Five Charts to Rule Them All

Our weekly series of articles, Five Charts to Rule Them All, presents five major market indicies and attempts to identify tradable trends.

The basic thesis we hold is that trends remain in place for long periods and that the equity, commodity, bond, and currency markets have relationships that change over time. Short term volatility occurs now and then, but usually a trend reasserts itself. We identify changes in trends by looking for not only price action of a particular market or market sector, but also by corresponding changes in other markets. For example, an increase in bond market premiums often indicates a weakness for equities. It's not a precise science by any means.

Over the last couple of weeks we witnessed the Chinese stock market suffer a fairly sharp decline. This was taken as a bearish sign by many as the Chinese market lead other world equity markets out of the deep, dark days of early this year. Had we seen a corresponding decline in small-cap equities (perceived as high risk) and an increase in treasury premiums then, we too, would have joined the bearish viewpoint and adjusted our trades accordingly.

We wonder if any of those commented so voraciously on our article "Don't follow the bears" placed any bearish short trades. If they did, I wonder if they are quoting the famous Greek poet Homer - "D'oh!".

Before we get to carried away, let's remember some other of Homer's words "Do thou restrain the haughty spirit in thy breast, for better far is gentle courtesy". The market may yet turn against us and it is best to humbley remember that.

What will the market do today, tomorrow, and the next day? All we can honestly say is that we do not know for certain. Based upon existing trends we see the high yield/inflation/re-flation trade lasting some time. We also see significant upside in the major market indicies and a downside in US Treasuries and the US Dollar. We can see no inter-market reasons why the trends in place will either slow down or reverse.

Commodities are the one asset class that are show no clear trend. We think the major indicies will turn bullish as the world's economies start to turn and stimulate demand - this may take awhile though. However the recent moves of Silver and Gold may hasten this, lets see if they keep their recent gains (we believe that they will and more).

We suggest that traders review their portfolio's and see if they would like to increase their long term trade weightings.

And we shall end on with some more words from Homer, written over 2000 years ago.

“Oh, woman, woman! When to ill thy mind is bent, all Hell contains no fouler fiend”

Wise man.

Disclosure: long VTI, DBC, TBT, UDN, IYR

Comments

[whidbey:]

"We identify changes in trends by looking for not only price action of a particular market or market sector, but also by corresponding changes in other markets."

You bet it is not a science, it isn't even supported by historical market prices movements. The five charts you selected are trend-less and you can stare at them until you are cross eyed, but there is little if any correlation obvious. I think your toy is busted, and you haven't caught on yet.

Sep 08 01:15 PM

[Thomas MacLeod:]

Thanks for your comment.

The charts are there to stimulate your thinking, try looking at things in a different way sometimes. For example on stockcharts.com try correlating the Value Line & IYR or CRB/GSG over a longer periods, or if you have access to Reuters or Bloomberg try some very long term correlations between bond and equity indexes.

There is no magic wand or perfect manner in which to predict market trends. but you can get signs for when to ramp up on long term out of the money protective puts and speculative calls.

If your interesting in educating yourself about market cycles I would suggest the following.

A. F. Burns, Introduction. In: Wesley C. Mitchell, What happens during business cycles: A progress report. New York, National Bureau of Economic Research, 1951

M. W. Lee, Economic fluctuations. Homewood, IL, Richard D. Irwin, 1955

John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999), p. 2.

Friedman, Milton; Anna Jacobson Schwartz (1993). A Montary History of the United States, 1867-1960. Princeton: Pri

O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in Action. Pearson Prentice Hall. p. 290. ISBN 0-13-063085-3.

Dr Andrew Colin "Fixed Income Attribution" (London, Wiley & Sons. January 2005) ISBN 978 0 470 01175 1

US Business Cycle Expansions and Contractions". NBER. www.nber.org/cycles.html. Retrieved 2009-02-20.


On Sep 08 01:15 PM whidbey wrote:

> "We identify changes in trends by looking for not only price action
> of a particular market or market sector, but also by corresponding
> changes in other markets."
>
> You bet it is not a science, it isn't even supported by historical
> market prices movements. The five charts you selected are trend-less
> and you can stare at them until you are cross eyed, but there is
> little if any correlation obvious. I think your toy is busted, and
> you haven't caught on yet.

Sep 08 10:11 PM

[Jake2:]

Homer was blind, wasn't he? And: King Lear Act III. Scene VII. .... Out, vile jelly! Where is thy lustre now?
The blind leading the blind (appropos Whidbey).

Sep 09 12:25 PM

[Thomas MacLeod:]

You may be thinking of the false etymology ho mê horôn (ὁ μὴ ὁρών: "he who does not see".

Other than that I don't quite get your point.

But I can, pretentiously, sprout Shakespeare at will.

There is no darkness but ignorance - Twelfth night, Act 4, Scene 2

On Sep 09 12:25 PM Jake2 wrote:

> Homer was blind, wasn't he? And: King Lear Act III. Scene VII. ....
> Out, vile jelly! Where is thy lustre now?
> The blind leading the blind (appropos Whidbey).

Sep 12 06:36 AM