Tag Archives: market cycles

Cartography Corner – November 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of October

Random Length Lumber Futures

We begin with a review of Random Length Lumber Futures (LBX9, LBF0) during October 2019. In our October 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for October are:

  • o M4         447.90
  • o M1         407.70
  • o PMH       393.50
  • o Close      367.10
  • MTrend   364.03
  • M3           363.20
  • M2         357.10             
  • PML        348.10                         
  • M5           316.90

Active traders can use 363.20 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

In our October edition, we anticipated a breakout from consolidation and recognized our ignorance as to which direction by highlighting, “The lumber market has been building energy for the next substantial move for four quarters and four months, respectively.  Relative to our technical methodology, it is a 50-50 proposition as to which direction.”

Figure 1 below displays the daily price action for October 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first eight trading sessions were spent with Lumber oscillating around our isolated pivot level of 363.20.  Longs and shorts were battling to establish a sustained directional move away from equilibrium at MTrend: 364.03. 

Astute readers will notice that the low price of the month was realized at the price of 357.50.  That price was four ticks above October’s M2 level of 357.10.  M2 was the first monthly support level under our isolated pivot.

The following seven trading sessions were spent with Lumber making an assault upon, and settling above, September’s high at PMH: 393.50.  The final eight trading sessions saw Lumber achieve and exceed our isolated resistance level at M1: 407.70.

Conservatively, active traders following our analysis had the opportunity to capture most of the trade up which equated to an approximate 10.5% profit. 

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during October 2019.  In our October 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for October are:

  • M4                 3275.75
  • M1                 3037.25
  • M3                 3032.25
  • PMH              3025.75
  • M2               3002.25      
  • Close             2978.50
  • MTrend         2952.81     
  • PML               2889.00     
  • M5                2763.75

Active traders can use 3037.25 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 2952.81 as the downside pivot, whereby they maintain a flat or short position below that level.

Figure 2 below displays the daily price action for October 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  We commented in October, “… the slope of the Weekly Trend could be in the initial stage of forming a rounded top.”  The first two- and one-half trading sessions of October saw the market price descend 123.50 points from September’s settlement price.  The decline accelerated once it settled below our isolated pivot level at MTrend: 2952.81.

The low price for the month was realized (early in the session) on Thursday, October 3rd at the price of 2855.00.  Please pay attention to the commentary that follows next, as it highlights the importance of our multi-time-period analysis.  The Weekly Downside Exhaustion level for the week of September 30th was at W5: 2868.00.  Once our Weekly Downside Exhaustion level was reached, we were immediately anticipating a two-week high to occur over the following four to six weeks.  This was reason one to cover any shorts.  Quarterly Trend for the fourth quarter of 2019 resides at 2840.92.  As we have communicated before, this is the most important level in our analysis and, at a minimum, we expect Quarterly Trend to be defended vigorously on the first approach.  This was reason two to cover any shorts.  By the time of the market’s close on October 3rd, the price had rotated back above September’s low price at PML: 2889.00.  The following five trading sessions were spent with the market price oscillating between MTrend: 2952.81, now acting as resistance, and support at PML: 2889.00.

On October 11th, the market price ascended above and settled above MTrend: 2952.81.  This afforded the market the opportunity to make an assault on our next isolated resistance level at M2: 3002.25.  Two trading sessions later, on October 15th, the market price achieved a high price of 3003.25.  This is notable because it achieved the two-week high that we were anticipating from October 3rd.   The following five trading sessions were spent with the market price oscillating around our isolated resistance level at M2: 3002.25.

On October 23rd, the market price settled above M2 and began its final ascent into the October 30th FOMC meeting.  It is worth noting that the market did not settle above our isolated upside pivot level at 3037.25 prior to October 30thWith one trading session remaining in October, common sense suggested waiting for November’s analysis to be produced in lieu of committing capital on the day of the FOMC meeting.

Humbly offered, our analysis captured the trade down early in the month, the rally into the pre-FOMC high, and the significant pivots in between.

Figure 2:

November 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures (ESZ9).  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Daily Trend             3038.39       
  • Current Settle         3035.75
  • Weekly Trend         2980.58       
  • Monthly Trend        2950.42       
  • Quarterly Trend      2840.92

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Up” for three quarters.  Stepping down one time-period, the monthly chart shows that E-Mini S&P 500 Futures have been “Trend Up” for five months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Up” for three weeks.  The relative positioning of the Trend Levels is bullishly aligned.  The market price is above all of them (with exception of Daily Trend) which is bullish as well.

In the monthly time-period, the “signal” was given in August 2019 to anticipate a two-month high within the following four to six months.  That two-month high was realized in October 2019, with the trade above 3025.75.

 

Support/Resistance:

In isolation, monthly support and resistance levels for November are:

  • M4                 3221.00
  • M3                 3093.00
  • M1                 3084.25
  • PMH              3055.00
  • Close             3035.75     
  • MTrend         2950.42
  • PML               2855.00     
  • M2                 2821.00    
  • M5                2684.25

Active traders can use 3055.00 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 2950.42 as the downside pivot, whereby they maintain a flat or short position below that level.

New Zealand Dollar Futures

For the month of November, we focus on New Zealand Dollar Futures (“Kiwi”).  We provide a monthly time-period analysis of 6NZ9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Quarterly Trend    0.6640           
  • Current Settle       0.6416
  • Daily Trend           0.6382           
  • Monthly Trend      0.6361           
  • Weekly Trend        0.6354

As can be seen in the quarterly chart below, Kiwi is in “Consolidation”.  Stepping down one time-period, the monthly chart shows that Kiwi has been “Trend Down” for four months.  Stepping down to the weekly time-period, the chart shows that Kiwi has been “Trend Up” for three weeks.

In the monthly time-period, the “signal” was given in August 2019 to anticipate a two-month high within the following four to six months.  That two-month high can be realized in November 2019 with a trade above 0.6462.

Our first priority in performing technical analysis is to identify the beginning of a new trend, the reversal of an existing trend, or a consolidation area.  With that in mind, we chose to focus on Kiwi for the month of November.  Since its peak in 2Q2017, Kiwi has traded down in five of the previous eight quarters.  In the calendar year 2019, it has only traded up in three months out of ten.  But something caught our attention… Monthly Trend for November has “quietly tiptoed” beneath the market.  In our judgment, the risk-reward is favorable for anticipating a trend reversal.    

Support/Resistance:

In isolation, monthly support and resistance levels for November are:

  • M4         0.6627
  • M3         0.6558
  • PMH       0.6444
  • M1         0.6426
  • Close       0.6416
  • MTrend   0.6361
  • PML        0.6215             
  • M2         0.6169                         
  • M5           0.5968

Active traders can use 0.6361 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

 

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription; we are asking you to listen.

Cartography Corner – October 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


A Review of September

U.S. Treasury Bond Futures

We begin with a review of U.S. Treasury Bond Futures (USZ9) during September 2019. In our September 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for September are:

  • M4         181-00
  • M1         176-26
  • M3         174-29
  • PMH       166-30
  • Close        165-08
  • MTrend    157-17
  • M2         157-02             
  • PML        154-31                          
  • M5            152-28

Active traders can use 166-30 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

In our September edition, we anticipated weakness and cautioned, “Short-time-period-focused market participants. . . Caveat Emptor.”  Figure 1 below displays the daily price action for September 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first nine trading sessions were spent with bonds descending in price by seven points and twenty-two thirty seconds.  Ours was a most timely warning. 

Astute readers will notice that the low price of the month was realized at the price of 157 18/32.  That price was one tick above September’s Monthly Trend level of 157 17/32.  Monthly Trend was also the first monthly support level offered by our analysis.   Another prime example of the importance of Monthly Trend as a significant pivot level.

The final eleven trading sessions were spent with bonds retracing as much as 75% of the initial decline.

Active traders following our analysis had the opportunity to capture the entire trade down, which equated to a $7,687.50 profit per contract.  Once Monthly Trend held, drawing from their understanding of our analysis, they also would have known it was worth using the Monthly Trend to acquire a long position with a well-defined stop in place (clustered support at Monthly Trend / M2) to limit risk.

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during September 2019.  In our September 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for September are:

  • M4                 3073.00
  • PMH              3014.25
  • M1                 2999.00
  • MTrend        2924.92
  • Close            2924.75      
  • M3                 2867.25
  • PML               2775.75     
  • M2                 2596.00    
  • M5                2522.00

Active traders can use 2924.92 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for September 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first nine trading sessions of September saw the market price ascend 101.00 points from August’s settlement price.  The gains accelerated once it settled above our isolated pivot level at MTrend: 2924.92.  The high price for the month was realized on September 13th, the exact same day that the low price in bonds was achieved.       

The purpose of every trading month is to surpass the high or low of the previous trading month.  As can be seen in Figure 2, the high price for August 2019 was at PMH: 3014.25.  The price action exceeded PMH: 3014.25, running the “obvious brothers’” buy-stops in the process.  However, the market did not settle above that level which signaled that it was time for active traders following our analysis to take profits on their purchases.

On September 20th, the market price rotated and settled back below M1: 2999.00, now acting as support.  If active traders following our work had not previously sold their long positions, they should have on that day. The final six sessions of September were spent with the market price declining back towards Monthly Trend.

Active traders following our analysis had the opportunity to capture the initial trade up, which equated to a $4,412.50 profit per contract.

Figure 2:

October 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures (ESZ9).  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Weekly Trend         2989.90       
  • Current Settle         2978.50
  • Daily Trend             2974.61       
  • Monthly Trend        2952.81       
  • Quarterly Trend      2840.92

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures have been “Trend Up” for three quarters.  Stepping down one time-period, the monthly chart shows that E-Mini S&P 500 Futures have been “Trend Up” for four months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.

Like we commented in August, the slope of the Weekly Trend could be in the initial stage of forming a rounded top.  Also, the market price has settled below Weekly Trend for two consecutive weeks.  Weekly Trend for this week is at 2989.90.  This deserves focus from short time-period-focused market participants.  A trend change in the short time-period is often a precursor to a trend change in the longer time-period(s).  We will watch closely to see if this occurs, bolstering the case for a topping pattern.

Support/Resistance:

In isolation, monthly support and resistance levels for October are:

  • M4                 3275.75
  • M1                 3037.25
  • M3                 3032.25
  • PMH              3025.75
  • M2               3002.25      
  • Close             2978.50
  • MTrend         2952.81     
  • PML               2889.00     
  • M5                2763.75

Active traders can use 3037.25 as the upside pivot, whereby they maintain a long position above that level.  Active traders can use 2952.81 as the downside pivot, whereby they maintain a flat or short position below that level.

Random Length Lumber Futures

For the month of October, we focus on Random Length Lumber Futures.  Lumber prices are often seen as an indicator of economic activity due to its widespread use in real estate.  Regardless of whether you may trade lumber, the analysis and price action of lumber may provide some clues as to the future direction of the economy.  We provide a monthly time-period analysis of LBX9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Weekly Trend        376.33          
  • Daily Trend            370.83
  • Current Settle        367.10          
  • Quarterly Trend     366.80          
  • Monthly Trend       364.03

As can be seen in the quarterly chart below, lumber is in “Consolidation”.  Stepping down one time-period, the monthly chart shows that lumber has been “Trend Up” for four months.  Stepping down to the weekly time-period, the chart shows that lumber has been “Trend Up” for three weeks.

In the quarterly time-period, the lumber market realized its last “substantial” price move (lower) in 3Q2018.  It has been consolidating since.  In the monthly time-period, the lumber market realized its last “substantial” price move from February 2019 to May 2019.  It has been consolidating since.  Astute readers will also notice that the current market price is resting just above BOTH Quarterly Trend and Monthly Trend.  The lumber market has been building energy for the next substantial move for four quarters and four months, respectively.  Relative to our technical methodology, it is a 50-50 proposition as to which direction.  As noted earlier, once this direction reveals itself, we may be simultaneously gifted with an indication of the state of the economy.

Support/Resistance:

In isolation, monthly support and resistance levels for October are:

  • M4         447.90
  • M1         407.70
  • PMH       393.50
  • Close      367.10
  • MTrend   364.03
  • M3           363.20
  • M2         357.10             
  • PML        348.10                         
  • M5           316.90

Active traders can use 363.20 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription; we are asking you to listen.

Cartography Corner – September 2019

J. Brett Freeze and his firm Global Technical Analysis (GTA) provides RIA Pro subscribers Cartography Corner on a monthly basis. Brett’s analysis offers readers a truly unique brand of technical insight and risk framework. We personally rely on Brett’s research to help better gauge market trends, their durability, and support and resistance price levels.

GTA presents their monthly analysis on a wide range of asset classes, indices, and securities. At times the analysis may agree with RIA Pro technical opinions, and other times it will run contrary to our thoughts. Our goal is not to push a single view or opinion, but provide research to help you better understand the markets. Please contact us with any questions or comments.  If you are interested in learning more about GTA’s services, please connect with them through the links provided in the article.

The link below penned by GTA provides a user’s guide and a sample of his analysis.

GTA Users Guide


In addition to the normal format in which we review last month’s commentary and present new analysis for the month ahead, we provide you with interesting research on long-term market cycles.

A Review of August

Silver Futures

We begin with a review of Silver Futures (SIU9/SIZ9) during August 2019. In our August 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for August are:

  • M4         18.805
  • M1         17.745
  • M3           17.469
  • PMH       16.685
  • Close        16.405
  • M2           15.265
  • MTrend   15.263             
  • PML          14.915                        
  • M5            14.205

Active traders can use 16.685 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 1 below displays the daily price action for August 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first five trading sessions were spent with silver ascending to and settling above, our isolated pivot level at PMH: 16.685.  Silver’s rally, which began in June, extended significantly in August. 

The following twelve trading sessions were spent with silver consolidating with an upward bias, testing our clustered resistance levels at M3: 17.469 and M1: 17.745.  On August 26th, silver settled above M1: 17.745 and proceeded over the following three trading sessions to test our Monthly Upside Exhaustion level at M4: 18.805.   The high price for August 2019 was achieved on August 29th at 18.760, a difference from M4 of 0.24%.

 Active traders following our analysis had the opportunity to capture a 12.4% profit.

 

Figure 1:

E-Mini S&P 500 Futures

We continue with a review of E-Mini S&P 500 Futures during August 2019.  In our August 2019 edition of The Cartography Corner, we wrote the following:

In isolation, monthly support and resistance levels for August are:

  • M4                3330.25
  • M2                3182.25
  • M1                3089.75
  • PMH              3029.50
  • M3               3020.25      
  • Close             2982.25
  • PML               2955.50     
  • M5                 2941.75    
  • MTrend         2897.03

Active traders can use 3029.50 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

Figure 2 below displays the daily price action for August 2019 in a candlestick chart, with support and resistance levels isolated by our methodology represented as dashed lines.  The first four trading sessions of August saw the market price collapse 206.50 points from July’s settlement price.  The descent accelerated once our isolated support levels at PML: 2955.50 and M5: 2941.75 were breached.  When August Monthly Trend at MTrend: 2897.03 was breached, the descent accelerated again.      

The remaining trading sessions of August 2019 were spent with the market price oscillating between 2817.00 (roughly) and our isolated support level at M5: 2941.75, now acting as resistance.  As can be seen in Figure 2, there were essentially five swing trades during the remainder of August, three up and two down.  Each swing covered approximately 125 points.

The war between bulls and bears continues with the battles becoming fiercer.

Figure 2:

September 2019 Analysis

We begin by providing a monthly time-period analysis of E-Mini S&P 500 Futures (ESU9).  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Monthly Trend        2924.92       
  • Current Settle         2924.75
  • Daily Trend             2905.47       
  • Weekly Trend         2884.92       
  • Quarterly Trend      2727.50

In the quarterly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.  Stepping down one time-period, the monthly chart shows that E-Mini S&P 500 Futures have been “Trend Up” for three months.  Stepping down to the weekly time-period, the chart shows that E-Mini S&P 500 Futures are in “Consolidation”.

We commented in August:

“We would like to point out the slope of the Weekly Trend has been forming a rounded top over the previous three weeks.  Weekly Trend is currently developing at 2996.58 for the week of August 5, 2019.  If that developing level holds (or develops lower), the topping process will be complete (in the weekly time-period) as 2996.58 is lower than this week’s Weekly Trend level of 2999.83.  Also, a weekly settlement this week below 2999.83 will end the current eight-week uptrend.”

The formation of the rounded top in the Weekly Trend was an excellent indicator of the directional turn in the short time period. 

Support/Resistance:

In isolation, monthly support and resistance levels for September are:

  • M4                 3073.00
  • PMH              3014.25
  • M1                 2999.00
  • MTrend        2924.92
  • Close            2924.75      
  • M3                 2867.25
  • PML               2775.75     
  • M2                 2596.00    
  • M5                2522.00

Active traders can use 2924.92 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

U.S. Treasury Bond Futures

For the month of September, we focus on U.S. Treasury Bond Futures (“bonds”).  We provide a monthly time-period analysis of USZ9.  The same analysis can be completed for any time-period or in aggregate.

Trends:

  • Daily Trend            165-20          
  • Current Settle        165-08
  • Weekly Trend        164-22          
  • Monthly Trend       157-17          
  • Quarterly Trend     147-27

As can be seen in the quarterly chart below, bonds have been “Trend Up” for three quarters.  Stepping down one time-period, the monthly chart also shows that bonds have been “Trend Up” for nine months.  Stepping down to the weekly time-period, the chart shows that bonds have been “Trend Up” for five weeks.

The condition was met in August 2019 that makes us anticipate a two-month low within the next four to six months.  That would be fulfilled with a trade below 152-28 in September 2019.  This is the second “signal” that has been given since this nine-month uptrend began.  The first was given in December 2018 and the two-month low was realized three months later.  In the week of July 29th, the condition was met that made us anticipate a two-week low within the next four to six weeks from that week.  The market is entering the fifth week of that time window and a two-week low can be realized this week with a trade below 162-06.

Like the rounded top highlighted in E-Mini S&P 500 futures in the August 2019 edition of The Cartography Corner, the Weekly Trend in bonds is beginning to take on the same curvature.  Short-time-period-focused market participants. . . Caveat Emptor.

 

Support/Resistance:

In isolation, monthly support and resistance levels for September are:

  • M4         181-00
  • M1         176-26
  • M3         174-29
  • PMH       166-30
  • Close        165-08
  • MTrend    157-17
  • M2         157-02             
  • PML        154-31                          
  • M5            152-28

Active traders can use 166-30 as the pivot, whereby they maintain a long position above that level and a flat or short position below it.

 

Equity Cycle, 1799 – 2061

What if the basis of causation in human affairs, economics, and markets is embedded in the law of vibration of nature?  Sound, light, and heat are all forms of vibration.  Sound is energy vibrating at a frequency that the ear can perceive.  Light is energy vibrating at a frequency that the eye can perceive.  Heat is energy that vibrates at a frequency that our internal thermometers can perceive.  Radiation that penetrates the Earth’s atmosphere causes proven psychological changes in people.

My dog barking at 2:30 each afternoon does not cause the mailman to deliver the mail to my house.  However, when my dog barks at 2:30 each afternoon, I can reliably trust that the mail is being delivered.  Similarly, it is not necessary for the market participant to answer in-depth questions of how or why, with regards to causation.  It is only necessary to answer the question of correlation and, if a correlation exists, what are the results?  Market participants of old, including W.D. Gann, Louise McWhirter, Donald Bradley, and others, not only recognized but successfully utilized the law of vibration across many individual markets.

We spent significant time collecting, organizing, and processing planetary data in the identification and construction of the composite equity cycle graphed on the following three pages.  The composite equity cycle is comprised of six individual cycles, each with a different phase, amplitude, and length.  The average cycle length is 13.5 years.

Our data series of the nominal equity index level spans 220 years, with a low value of 2.85 and high value of 26,864.27.  We faced the challenge of how to graphically present this data series in the most aesthetic manner.  We started by graphing lognormal values, but the result did not “tell the story” in a legible way.  We finally were enlightened (thank you, Jack) to present a rolling return.  The benefit of using a rolling return is that the range of values is relatively narrow and presents itself well graphically.  We set the length of the rolling return equal to the average cycle length.

The first graph displays the cycle over the entire time period, 1799 – 2061.

The second graph highlights the peaks in the cycle and how well they line up with peaks in the rolling 13.5Y annualized return in the Dow Jones Industrial Average.  The dashed lines represent anticipated future peaks.

The third graph highlights the troughs in the cycle and how well they line up with troughs in the rolling 13.5Y annualized return in the Dow Jones Industrial Average.  The dashed lines represent anticipated future troughs.

Compelling.

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Summary

The power of technical analysis is in its ability to reduce multi-dimensional markets into a filtered two-dimensional space of price and time.  Our methodology applies a consistent framework that identifies key measures of trend, distinct levels of support and resistance, and identification of potential trading ranges.  Our methodology can be applied to any security or index, across markets, for which we can attain a reliable price history.  We look forward to bringing you our unique brand of technical analysis and insight into many different markets.  If you are a professional market participant and are open to discovering more, please connect with us.  We are not asking for a subscription; we are asking you to listen.

Trying To Be Consistently “Not Stupid”

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” – Charlie Munger

As described in a recent article, Has This Cycle Reached Its Tail, an appreciation for where the economy is within the cycle of economic expansion and contraction is quite important for investors. It offers a gauge, a guidepost of sorts, to know when to take a lot of risk and when to take a conservative approach.

This task is most difficult when a cycle changes. As we are in the late innings of the current cycle, euphoria is rampant, and everyone is bullish. During these periods, as risks are peaking, it is very challenging to be conservative and make less than your neighbors. It is equally difficult taking an aggressive stance at the depths of a recession, when risk is low, despair is acute, and everyone is selling.

What we know is that a downturn in the economy, a recession, is out there. It is coming, and as Warren Buffett’s top lieutenant Charlie Munger points out in the quote above, successful navigation comes down to trying to make as few mistakes as possible.

The Aging Expansion

In May 2019, the current economic expansion will tie the expansion of 1991-2001 as the longest since at least 1857 as shown below. 

Since gingerly exiting the financial crisis in June 2009, the economy has managed to maintain a growth trajectory for ten years. At the same time, it has been the weakest period of economic growth in the modern era but has delivered near-record gains in the stock market and significant appreciation in other risk assets. The contrast between those two issues – weak growth and record risky financial asset appreciation make the argument for caution even more persuasive at this juncture.

Although verbally reinforcing his optimistic outlook for continued economic growth, Federal Reserve (Fed) Chairman Jerome Powell and the Federal Open Market Committee (FOMC) did not inspire confidence with their abrupt shift in monetary policy and economic outlook over the past three months.

The following is a list of considerations regarding current economic circumstances. It is a fact that the expansion is “seasoned” and quite long in the tooth, but is that a reason to become cautious and defensive and potentially miss out on future gains? Revisiting the data may help us avoid making a mistake or, in the words of Munger, be “not stupid.”

1. Despite the turmoil of the fourth quarter, the stock market has rebounded sharply and now sits confidently just below the all-time highs of September 2018. However, a closer look at the entrails of the stock market tells a different story. Since the end of August 2018, cyclically-sensitive stocks such as energy, financials, and materials all remain down by roughly 10% while defensive sectors such as Utilities, Staples and Real Estate are up by 7%.

2. Bond markets around the world are signaling concern as yields are falling and curves are inverting (a historically durable sign of economic slowdown). The amount of negative yielding bonds globally has risen dramatically from less than $6 trillion to over $10.5 trillion since October 2018. Since March 1, 2019, 2-year U.S. Treasury yields have dropped by 35 basis points (bps), and 10-year Treasury yields have fallen by 40 bps (a basis point is 1/100th of a percent). 2-year Treasury yields (2.20%) are now 0.30% less than the upper-bound of the Fed Funds target rate of 2.50%. Meanwhile, three-month Treasury-bill yields are higher than every other Treasury yield out to the 10-year yield. This inversion signals acute worry about an economic slowdown.

3. Economic data in the United States has been disappointing for the balance of 2019. February’s labor market added just 20,000 new jobs compared with an average of +234,000 over the prior 12months. This was the first month under +100,000 since September 2017. Auto sales (-0.8%) were a dud and consumer confidence, besides being down 7 points, saw the sharpest decline in the jobs component since the late innings of the financial crisis (Feb 2009), reinforcing concerns in the labor market. Retail sales and the Johnson Redbook retail data also confirm a slowing/weakening trend in consumer spending. Lastly, as we pointed out at RIA Pro, tax receipt growth is declining. Not what one would expect in a robust economy.

4. As challenging as that list of issues is for the domestic economy, things are even more troubling on a global basis. The slowdown in China persists and is occurring amid their on-going efforts to stimulate the economy (once again). China’s debt-to-GDP ratio has risen from 150% to 250% over the past ten years, and according to the Wall Street Journal, the credit multiplier is weakening. Whereas 1 yuan of credit financing used to produce 3.5 yuan of growth, 1 yuan of credit now only produces 1 yuan of growth. In the European Union, a recession seems inevitable as Germany and other countries in the EU stumble. The European Central Bank recently cut the growth outlook from 1.9% to 1.1% and, like the Fed, dramatically softened their policy language. Turbulence in Turkey is taking center stage again as elections approach. Offshore overnight financing rates recently hit 1,350% as the Turkish government intervened to restrict the outflow of funds to paper over their use of government reserves to prop up the currency.

5. The Federal Reserve (and many other central banks) has formalized the move to a much more dovish stance in the first quarter. On the one hand applauding the strength and durability of the U.S. economy as well as the outlook, they at the same time flipped from a posture of 2-3 rate hikes in 2019 to zero. This shift included hidden lingo in the recent FOMC statement that appears to defy their superficial optimism. The jargon memorialized in the FOMC statement includes a clear signal that the next rate move could just as easily be a cut as a hike. Besides the dramatic shift in rate expectations, the Fed also downgraded their outlook for growth in 2019 and 2020 and cut their expectations for unemployment and inflation (their two mandates). Finally, in addition to all of that, they formalized plans to halt balance sheet reductions. The market is now implying the Fed Funds rate will be cut to 2.07% by January 2020.

Summary

Based on the radical changes we have seen from the central bankers and the economic data over the past six months, it does not seem to be unreasonable to say that the Fed has sent the clearest signal of all. The questions we ask when trying to understand the difference between actions and words is, “What do they know that we do not”? Connecting those dots allows us to reconcile the difference between what appears to be an inconsistent message and the reality of what is written between the lines. The Fed is trying to put a happy face on evolving circumstances, but you can’t make a silk purse out of a sow’s ear.

The economic cycle appears to be in the midst of a transition. This surprisingly long expansion will eventually end as all others have. A recession is out there, and it will make an appearance. Our job is not guessing to be lucky; it is to be astute and play the odds.

Reality reveals itself one moment at a time as does fallacy. Understanding the difference between the two is often difficult, which brings us back to limiting mistakes. Using common sense and avoiding the emotion of markets dramatically raises one’s ability “to be consistently not stupid.” A lofty goal indeed.

Has This Cycle Reached Its Tail?

We asked a few friends what the picture below looks like, and most told us they saw a badly drawn bird with a wide open beak. Based on the photograph below our colorful bird, they might be on to something. 

As you might suspect, this article is not about our ability to graph a bird using Excel. The graph represents the current bull market and economic cycle as told by the yield curve and investor sentiment.

As the picture is almost complete, the bird provides a clue to where we are in the current cycle and when the next cycle may begin. For investors, one of the most important pieces of information is understanding where we are in the economic cycle as it offers a critical gauge in risk-taking.

Cycles

Economic Cycles- Economic cycles are frequently depicted with a sine wave gyrating above and below a longer-term trend line. Throughout history, economic cycles include periods where economic growth exceeds its potential as well as the inevitable busts when slower than potential growth occurs.  Most often cycles track a trend line, oscillating above and below it, but spend little time at the trend other than passing through it.

Boom and bust periods occur because economic activity is governed by human behavior. In other words, our spending habits are erratic because we are subject to bouts of optimism and pessimism about the economy, our financial prospects and a host of other non-financial issues.

The graph below shows the sine wave-like quality of U.S. GDP growth, which has wavered above and below trend growth for decades. 

Data Courtesy: St. Louis Federal Reserve (FRED)

Stock Market Cycles- Stock markets also follow a pattern that is well correlated to economic cycles. Strong economic activity results in investor optimism. During these periods, investors tend to believe that rising economic growth and strong corporate profits are long-lasting. As such they are prone to extrapolate these shorter-term trends over longer periods. Investors temporarily forget that periods of above-average growth will inevitably be met with periods of below-average growth. During bust periods, these mistakes are corrected and often over-corrected.

Implied volatility is a great measure of aggregate investor sentiment. It measures the expected market movement as determined by the supply and demand for options. When investors are optimistic about future returns, they tend to neglect to hedge in the options market. The sustained and methodical reduction in options pricing causes implied volatility to decline. In recent years, ETF’s and professional strategies whose objectives were to be short volatility steadily gained in popularity and helped push implied volatility down. Conversely, when investors grow concerned over higher valuations, they hedge more frequently using options and drive implied volatility higher.

Yield Curve Cycles- The yield curve also takes on a similar path that tends to mirror economic cycles. When the economic cycle portends strong growth, the yield curve steepens. That is to say, the difference between longer and shorter maturity yields rises. This occurs as investors in longer maturity bonds become increasingly concerned with the potential for rising inflation resulting from stronger economic growth.

When strong growth spurs inflation expectations or actual inflation rises, the Fed begins to take action. To combat rising price expectations, they tighten policy with a higher Fed Funds rate. Shorter-term bond yields follow the Fed Funds rate closely, and as the Fed tries to dampen growth, the yield curve flattens. In that instance, longer-term investors are comforted by the Fed actions. This causes longer maturity yields to rise by less than those of shorter maturity yields, or it can help push longer maturity yields lower on an outright basis.

A steeper yield curve increases the incentive to lend and generates more economic growth while a flatter curve reduces the incentive and slows economic growth. The graph below shows how an inverted yield curve, where the yield on a  2-year U.S Treasury note is higher than that of a 10-year U.S. Treasury note, has paved the way for every recession since at least 1980.

Data Courtesy: St. Louis Federal Reserve (FRED)

The Bird is the Word

The graph below shows a scatter plot of the relationship between implied volatility as represented by spot VIX and the 3-month to 10-year yield curve spread. With proper context, you can see the bird is a graph depicting the most recent cycle of stock market optimism (VIX) and the economic growth cycle (yield curve). The graph uses monthly periods encompassing two -year averages to smooth the data and make the longer-term trends more apparent.

Data Courtesy: St. Louis Federal Reserve (FRED)

When we started on this project, we expected to see an oval shaped figure, slanting upward and to the right. Despite the irregularities of the “beak” and “front legs,” that is essentially what we got.

The blue triangle on the bottom-left is the first data point, representing the average VIX and yield curve spread from January 2006 through December of 2007. The years 2006 and 2007 were the economic peak of the prior market cycle. As shown, the two-year average progresses forward month-by-month and moves upward and to the right, meaning that VIX was increasing while the yield curve was steepening. In this period, the yield curve steepened as the Fed began rapidly reducing the fed funds rate in mid-2007. Likewise, VIX started spiking thereafter as the recession and financial crisis began to play out.

The gray and yellow segments on the graph reflect the decline in volatility as the financial crisis abated. Since 2010, the yield curve steadily flattened, and volatility fell to record lows. The one real break to the cycle trend was the “bird leg,” or the periods including 2013 when the yield curve steepened amid the taper tantrum. After that period, the oval-cycle pattern resumed. The red circle marks the most recent monthly data points and shows us where the trend is headed.

Interestingly, note that the number of dots forming the belly of the bird is much greater than those forming the back. This is typical as the expansionary portion of economic and market cycles tend to last five to ten years while market declines and recessions are usually limited to two or three years.

Summary

Think of the economy and stock market as a long-distance runner. At times they may pick up the pace for an extended period, but in doing so, they will inevitably overexert themselves and then must spend a period of time running at a below average pace. 

The stock market has been outrunning economic growth for a long time. This is witnessed by valuations that have surged to record highs. The yield curve is quite flat and volatility, despite spiking twice over the last year, currently resides well below the long-term average and not far from record lows. The current trajectory, as shown with the dotted red arrow in the chart above, is on a path towards the peak of the prior cycle.

The Fed has recently made a dovish (no pun intended) policy U-turn and appears to be on the path to lower rates. This likely means that the curve flattening is nearing an end and steepening is in the cards. At the same time, the market is showing signs of topping as witnessed by two large drawdowns and spikes in implied volatility over the last 15 months.

Based on the analysis above, it appears that the current cycle is close to completion. It is, however, but one piece of information. To borrow from Howard Marks, author of the book Mastering Market Cycles, he states the following:

While they may not know what lies ahead, investors can enhance their likelihood of success if they base their actions on a sense for where the market stands in its cycle….there is no single reliable gauge that one can look to for an indication of whether market participants’ behavior at a point in time is prudent or imprudent.  All we can do is assemble anecdotal evidence and try to draw the correct inferences from it.

We concur and will use the “bird” as evidence that the cycle is mature.

Managing “Mr. Market” With Howard Marks

I went on a long distance drive for Thanksgiving – Houston to Southern California and back. I don’t recommend doing that unless you have two full weeks. It’s 1500 miles each way, which means you should allocate six days to driving.

I didn’t allocate my time well, because I had around 10 days, not two full weeks. That meant I spent more time driving than visiting. But on the drive I managed to catch up on some podcasts, and one that stands out is Meb Faber’s interview of Howard Marks. Marks is a legendary investor and has a new book out called Mastering the Market Cycle. A few things stand out about the interview. Cycles are related to risk-taking and behavior, and they are often debt-driven. A rising stock  market often occurs simultaneously when lending standards relax. That’s why junk bonds and real estate often move in tandem with the stock market in what have come to feel like “risk-on, risk-off” trends.

Can anyone master these trends? First, don’t expect to time things exactly right. Marks raised an $11 billion fund in 2007-2009 that capitalized on bonds and other instruments of near-bankrupt companies. He’s frank with Faber that he didn’t know what was happening with CDOs or mortgage-backed securities; he didn’t have the precise insight that Michael Burry or Steve Eisman did, for example, in shorting mortgage-backed CDOs. But he saw deals being done everyday that didn’t make sense to him and reflected an increasing indifference to risk. In late 2008, he started putting money to work, buying distressed debt without knowing where the bottom was. Investors trying to time market cycles should understand that capturing tops and bottoms isn’t the goal. Buying on the way down and selling on the way up are difficult enough – and they will allow you to reap plenty of reward.

Another lesson for individual investors is that they should lessen their moves. Stop trying to be all in or all out of the market. Stop trying to be precise about timing; seeking precision can get you into trouble. As things get more expensive, your bias should be toward selling; as they get cheaper, your bias should be toward buying. It’s all about putting probabilities on your side, not timing full entries and full exits precisely. This part of the interview reminds me of Ben Graham’s discussion of the “enterprising investor” in his classic book The Intelligent Investor.

The enterprising investor doesn’t maintain a balanced or 60% stock / 40% bond mix at all times. Instead, he calibrates upward or downward between 75% stocks and 25% stocks. In other words, Graham counsels the most adept and studious investors never to be all in or all out, and Marks basically does the same thing. One has to be humble in trying to manage Mr. Market, Graham’s fictional, manic-depressive fellow one should think about when assessing markets.

A corollary to these lessons is that cycles can last longer than you think, and Marks is honest again that his caution in recent years has cost him. That’s not a reason to dismiss his wisdom; it’s just an acknowledgment that you shouldn’t seek precision. The current rally in stocks, corporate bonds, and real estate has gone on for almost a decade now. It feels long in the tooth, but that doesn’t mean it can’t go on longer. I’ve noted that the Shiller PE (stock prices relative to past 10-yr average earnings), for example, is in the low 30s, levels seen only in the run-ups to 1929 and 2000. But in 2000, the metric hit 44. There’s no law saying it can’t do that again — or even go higher this time. Marks mentions that it feels like the 8th inning now. But he also notes that final innings can last a long time, and games can go into extra innings. Again, a lot of patience is required whether you keep a steady allocation or whether you manipulate your allocation according to your understanding of cycles.

Marks says investors should set target allocations. But then they can deviate from them – as long as they know what they’re deviating from. So a classic balanced (60% stocks, 40% bonds) investor can go down to 50% or 40% stocks at this point, for example. Last, nobody should try timing cycles without being a keen student of market history. Too many investors try to time markets without having seen even one full market cycle. They don’t understand that things play out a little differently each time, and that they need to have patience. Timing market cycles isn’t easy even for Marks, and he’s had a 50-year career at this point. Everyone will have to calibrate to their own taste and temperament, but everyone should resist the temptation to make extreme moves. My own opinion is that smaller investors should also do this under the guidance of a professional. Don’t misallocate your assets the way I misallocated my time for this Thanksgiving trip. And call us if you have questions about how we allocate portfolios.

Two Key Indicators Show the S&P 500 Becoming the New ‘Cash’

Pension plan administrators do it. Their actuaries and consultants do it. Professional endowment and foundation investors do it. Financial advisors do it. Private investors may or may not do it, but they probably should.

Do what?

All of these folks already are or should be asking themselves the following question: What’s a reasonable expectation for the long-term return on a broad-market equity investment?

Professionals usually answer the question using complex models, and there’s nothing wrong with that, but we’ll keep it simple here. Simple often beats the snot out of a long white paper, and two recent developments beg for simple.

First, on Thursday the Fed released its flow-of-funds data, which includes an estimate for the household sector’s overall asset allocation. Data show allocations to corporate equities reaching 25.1% of total household (and nonprofit) assets, a level only before seen between Q4 1998 and Q3 2000. Here’s the full history:

spy returns chart 1

Now, you may say 25% is just a number, and we would agree, but only to a point. We don’t think the household sector’s current allocations tell us anything about the market’s near-term direction. In fact, we don’t detect any of the most common precursors to major market turning points, as discussed here. But we do think household equity allocations offer clues to long-term returns. Consider the next chart, which compares the allocation data to the corresponding S&P 500 returns over subsequent periods of six, eight and ten years:

spy returns chart 2

You’ll decide for yourself, of course, how to interpret the chart, but we’ll entertain three possibilities. First, you might rely on a few instances in which S&P 500 returns reached almost 4% after the equity allocation was 25% or more. Compared to today’s minuscule bond yields, 4% looks respectable. If stocks do, indeed, return 4% over the next six to ten years, that could be higher than the return on any other major asset class, which probably explains how stocks got so expensive in the first place.

Second, you might mentally project the scatter plot’s downward trend out to the current equity allocation. Doing that, returns appear to spread evenly around today’s cash rate of about 1%. So, whereas optimistically you might expect a return of 4% or thereabouts, more realistically a negative return is almost as likely.

Third, you might look at the data and say, “So what? We should really use a traditional indicator—one that compares prices to earnings—not an asset allocation measure.” Which brings us to another recent development that might alter future returns—the S&P 500 busting through 2500. To account for that latest market milestone, the next chart updates one of our favorite S&P 500 indicators, the price–to–peak earnings multiple or P/PE. (Unlike a standard price-to-earnings multiple that places the past year’s earnings in the denominator, P/PE uses the highest four-quarter earnings to date, mitigating distortions that occur when earnings fall in recessions.)

spy returns chart 3

At a price–to–peak earnings multiple of 23.6, we’re currently at about the same valuation as in December 1997. Once again, you might find an optimistic interpretation—that is, the long bull market that finally ended in 2000 suggests there could still be room to bubble up from here. But the implications for long-term returns aren’t nearly as optimistic, as shown in our final chart:

spy returns chart 4

If you stare at the chart long enough, you might see a less bearish picture than in the first scatter plot above. (Stare even longer and you might see the King of France.) But the difference isn’t especially large. On either chart, the downward slope points to a meager long-term return. In fact, if we use only the scatter plots above to make our estimate, while also accounting for the Fed’s predicted interest rate path, the S&P 500 appears to offer a similar return to cash.

Conclusions

To be clear, we’re encouraging long-term bulls to reconsider their assumptions, but we’re not advising them to dismantle carefully diversified portfolios (meaning those that are spread sensibly among multiple asset classes). We would be more likely to recommend a major portfolio shift if the usual bear-market catalysts—sharply rising inflation, high interest rates and poor credit conditions—were present.

More to the point, it seems a good time for investors to check their expectations and risk levels. Investors should develop reasonable expectations informed by data such as those in the scatter plots above. And they shouldn’t take more risk than they’ll be able to tolerate as the next bear market plays out. As always, only a small percentage of investors will accurately time the next market cycle, and we shouldn’t bet too heavily on being among those fortunate few.