Now More Than Ever, Investors Must Understand Trends Within Trends
While the market is pushing the topside of the secular channel, it maintains itself above its secondary and cyclical bull trends.
-- Jiminy Cricket (Pinocchio)
With the market only a few small percentage points from topping the secular channel, my firm has recently received a barrage of calls, questions, and inquiries about what our market stance is, what we are doing to prepare, and best of all, what if our 100-Year Market Theory (100-YMT) is wrong. To preface the answer let me first say this following: Over the next few months (by the end of the first quarter) we will be releasing our third update to the 100-YMT since its 2002 inception and 2004’s first mass publication on Minyanville.com. The following “answer” to these questions will serve as a glimpse into this release.
A few weeks back one of our stakeholder readers (Steven H.) began the onslaught of questions to our firm by starting his email with:
This is not only a great question, it is the framework of thinking which birthed our soon-to-be-release third edition. Without jumping down the proverbial rabbit hole with Alice, we believe a basic overview is required.
To preface today’s closing statement, we illustrate the last 18 years of the S&P 500 Index (INDEXSP:.INX). The chart legend at the bottom depicts the following:
- the Secular Channel (black dashes)
- the Cyclical Bull Markets (blue lines)
- the Cyclical Bear Markets (red lines)
- the Secondary (Counter-Cyclical) Bull Markets (green lines)
In referring back to the original theory to evaluate the previous chart, we stated the need to understand trends within trends -- otherwise quantified, the timeframe used in the determination of trends. Beginning from a macro standpoint, it’s easy to see the secular trend (five to 20 years in length) has a range of 800-1,550 and is considered consolidatory, maintaining the majority of action within said range for an extended period. Nonetheless, this consolidatory action can take place in any timeframe (secular, cyclical and secondary), not unlike the bear and bull trends.
The second, even more important reference to the 100-YMT, is our statement of the theory being used as an underlying foundation to a sound investment philosophy -- an opposing theory to CAPM (Capital Asset Pricing Model) and the all-too-popular Buy and Hold theory. Once these concepts are grasped, the questions of preparation -- of whether or not the market is at a secular top, and what should be done about it -- get answered.
Knowing that it may rain is a good reason to bring an umbrella, but it most certainly does not mean it will rain. So let’s get straight to the point. Does today's approach toward the top of the secular channel concern us as a money management firm? Not just yes, but hell yes. Does it concern us that GDP is again declining and unemployment has yet to come below 7.5%? Yes. Is it a concern that the last two times the US equity markets have reached this level, the GDP was nearly double what it is today and unemployment was half? Yes. Is it concerning that consumer confidence has again dropped below 60 after never reaching a ‘post-recession’ average of 100 and only breaching 70 twice since 2009? Yes.
But all of this does not change the fact that we have been in a “money-push” (2012 Year End Report) since the 2009 bottom. In 2011, my firm made a major market call and we were wrong, but not for long. We called the August 2011 break of "2011’s Channel of Indecision" -- the turning point of the cyclical market from bull to bear. December of the same year we changed our incorrect stance and once again shifted back to bull. This was due to understanding trends within trends -- the crux of the theory.
Back to the question, what if the 100-YMT is wrong? All in itself -- and in fear of sounding full of hubris -- it can’t be wrong; hence our concluding statement. By evaluating the chart above there are multiple trends within trends. While the market is pushing the topside of the secular channel, it maintains itself above its secondary and cyclical bull trends. It is only when these break that a stance change should be made. Our quantitative metrics currently show a cyclical trend level of approximately 1,300 and a secondary trend of 1,400. The further this expansion of spread, the higher the risk and therefore the more importance placed on the secondary trend level break. But until then, sit back and enjoy the ride.
One final note. It continues to be our contention, whether broken above for a spell or not, that the Shiller PE10 will again drop below 10 within the next four to six years. Stay tuned for the re-release of our 100-YMT .
I hope this helps and finds you well.
Editor's Note: Read more at Tesseract Asset Management.
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