What is critical to any good trading strategy is to always go with the price based trading. This means that for the most part to make money you want to have positions that are in line with the movement of the price of the security that you are dealing with. If you are wrong and loosing money, get out. Period! Seems so obvious, but it's hard to execute with the 'monkey brain'.
Saying that, it is always 'entertaining' to review what is and what can be. Martin Pring is a guru when it comes to business cycle analysis. He wrote in February that we were in what he calls stage 4 of the cycle. If the business cycle is indeed in stage four, this means that bonds are selling and their yields are increasing. This does seem to be the case because since May 2012 Bonds have been selling off and yields are increasing:
You can see how the yields bounced from the low that was set in 2008/09. We still have a little bit of headroom if the yields want to continue higher (higher highs resistance trendline is coming down).
So, 'check'... bonds are selling. So in this sense Mr. Pring is correct and this does have the attributes of being in a stage four. Intermarket analysis states that commodities in general normally leads and follows the same direction as bond yields. *Tangent*- Intermarket analysis is such a horrible word associated to this study as it requires OUTSIDE (external) data, rather than internal data... Why wouldn't they call it outermarket analysis? Blarg... *Tangent*
Ok, so lets look at bond yields and commodities:
Commodities have not been keeping up. So what's the deal? The US dollar that's what. Whenever you look at commodities you MUST be aware of what the US dollar is doing.
Here is a ratio of the USD to the Dow Jones Commodities Index.
The USD has been slowly making a bottom and set a low in the middle of 2008. This is the hidden commodity bugaboo. It is obvious though if anyone takes the time to look that when USD moves up, commodities go down or sideways (for the most part).
Point is that the stage 4 theory still applies.
Lets look at the VERY long term market trend now:
Visually we are running near the top of the long term channel that has the potential to provide resistance. This resistance may coincide with Mr. Pring's assertion that we may be ripe for a August 2013 pullback in stocks that will take us into stage five of his business cycle. What is critical to what I 'believe' and what is actually happening though is that even if I do 'believe' that the markets are ripe for a pullback, the fact is that it is in an uptrend and there will be AMPLE and OBVIOUS warning of a break of this trend.
Regardless, utilizing my magical 'predictive' techniques. It does appear placing a long term Fibonacci graph over the price action lines up with existing resistance and support levels. If we are to move higher we really need to breakout of 15,500 level for the Dow Jones. Then we can see a pop to the 18,500 level (20% increase). If of course resistance levels and cycles are proven correct then we may see a 7 to 22% decrease. What's interesting to see is that this is a very healthy correction for a long term bullish market that has another 10 years to go before it has the potential of reaching the 18,500 level if it stays within this price channel.
I am all about empirical evidence. Business cycles and intermarket theory have been discussed and theorized for many decades. I am very excited that Mr. Pring at least has created the Dow Jones Pring US Business Cycle Index. This means we are seeing money being put where the mouth is so to speak. There are unfortunately only two years of history for this index, but so far it has been working well. The problem though is that we do not really know when the Pring Index will change their levels of allocations when they move from stage four to five. This may be very informative for the public (or trader like myself) after a few more years of activity. Let's say the Pring Index continues to exhibit a channel type quality of price action for many years, then lets further say that the price has been trending toward the top of this channel. Could we possibly utilize this as a trading mechanism so that if we know the Pring Index is reducing their allocation of stock, maintaining their commodity allocation, and increasing their cash position that we could basically short their index?
The real problem with the Pring Index is that it does not completely remove the stock portion of the portfolio as it should (In my humble opinion). Business cycle states that in stage five we should see a reduction in the price of stocks. So why have a portion allocated toward stocks at all? Well this is due to the fact that what they are doing is employing a sector rotation strategy that would allocate their capital into ETF's that better mirror a sector that would do better within this business cycle. It is a good system, and so far it is working, but it would be interesting if Mr. Pring had an index or returns that exactly mirror the business cycle (as I thought it should be interpreted).
Anyway, it appears in my opinion we may be moving into stage five of the business cycle from looking at different sources here (I have posted just a few examples obviously). As I always state, protect yourself!
Next Month: Systematic long term ratio trading examples.
Protect yourselves,
Lee MacFarlane
Derivatives Trader - President
Kinship Investments Ltd.
office (250-385-9132)
fax (250-385-9134)
Derivatives Trader - President
Kinship Investments Ltd.
office (250-385-9132)
fax (250-385-9134)
check us out on 
Legal:
Past performance is not necessarily indicative of future trading results.
Lee MacFalane is a derivatives trader trained under the Canadian Securities Institute and is working toward his CMT designation under sponsors with the CSTA (www.csta.org). He manages Kinship Investments, a Private Managed Fund (working under the Capital Raising Exception Act of the BCSC). Kinship Investments is not an advisory service and does not provide investment advice. This blog represents Lee MacFarlane's opinions only and is not intended to be used as investment advice. Lee MacFarlane and Kinship Investments may or may not hold securities that are discussed in this blog. Please contact lee@kinshipinvestments.com for further information or go to www.kinshipinvestments.com/trustfund.html to view our latest results.
Lee MacFalane is a derivatives trader trained under the Canadian Securities Institute and is working toward his CMT designation under sponsors with the CSTA (www.csta.org). He manages Kinship Investments, a Private Managed Fund (working under the Capital Raising Exception Act of the BCSC). Kinship Investments is not an advisory service and does not provide investment advice. This blog represents Lee MacFarlane's opinions only and is not intended to be used as investment advice. Lee MacFarlane and Kinship Investments may or may not hold securities that are discussed in this blog. Please contact lee@kinshipinvestments.com for further information or go to www.kinshipinvestments.com/trustfund.html to view our latest results.
