# Macro Cycles 2014-2018



## shouldaindex

*Commodities:* http://static5.businessinsider.com/image/4d798305ccd1d54c72010000/commodities.png

The 2014 crash looked inevitable to the exact timing and degree as the cycle patterns, yet nobody really predicted it.  

*Housing Prices: *http://www.ampcapital.com/AMPCapita...rs-insights/2013/august/15/Chart-3_150813.jpg

This ones not as clear as to whether we're in a bull or bear, but I've looked at longest period above trend:

1926 to 1938 - 12 years
1967 to 1978 - 11 years
2005 to 20--  - 10 years on going, suggests we're pushing the final years before a downturn.

*Australian Unemployment* - http://www.rba.gov.au/speeches/2012/images/sp-dg-091012-graph1.gif

We're in the 6% range in 2015 and expected to be trending up.  Bad things happen when you can't keep unemployment below 6%, the 1982 and 1991 recessions occured when unemployed tried to get back under 6% and failed.

*GDP Growth* - http://www.rba.gov.au/speeches/2010/images/sp-dg-200810-graph1.gif

Troughs - 1963, 1974, 1982, 1991, 2001, 2008 or 11 years, 8 years, 9 years, 10 years, 7 years in between.  Currently 7 years up until 2015, so a bottom in terms of GDP growth could be coming in the next few years.

We're also possibly approaching ends of cycles such as *U.S Stock Market Bull Run, Fed Rates, Australia Stock market, RBA Rates*.

Just putting this out there, if anyone has any thoughts, I'm interested in counter-information and counter-arguments as well.


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## Tooth Faerie

Great idea. I am a newbie and probably won't have much to add but I will be reading with great enthusiasm.

From what I understand, we only observe the cycles in hindsight. It's difficult to perceive it in the present.


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## shouldaindex

Some further info:

*S&P 500 U.S Market Earnings: http://www.multpl.com/s-p-500-earnings/*

I'm looking at how many years in between Earnings peaks (that are followed by minimum 10% drop) starting from 1875:

6,7,5,4,6,4,4,6,10,3,8,3,10,6,10,7,5,5,4,9,3,7.

We're currently at 8.

Inference is U.S stock market earnings are due for a decline of 10% by 2017.

*
ASX http://www.shareswatch.com.au/blog/...s/asx-all-ords-index-20-year-chart-oct-11.gif*

Gain, Peak Year, Loss
+50, 1989, -30 
+40, 1992, -19
+50, 1994, -20
+50, 1998, -16
+80, 2002, -20
+160, 2007, -55
+65, 2011, -20
+50, 2015, -  (*currently) 

These are the 8 cycles over the past 28 years which started off with a 50% gain from the 1987 crash, reaching a peak in 1989, then declining 30%.  Then new cycle starts.

So every cycle has lasted between 2 and 5 years, had a minimum gain of 40% and a minimum loss of -15%.

Another thing to add is that all those minimum losses of -15% took 6 to 24 months.  And the bottom of the cycle is always higher than the last.

So if the pattern continues, we'd expect:
- Peak to occur by 2016 at latest, followed by a minimum -15% decline over 6 to 24 months.  
- If the peak actually already happened at 5950 in April 2015, that would take us to 5050 but no lower than previous cycle bottom of 3900, finishing between October 2015 and March 2017.
- If a new peak is reached before the end of 2016, recalculate figures from that number.

*House Prices - http://www.rba.gov.au/speeches/2008/images/sp-so-270308-graph1.gif*

Using the market cycles from the previous information, you see they all coincide with declines (however small) in house prices (89, 92, 94, 98, 02, 07, 11)

If you're looking for the end of one cycle (housing or stocks) look for the other and they'll correlate pretty quickly!


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## shouldaindex

We're running out of a time for a major catalyst to occur for the April 2015 peak to be our flag in the ground.  What I mean by that is in the early bear phase, sentiment / expectation / valuation drives the market down, but for the major leg of a bear market to occur it needs actual $ earnings declines (triggered by China, US, Australian Housing for example) within about 9 months. If this doesn't happen, it leaves a long time for bulls to retrace and create new highs, as that's what a bull market does and it's either one or the other.

So based on that, I'd guess a new peak will be created (perhaps 6000 in 1H 2016) and then a repeat of the early bear phase, but then instead of climbing back to new a peak, an actual catalyst goes bang, and then we get into the major leg of 20%+ bear market which typically lasts 12 to 18 months.

But it all depends on when you expect an actual trigger, which is why cycle timelines come in handy.  Problem is the factors I've analysed still fit in 2016, but it is the absolute latest I see a peak in the ASX occuring.  So either way it's happened or happening soon,  but there could still be a short-term bull trap back up before hand.

*To back up the possibility of a delay / mistaken early bear market that is actually a late bull:

*



1989, 1997, 2001, 2007, 2010 all created the same pattern of a false peak with a 10% decline but retraced to a new high within a year, then the actual bear market starts (ignore the lines).


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## shouldaindex

Looking at the past 30 years again, and seeing if there's a pattern with bottoms in the cycle using a few variations of statistics:

*Using history back to 1960, how big a drop do we see to end every cycle that has gained at least 40% (numbers rounded).*

1960 -20%
1964 -20% 
1969 -30%
1973 -50%
1976 -20%
1981 -30%
1984 -20%
1987 -50% 
1989 -30%
1992 -20% 
1994 -20%
1998 -15%
2002 -20%
2007 -55%
2011 -20% 

Using probabilities by removing a few outliers suggests that the most likely decline is the range of 20-30%.  If we used this cycle's current peak of 5950, that would lead to a suggested bottom ranging between *4150-4750*.

*How much of the gains in the bull phase were retraced in the bear phase:*

1989 = 80%
1992 = 60%
1994 = 55%
1998 = 40%
2002 = 70%
2007 = 90%
2011 = 55%

Current cycle bottom to peak is 3950 to 5950 and a gain of 2000.  We see the most retraces have been between about 55%-80% (taking out the lowest and highest outlier).  Applying 55-80% to 2000 sees a retrace of 900 to 1600 points.  This would end with a bottom range of *4350-5050*.

*Where does the bottom end up compared to 2 years into the bull phase:*

1990 -25%
1992 -13%
1994 -5%
1998 -15%
2002 -18%
2007 -27%
2011 -20%

Every cycle ended with a bottom lower than the All Ords at the 2 year mark of a bull run.  Again taking out the lowest and highest outliers, we get a range of -13 to -25%.  2 years into this cycle the All Ords was 5300. Apply the bottom decline from recent history we get a drop to *4000-4600*.


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## shouldaindex

The prettiest graph in stock markets.  Consistant bottoms in similar cycle lengths as the ASX.  Looking at about 18-19k to hold a 30 year pattern.  It is also highly leveraged to the main potential negative earnings threat of China, so it seems if the ASX is to enter a major bear leg from that, it'll be reflected in the Hang Seng too, which indicates another 10-15% (I think over more a medium term period of 6-15 months), similar to my ASX projections.


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## Paavfc

7 Year cycle could see a top in 2108 imo.
Do you subscribe to that theory ??


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## shouldaindex

Not in and of itself.  The numbers I come up with are more of a guide based on cyclical factors in the economy, rather than a system that lead to an exact number.  EG. If I find the min / max of something and I assume the pattern to continues, then the next time will continue to be within that range


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## shouldaindex

In the absence of a major trigger affecting the economy (China Slowdown actually affecting House Prices for example), I think we're more likely to head up, either in a bull-trap or as the start of a new cycle (less likely, but possible).  Let's explore both hypothesising 4900 today as our bottom.

*Bear Trap*
There's been some bull-trap phases in previous cycles.  They've lasted 1, 2, 3, 7, 9 months and tend to range between 7-20% gains.  So that would mean finding a top of 5300-5900 between September 2015 and May 2016.  Then beginning the major leg down after that to a new low, driven by an actual catalyst & lower earnings.

*New Cycle*
We've had short 6-12 month bear markets that just trended down without a Bull Trap phase.   The next cycle has tended to be shorter than average, and peaking within 2-3 years.  Every cycle has gained at least 40%, so that would get us to 2017 and about 6900.  This is my least preferred scenario, as really none of the catalysts that we've expected to affect earnings in 2015/2016 would have occured, and just more waiting time 'till they do.


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## shouldaindex

Something happened in 1998 that hasn't happened at any other time between 1985-2015.  ASX declined 15% without reaching 20%.

So right now we've reached 15%, so that suggests the odds are we'll head to 20% during this bear phase at some stage.

What puzzles me is the lack of actual earnings hit so far or forecast (apart from known commodity drops pre-April).  Example Blackmores just reached $100, on the back of high Asian growth.  No effect from any of the China worries recently, or forecast.


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## shouldaindex

Black Dots indicate 15% drops (approximately) since 1988 to give an indicator of what has happened at similar points in history.


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## shouldaindex

Some interesting info from various sources about key economic factors until 2017.

*Unemployment*
RBA saying unemployment won't increase any further from 6.0%-6.3% and will in fact decline from 2017.  

*GDP Growth*
RBA projecting GDP growth of 2-3% in 2015, 2.5-3.5% 2016 and 3%-4.5% in 2017.

*RBA Rates*
Westpac research not expecting RBA rates to increase until earliest in 2017.

*House Prices*
Bis Shrapnel expecting growth in house prices in 2016, then perhaps a slowdown coinciding with increasing rates in 2017.

So all that information is predicting a good next 18 months for the economy, which doesn't match investor sentiment.  I am now wondering if this 15% drop will be labelled after the fact as the China stockmarket related correction, as really no other narrative makes sense to me.

Anyway, what makes sense to me for the next while is for XAO to head back up to pre-correction levels, as I can't see any reason why we would go down again for a significant new low.  EG.  ANZ if you took 5% off it's low would be yielding close to 10% grossed up.  If earnings aren't being affected by a tangible macro, I don't see that happening.

I do note that September and October in the US are the most volatile months, so would love some more fireworks to work into the mix, as the past couple of weeks turned out to be quite boring ending up where we were originally once people figured out it was much ado about nothing.


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## shouldaindex

Heard a good saying last night:

"There are bear markets and bull markets.  There are mini-bear markets, but there aren't mini-bull markets."

This illustrates the magnitude and length of phases.
- ASX bear markets have lost 20-60% for up to 24 months.
- ASX bull markets have made 40%-350% over 2 to 5 years.
- ASX mini-bear markets have lost 15-20% over 6-12 months.

So what makes this current phase so interesting is that we might have what seems like a mini-bull market (short-term, healthy recovery from low), but in hindsight it will form a leg as 1 of the 3 scenarios above.

So either the start of a new bull (needed but unjustified correction), or a bull trap as part of a mini-bear (justified correction, but moving on soon) or bear market (sentiment correctly predicted earnings declines).


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## sinner

shoulda, only just caught this. Really awesome stuff here. I'm guessing that behind the "informal" version presented here, you have some really hard work that drives these observations.

Check out the work of Tom McClellan at mcoscillator.com for some more inspiration!

I'll def be paying attention.


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## shouldaindex

Hi thanks Sinner.  

It actually doesn't take as much effort!  All of it is known information with a few inferences.  But it is as much a personal development exercise as anything else, as the relevence of it for actual stock market predictions is debatable.


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## shouldaindex

I've been thinking about the nature of catalysts for a bear market.   So I ended up pondering can it happen in isolation in Australia or does it need a negative global environment.

*This is U.S S&P500 EPS:*




I've found in the past 9 U.S S&P 500 Earnings drops, the ASX has dropped 15%+ each time.  The ASX has only dropped 15%, 2 times in 35 years without one.  So there is a high correlation between ASX downturns and global downturns.

The 4 times the ASX since 1980 has lost 30% or more, U.S Earnings have declined over 30%.  So it has required a major global event.

So how does this help us?  It gives us a clue, if U.S / Global economy remains healthy without significant earnings deterioration, the ASX pull back for this cycle is likely to be not much more than 17-22% (already did 17%), as any ASX pull back of 30%+ has required significant earnings deterioration from the U.S.


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## shouldaindex

You can see if you can find a cycle's trough (bottom), it is extremely rare that future cycle troughs will be lower.  There are only 4 periods where there were lower troughs, 3 of them during war times.  So if you can get close to finding it, the theory is you'll end up in front in future cycles.

*All Ordinaries since 1880, 4 periods of lower bottoms (black dots)*


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## shouldaindex

I've gone over some information and had a look at how September fares in various metrics in U.S and Australia.

Dow Jones shows September to be the worst month for returns:




In the ASX, the past 8 cycles where it has declined over 15%, they all involved September and October.  

Timewise, the past 8 cycles that had 15%-25% drops, all of them occured between 4-12 months.  Even the ones that went on for longer with 30, 50% type drops followed the same initial timeframe, it's just that they had another major leg up/down after due to Recession or GFC.


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## shouldaindex

*U.S Fed - First Interest Rate Rise (Blue Line) and Next Recession (Grey Bars)*

How many years after the first interest rate rise, does a recession occur?

3, 2, 3, 2, 3, 2, 4, 7, 4

Taking out 7 as an outlier, we would make a guestimate of 2017/2018.


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## shouldaindex

This ones a bit hard to see, but basically:

You need S&P500 ForwardPE at 15 or less in order to make 15% Annually for 5 years.




Currently it sits at 16.5 @ 1980 (According to MSCI), so need a further 10% drop to get 1800 (without earnings declines) to get to 15 and under.

That further 10% drop range is also similar to get the ASX currently from 5250 to the 4600-4700 area which I've targetted as the maximum drop without a major negative economic event, based on a 22% decline maximum (probability from recent history) without a Recession or GFC type event.

So then combining the two pieces of information, if you can get that 10% further decline you both get the bottom end of value that also fits into the prime future performance zone (assuming ASX is similar to S&P500 in that respect).

I am currently sceptical about the possibility of major event happening in 2015/2016 such as recession or financial crisis.  So as it stands, as much as I'd like to see earnings take a fall this cycle (instead of waiting for another in the next few years) we may be getting half of what we want, really good valuation (if further 10% drop occurs) but on earnings that are still holding up (with a few correlations pointing to 2017/2018 as danger time).  

This would lead to a paradox scenario where you are buying based on value too good to refuse, but believe there will be a fall in the economy within 2-3 years.  The reason I'd still buy, is because history has shown future cycle bottoms are rarely lower than the ones before.


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## shouldaindex

The last decline to reach the bottom of the last 8 cycles has lasted between 2 to 8 weeks.

If 4936 turns out to be the bottom (I'm unsure at this stage), it's last decline lasted 3 weeks, so it does fit within that pattern.

We are currently on the up, so if we are to make a new last decline, this information suggets it's likely to take another 2 more weeks to form a last decline (starting from the moment the upwards trend turns).


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## shouldaindex

*Bottom Picking:*

This one's very roughly (not exact figures) from reading XAO graphs tonight, but the overall information still paints a picture:

These are the very last drops to a find a cyclical bottom:

2011 7 days, -9% 
2007: 5 days, -7% 
2002: 9 days, -11% 
1998: 13 days, -6%
1994: 15 days, -3%
1992: 8 days, -6%
1989: 9 days, -5%
1987: 3 days, -8%

These are the very first rises after a cyclical bottom:

2011: 11 days, +12%
2007: 6 days, +12%
2002: 6 days, + 6%
1998: 16 days, +11%
1994: 10 days, +5% 
1992: 6 days, +7%
1989: 4 days, + 5%
1987: 4 days, +10%

So using 2011 as an example.  If all my analysis (hypothetically somehow) points me towards an 18 day window that will have a multi-year bottom, I could still miss out on 9% by being 7 days too early, or 12% by being 11 days too late.

That's a tough business.


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## rimtas

shouldaindex said:


> I've been thinking about the nature of catalysts for a bear market..




Have you considered an idea, that there is no need for catalyst, neither for bear, nor for bull. If social mood goes down, that is affecting how people behave-they spend less,, save more, avoid debt, don't make far reaching optimistic decisions. This translates into lower earnings, declining investment and lower share and realestate market. 
 Because share market is the best known indicator of  social mood, it predicts everything else, because you sell shares instatntly, but other decisions take time to materialize-thats why earnings lags stock market, as an example. You can not predict share market looking at earnings, but you can predict earnings looking at share market. 


Also, your cyclycal calculations are based on linear projection-you try to use past few decades corections and assume market will behave the same. You get sometimes confused that market once ot twice produced "out of normal" corrections, when in fact they are normal, if you consider that market is not linear, but behaves as a fractal-big corrections occurs on 1 min, 5 min, 1H, I day, 1 Week, 1Month and 1 Century intervals regularly, they are normal. 

I must admit that Australia's market is the Only in the world that in the last 150 years produced only short lasting(~5 years) and least declining (bigest drops were ~50%)corrections. It's entire chart fits nicely into two parallel lines. But this nice linear statistics ends right here.  
From 2007, All Ords are still below ATH, meaning that 5 year correction average has bean broken-it is already almost 8 years below ATH and heading down. First time in 150 years. This should tell you something. It tells me clearly-we are heading for this, as you consider-"not normal, not average" correction.


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## shouldaindex

Hi Rimtas, thanks for your thoughts on both Earnings and Historical Information.

I definately don't stick literally to the information/analysis as it has obvious limitations, but thought I'd jot it down as an exercise.   It's one tool amongst infinate.


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## db94

shouldaindex said:


> Hi Rimtas, thanks for your thoughts on both Earnings and Historical Information.
> 
> I definately don't stick literally to the information/analysis as it has obvious limitations, but thought I'd jot it down as an exercise.   It's one tool amongst infinate.




While Rimtas may be raining on your parade, I'm loving this!! Really insightful. And putting some things into perspective for me. Keep up the good work


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## shouldaindex

Thanks DB for your feedback!

Here's a portion of the ASX historical I've used before, and I'm going to look at *secular bear markets *and what happens in them.  The past 9 cycles in the past 35 years have been in a secular bull market, so let's present an alternative to the future.

*Secular Bear Markets*
(graphic isn't great, but read below)



*
Worst Long-Term Bear Markets:
1929 to 1945: 16 years / Annual average gain of about 1% (plus dividends)
1967 to 1983: 16 years / Annual average gain of about 2% (plus dividends)*

If we applied that secular bear scenario to 2007, where the ASX gained between 1 to 2% annually, the ASX would be 8000 to 9400 in 2023.

The interesting thing is that would still still be a healthy gain of 6-8% (plus dividends) in the next 8 years (5000 to 8000-9400 in 2023)

So we would have to create a new record worst history which would make all past information irrelevent! Otherwise if it follows the past within a certain range that is an approximate guide to what may happen even if we are in a 16 year secular bear market.


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## shouldaindex

GDP growth for Q2 = 0.2%

All it would take is a further -0.3% drop to get into negative territory for 2 Quarters and that's a recession.

If a major economic event did happen to end this cycle, we would then be looking at a more extreme set of data that includes Recessions/GFC/Crashes.  That would bring into play the possibility of a 30-60% decline, where as a cycle without such an event has historically maxed out at about 22%.

Data since 1960:

Cycle ends with major economic events (rounded figure %) 20, 30, 50, 20, 30, 50, 30, 50.

...Without (rounded figure %) 20, 15, 20, 20, 15, 20, 20, 20.

Up until today, I hadn't read any data to indicate any danger of this, but it has upped my alert to needing to not be so locked into a cycle end without one.


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## shouldaindex

This is why I do this for a hobby.

Using Intraday Highs and Lows I've managed to turn the 15% declines (which were rounded from 17%, 18%) in 1998 and 1984 into 20% declines (using intraday highs/lows instead of just closing), which means every mention of 15% now refers to 20%.

So now that cycles have all ended with 20%+ declines, for a 30+ year pattern to continue the ASX would be expected to get to at least 4771 (20% drop from 5963).


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## shouldaindex

When the ASX dropped 20% to end it's cycle (over the past 30 years), the specific intraday peak/trough ranged from 20.0% to 22.9%.

So if that happens in this cycle, the range we are looking for are: *4599 to 4771* (-20.0% to -22.9)

On a similar gradient from April to August, gets us to that range by *October*.

Again, not meant to be taken literally, but gives you some sort of expectation.


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## tech/a

Wow.

Rational randomness.
Well one interpretation.


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## shouldaindex

*Found this regarding Fed Rate Hike Cycles*




Seems like PE contraction does happen, whether the 10-15% contraction of the last few months is the contraction as part of this phase of the cycle, or if there will be the usual post-hike contraction, we'll wait and see.  

But historically it shows the 3 months after are the worst period during the 12 month period surrounding the first hike.  Also, it looks like we may set a record loss for the 3-6 months prior, so it shows the limitations of historical patterns.


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## shouldaindex

One of the discussions regarding using 30-40 year sample sizes, is that it may actually be capturing an abnormal period of history over the past 100 years. 

So what I've done is drawn a trend line from 1915 to 2009, which I consider to be 'fair'.  

*ASX 1915 to 2009 Trend Line *




I've calculated that, that trend grows at 5.6% Per Annum.

Extrapolating that to 2016 would have us at the 100 year trend @ 4500.

Keep in mind that very small % changes have a drastic effect over 100 years, so take it with a grain of salt.  What it can illustrate is that cycles can be at different stages within larger cycles or what might be considered trend within one time frame may be considered above or below. And also just like a sample size of 30 years, a 100 year sample size may not continue in the future.


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## shouldaindex

Wanted to touch on the current cycle in the context of the larger cycle using the Dow Jones (chart sourced from a google search).

*Dow Jones Historical*




*Look at the blue boxes that lay across 17 year bear markets between:*
*
1905-1922
1932-1949
1965-1982
1999-2016 (projected)*

You can see similar traits that have occured in the current 17 year period such as tops matching or gradually getting slightly higher (tick), biggest crash in the middle (tick), and smallest decline at the end (hopefully).

The good news is if we are at the end of a secular bear, the next period is where the market makes gains that it doesn't retrace in a secular bull.

Like everything there is contrary information and arguments (The 5% trend line has us at about double the expected price), so this is just one piece of the puzzle.


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## shouldaindex

*When the All Ordinaries hits exactly a 20% decline from peak, where is it 12 months later?  *

*Date: 12 Months Later %*
Sep 21 1990: +9%
Nov 16 1992: +53%
Nov 22 1994: +14%
Oct 28 1997: +16%
March 5 2003: +23%
June 11 2008: -26%
August 8 2011: +6%

So I've mentioned splitting up forecasts based on WITH major economic event and WITHOUT.  I've previously categorised 1990 and 2008 as WITH due to Recession and GFC.

*12 Month Returns once ASX hits exactly -20%:*
WITH Major Economic Event: +9%, -26% *= Average -9%*
WITHOUT Major Economic Event: +53%, +23%, +16%, 14%, +6% *= Average +22%*

Doing this for this cycle, our 20% decline number is 4771.  So if you had a strategy of investing that day, this is the types of returns that have occured in the next 12 months.


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## Junior

Shouldaindex, really enjoying the data in this thread.  Keep it up.

How is an 'economic event' classified?  Is it likely that 2015 or 2016 will end up in this category?

We've had a commodity price and oil price meltdown, and Australia likely to be in recession.  Do any of these factors indicate an event?


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## shouldaindex

Junior said:


> Shouldaindex, really enjoying the data in this thread.  Keep it up.
> 
> How is an 'economic event' classified?  Is it likely that 2015 or 2016 will end up in this category?
> 
> We've had a commodity price and oil price meltdown, and Australia likely to be in recession.  Do any of these factors indicate an event?




I'd define it as being 100% obvious.  That way there's less room for 'fixing' subjectively.  

IE. Stock Market Crash in 1987, Recession in 1990, GFC in 2008.

I'm less sure about analysing the actual economy than the stock market, that's why I tend to seperate things into the 2 categories "With or Without A..."  

But out of every piece of information I've posted the one that sticks out to me (globally, that will also reflect in Australia) is how long U.S Earnings have gone without a 10% decline.  We're at 8 years, and there's only really 2-3 other periods that have gone longer since 1880.  This is mirrored by the 3rd longest bull market in the U.S.

https://www.aussiestockforums.com/forums/attachment.php?attachmentid=64083&d=1440756106

Also the House Price cycle, there's never been more than 5 years without a decline and we're in the 4th year.

http://www.rba.gov.au/speeches/2008/images/sp-so-270308-graph1.gif

So if the ASX gets into my target range, I'll probably have to split my buys into tranches because I'll want a spare bullet if things do reach the major economic event stage.


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## Smurf1976

Junior said:


> How is an 'economic event' classified?  Is it likely that 2015 or 2016 will end up in this category?
> 
> We've had a commodity price and oil price meltdown, and Australia likely to be in recession.  Do any of these factors indicate an event?




The price of oil has dropped about 60% compared to a year ago. Given that other commodities have also fallen, I'd say that's an "event" at least in that it's a very significant change in the price of a key commodity. It's not as though we're talking about a tiny market or a small change, the change in the price of oil is roughly a $2.4 Trillion annual change (in USD) at the global level.

Where it gets more complex is that the "event" in this case is potentially a good one for many countries and most consumers. Australia, the USA, Japan and China are all net importers of oil (yes, the US imports - production there has risen as is well known but they're still an importer overall).


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## shouldaindex

*S&P500 15%+ declines since 1929.  I've grouped them by (rounded number)*

(85) - 83
(55) - 54, 54, 56, 56
(50) - 48, 48, 49, 49
(45) - 44
(40) - 40
(35) - 33, 33, 34, 36, 36
(30) - 29, 29, 31
(25) - 26, 26, 26, 26, 26, 27, 27
(20) - 19, 19, 19, 19, 20, 20, 20, 20, 22, 22
(15) - 16,16,17

So playing around with a few takeaways / assumptions.  
- 19%+ declines happen approximately every 2.3 years.  We are well past that in 2015.
- Only 3 times out of 40 not reached 19% if reached 15%. S&P500 triggered the 15% mark last month, so statistically there's a 93% chance of going lower.
- I would feel comfortable predicting a decline of under 30%, without a major economic event such as U.S Recession or Financial Crisis.
- Using probabilities to gain an extra couple %, you can see where the groupings have settled most commonly around round numbers.

*S&P500 Years in between 19% declines since 1940*
6, 2, 9, 5, 4, 2, 3, 4, 3, 5, 6, 3, 10, 7, 4, 4

We're in the 2015 Bear phase of the cycle now, and I'm tentatively expecting another in 2017/2018 due to some other indicators, meaning a shorter than average bull phase of the next cycle.


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## rimtas

You will have almost the same results if you try to do this analysis on 5 min , or 1H charts(not percentage of course). You will have plenty of data in smaller timeframes (not just a few centuries)and notice that smaller declines occurs more frequently than bigger ones, and crashes also are the norm, just they are the rarest.  It is a no brainer to see that the same picture occurs at any time frame.


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## shouldaindex

ASX All-Time Bulls and Bears




1900-2007:

Bears - Blue retraces and goes nowhere - 57 Years
00-02
11-16
22-30
33-42
48-53
59-74
79-82
86-92
03-07

Bulls - Orange makes permanent gains - 50 Years
02-11
16-22
30-33
42-48
53-59
74-79
82-86
92-03


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## shouldaindex

*All Ordinaries Since 2000.* 

Periods where the All Ordinaries would have made 5% or more capital growth to today.  

So you can imagine a 5% trend line where only those periods are below it.




If a similar pattern continues, I think we're on the cusp of another block in the coming months.


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## shouldaindex

Here's something interesting regarding U.S Markets that's relevent for where we are currently:

There have been 22 declines of 20%+ (since 1929) and all of them have happened with a:
- recession (19)
- world war (2)  
- market crash (1)

There hasn't been a 20%+ decline without one of those happening since 1929.

The biggest have been 16, 19, 19, 19.

*These are calculated on closing prices, not intraday.

So if the trend continues, it could signify a behavioural pattern that people don't let the S&P500 close -20% without significant event.

It throws a spanner into the works, because the U.S is in the 3rd longest bull market (without -20%) and the expectation is it will hit that mark to reset the cycle.  What could happen is that we've seen the predictive ability of the S&P500 in regards to recessions, so if it does reach -20% and it hasn't happened yet, history says it has an impeccable record at saying it's coming.


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## shouldaindex

Doing some research on what happens once a market hits -20% from peak.

*This is the S&P500 since 1929 and the returns for the following 3 / 6 / 12 months after -20% from peak is hit* (rounded numbers from graph readings for illustrative purposes only)

*3 month returns* (%) +20, +15, +10, +10, +10, +5, +5, +5, +5, +5, 0, 0, 0, 0, 0, -5, -5, -10, -10, -10, -10, -15, -25, -30 = *Average -1%*

*6 month returns* (%) +50, +25, +25, +25, +20, +15, +15, +15, +5, +5, +5, +5, 0, 0, -5, -5, -10, -10, -10, -10, -20, 20, -30, -45 =* Average +1%*

*12 month returns *(%) +100, +50, +40, +35, +25, +25, +20, +20, +10, +5, +5, 0, -5, -5, -5, -5, -10, -10, -15, -15, -25, -30, -35, -40 = *Average +5%*

A lot less difference than I assumed, which could open up the strategy of dollar cost averaging over a similiar time period which would reduce volatility (as you can see from the best to worst cases) while performance is pretty much neutral for the first 6 months.


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## shouldaindex

Had a look at the last 3 bear markets, and tried to find a trend in terms of timeline.  I've drawn the most prominent bottom trend line in each, and then a vertical line to find the peak.   You can see each of them start within a few months of the peak, so using similar rules, we'll project some for 2015:

*ASX 2002 *




*ASX 2007*




*ASX 2011*




*ASX 2015*




Doesn't really tell you anything new, intuitively you probably guess mid-high 4000s if things continue down and that's what it looks like the lines are indicating for 2015.


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## shouldaindex

*This is the 2007-2009 GFC from peak to trough.*

The GFC in hindsight, follows my general expectations of a bear market.  Around the -20% as the first phase, and then it needs significant economic trigger to take it further, which usually occurs within the next 6 months or so.




Right now we're looking to see if we can reach that -20% on both the All Ordinaries and Dow Jones, and from there analysing the chances of recession / financial crisis type event.


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## shouldaindex

While things look to be steadying at the moment.

Keep in mind in the last 100 years, a -30% decline period has passed across every decade in the ASX, and we haven't had one yet this decade and there's 4 years to go.

To illustrate some figures, from an XAO peak of 5950 in April, -30% takes us to about 4200.   

If that doesn't occur and we reach a new peak, for a -30% decline to bottom out at current XAO of 5200 it'd need to reach 7400.

The caveat to all that is that the Dow Jones once went 28 years without a -30% decline, so there is no certainty of the trend continuing on the ASX.


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## tinhat

shouldaindex said:


> While things look to be steadying at the moment.
> 
> Keep in mind in the last 100 years, a -30% decline period has passed across every decade in the ASX, and we haven't had one yet this decade and there's 4 years to go.
> 
> To illustrate some figures, from an XAO peak of 5950 in April, -30% takes us to about 4200.
> 
> If that doesn't occur and we reach a new peak, for a -30% decline to bottom out at current XAO of 5200 it'd need to reach 7400.
> 
> The caveat to all that is that the Dow Jones once went 28 years without a -30% decline, so there is no certainty of the trend continuing on the ASX.




Can you identify the period during the 1990s that the Australian market declined by 30% please?


----------



## tinhat

OK - I found it. Jan 90 to Jan 91 represents a 30% fall in the value of the All Ords from 1713 to 1199.


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## Wysiwyg

AASE established in 1938



> *Milestones of the Australian Share Market*
> 
> Australia's first stock exchange was established in Melbourne in 1861. Over the next few decades, additional regional exchanges were established in Sydney (1871), Hobart (1882), Brisbane (1884), Adelaide (1887) and Perth (1889).
> 
> All exchanges traded independently of each other until 1937 when the Australian Associated Stock Exchanges (AASE) was established, bringing with it uniformed listing and commission rules.
> 
> *The following year, in 1938, the first share price index was published*


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## McLovin

Wysiwyg said:


> AASE established in 1938




There is data going back to 1875 that was calculated in the 1990s. I have it but I'm overseas at the moment so can't post. It's freely available somewhere on the Net.


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## craft

shouldaindex said:


> While things look to be steadying at the moment.
> 
> Keep in mind in the last 100 years, a -30% decline period has passed across every decade in the ASX, and we haven't had one yet this decade and there's 4 years to go.
> 
> To illustrate some figures, from an XAO peak of 5950 in April, -30% takes us to about 4200.
> 
> If that doesn't occur and we reach a new peak, for a -30% decline to bottom out at current XAO of 5200 it'd need to reach 7400.
> 
> The caveat to all that is that the Dow Jones once went 28 years without a -30% decline, so there is no certainty of the trend continuing on the ASX.




Nice thread here shoulda~

Not sure the 60's at least doesn't throw a spanner in your observation. 

The data Mclovin refers to is based on monthly average figures and the chart below is an equity drawdown from all-time peak (not decade peak) of that data

Looking at that I would expect an all-time high before another major drawdown.

The only time we didn't hit new highs prior to then next major pull back was late 1870's and early 1970's and both of those time the initial draw down was no where as lengthy as this time. 

History suggests current retracement is just one step back on the walk of worry to new all time highs unless of course this time it is different.


----------



## shouldaindex

Hi Craft, 

I think the thin 30% drawdown around 1970 on your graph, is the one I counted as starting in 1969.

On the drawdowns, I've used data from the ASX historical:

black dots = 30% drawdown
pink dots = 20% drawdown

Click to enlarge:


----------



## craft

shouldaindex said:


> Hi Craft,
> 
> I think the thin 30% drawdown around 1970 on your graph, is the one I counted as starting in 1969.
> 
> On the drawdowns, I've used data from the ASX historical:
> 
> black dots = 30% drawdown
> pink dots = 20% drawdown
> 
> Click to enlarge:
> 
> View attachment 64712




O.k see where you get the decade observation - not sure arbitrary decades periods mean a lot though.

Here is another way to look at it (months since last drawn down by 30%+ from all time high)




Using month average data source from Wren Financial advisors.


----------



## shouldaindex

*House Price Growth looks to have peaked in 2015*

http://www.theaustralian.com.au/bus...s/news-story/018bc71814023f080674dfd452c8113f

*So let's look at previous peaks in the cycle:*




*House Price Peaks in:*
1982, 1986, 1989, 1995, 1998, 2002, 2008, 2011, 2015

*ASX Peaks (leading to 20%+ declines) corresponding with House Price Peaks:*
1981, 1987, 1989, 1994, 1997, 2002, 2007, 2011, 

You can see when there is a house price peak, there is an ASX Peak leading to a 20%+ decline close by.


----------



## Smurf1976

shouldaindex said:


> You can see when there is a house price peak, there is an ASX Peak leading to a 20%+ decline close by.



Interesting.

Any thoughts as to the underlying reasons? I assume it relates to confidence / broader economy / credit?


----------



## Wysiwyg

XAO (gauge for ASX?) at 4770 is a 20% decline from year 2015 peak of 5963. XAO low of 4936 since peak was 17.2%. Another support test of 5000 points?


----------



## shouldaindex

Seems inevitable IMO that, that 4700's level will be hit.

Housing and the Stock Market are both macro reflections so not surprised they move together, but sometimes there's a gap, so can be a nice indicator for the other.


----------



## shouldaindex

Just to give some background on the nature of the lengths of bear markets (20%+ declines).

*In the ASX since WW2, bear markets have taken the following amount of months to reach a bottom: *2, 2, 4, 4, 6, 6, 10, 10, 11, 12, 12, 12, 15, 17, 23, 24

*In the U.S Markets since WW1 (data goes back further), bear markets have taken the following amount of months to reach a bottom:* 2, 3, 3, 4, 4, 4, 5, 5, 6, 6, 8, 8, 8, 12, 13, 14, 17, 17, 18, 18, 21, 21, 26, 30.

If we make an assumption that the current peaks of the ASX in April 2015 and Dow Jones in May 2015 are in fact the bull market peaks for this cycle, it would mean we're already 9 and 8 months into a bear market.

That means out of the 40 bear markets covered in the sample, if projected onto the above dates would have resulted in a bottom being found between 2015-2017.


----------



## shouldaindex

Another interesting piece of research I've found is that the last 8 bear markets dating back to 1984 on the ASX, all reached the -20% drawdown mark within 12 months of the peak.

We peaked in April 2015.  Normally I associate December to April as seasonal strength (80%+ winning record) but obviously when the rest of that % occurs, it's usually due to a bear market, so adjusting to keep an open mind about that.

Something else to think about is that it's generally accepted that stock markets are forward looking about 6-9 months.   So remember the April 2015 peak?  Since then it's been 9 months and we've had China, Interest Rates, House Prices, Commodities (they were actual recovering early 2015) all with significant negative cyclical changes predicted accurately by the market.

So right now the market doesn't like the economic outlook for H2 2016, but as time goes on at some stage it will change it's mind 6-9 months before it happens, in theory.


----------



## shouldaindex

_Defining a Bear Market in U.S as -19% using closing numbers and ASX -20% using intraday numbers.

And Significant Events as a Recession  / GFC  / Market Crash. _

U.S has had 15 Bear Markets since WW2:  9 With Significant Events and 6 Without.

ASX has had 16 Bear Markets since WW2: 8 With Significant Events and 8 Without.

So basically when you're asking 'when are we going to get a Bear Market?', you could argue it's when the market thinks the odds of a Recession (or GFC like 2008 or Market Crash like 1987) have moved to 50% or greater, given that is what history shows.

My completely subjective judgement is that we're not there yet, but things can move extremely quickly.


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## shouldaindex

XJO is a chance to hit -20% drawdown on Monday.

That's like making the Grand Final for this thread.


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## shouldaindex

Just going to post some factors, shorthanded, that need to be wiped out and also act as 'pro arguments' for a major bear market: 

(there are plenty of others for either a minor bear market and bull market too that I'll write about another time)

*S&P Shiller* 25% above historical mean.
*US Trailing PE* 20% above historical mean.
*U.S EPS Peaks* 9 years since a -20% decline, longest since 1880 is 13 years.
*U.S Profit Margin* Highest in history in 2015.
*S&P ROE * 30% above the trough of the past 5 downturns.
*Equity Asset Allocation Future Returns* still closer to high allocation which suggests low returns.
*Global GDP Years * Was approaching the end of the 'limit' between downturns, now starting.
*Australia Recession* 25 years and with macros bottoming out.
*House Price Ratio / Supply / Years* Price / Balance has only just begun to turn last quarter.
*Bank Bad Debts* Still close to record lows.
*ASX 30% Drop Cycle* Haven't had a 30% decline in 8 years, average since 1916 is 1 every 10.
*Dow 5% Line* If reverts back to this 100 year trend, means that we're continuing a secular bear market.
*Unemployment Above 6%* 5.8% doesn't leave room for error, sustained above 6% has led to big events.


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## Bill M

Thanks for all your posts shouldaindex, really appreciate it.

You know, if they stuck you, a technical trader and a fundamental investor into a room for a few days and asked them to come up with some strategies and ideas for investments, I reckon there would be some good suggestions. What do you do for a living if you don't mind me asking?


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## shouldaindex

That's very kind of you Bill. 

I work at reception for a charity involved with mental health support. 

Bet that's not what you expected!


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## shouldaindex

Here's one to contemplate over the weekend:

*Dow Jones since 1780* (double click to enlarge)





Look how much of it is ABOVE the pink lines / IE. ABOVE the next bottom.  

Indicates the vast majority of the time it's actually a bad time to buy.


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## shouldaindex

Bear markets in the U.S and Australia since WW1, approximately 80% of the time, had a maximum drawdown of -26% when a Recession / GFC / Flash Crash hasn't followed through (and the other 20% of the time weren't _that_ much further).

Bear markets in the U.S and Australia since WW1, approximately 90% of the time, bottom out within 2 years.

There are always exceptions to the rule shown above, but we can create some general expectations:

- Bottoming out to conclude by April 2017 (15 months time).
- Maximum drawdown of -26% without a major event follow through (types mentioned above).
- Maximum drawdown can be extended (but doesn't necessarily) past -26% if a major event does occur.


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## systematic

Have I read you incorrectly?



shouldaindex said:


> Bear markets in the U.S and Australia since WW1, approximately 80% of the time, had a maximum drawdown of -26% when a Recession / GFC / Flash Crash hasn't followed through (*and the other 20% of the time weren't that much further*).
> 
> 
> - Maximum drawdown can be extended (but doesn't necessarily) past -26% if a major event does occur.





85% drawdown is a bit further than 26%!  Though I could have mistaken what you meant.

Edit:  Sorry, I thought the above drawdown must have been in your "other 20%" but I don't think it is. This would come under your, "can be extended...if a major even does occur" point.  Is that correct now?


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## shouldaindex

Sorry that is a bit confusing, I meant:

Without a recession type event occuring:

* 80% of the time the drawdown is -26% or less
* 20% of the time the drawdown exceeds -26%, but not that much further

With a recession type event occuring:

* Usually extends past -26%
* But doesn't always

Just focusing on the first part, as that's where we are currently.

It suggests that we've done most of the drawdown already (we're at -18% as of today, and history suggests we are unlikely to exceed -26%) if there is no recession type event to occur within the next 18 months.


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## systematic

Got it, thanks for clearing up, shouldaindex.


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## craft

shouldaindex said:


> Here's one to contemplate over the weekend:
> 
> *Dow Jones since 1780* (double click to enlarge)
> 
> View attachment 65552
> 
> 
> 
> Look how much of it is ABOVE the pink lines / IE. ABOVE the next bottom.
> 
> *Indicates the vast majority of the time it's actually a bad time to buy*.





I can attest to that (Fully paid up member of the premature accumulators club)  Lucky getting it perfect isn't a requirement to building wealth over time.  Biggest risk is letting the fear of overpaying in the short run keep you underexposed to equities over the long run.


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## Bill M

craft said:


> I can attest to that (Fully paid up member of the premature accumulators club)  Lucky getting it perfect isn't a requirement to building wealth over time.  *Biggest risk is letting the fear of overpaying in the short run keep you underexposed to equities over the long run.*




Too right craft, I switched a bit more into equities yesterday in my wife's super. Averaging down is a big no no for the traders but I do it all the time. The lower it goes, the better. When the money is all placed, I have the rest of my life to wait for payback. Nothing to fear and in the mean time the dividends keep paying my pension.


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## Bill M

shouldaindex said:


> That's very kind of you Bill.
> 
> I work at reception for a charity involved with mental health support.
> 
> Bet that's not what you expected!




Great stuff mate, good to see you doing something so very necessary for the community, well done.

I kinda imagined you being an Actuary or working for the Bureau of Statistics.

It's great to see all types being keen and involved in investing, you take it one step further, thank you. Cheers and all the best.


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## shouldaindex

Here's something I found interesting.

*Dow Jones with Recessions (24 shades of grey). *




*Out of the 23 periods from recession to recession (using the lows):*

20 times has not doubled.
3 times has doubled (3 black lines in picture).

For us to have the next recession low @ 12900+, it needs to double the 6450 recession low from 2009.


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## shouldaindex

This one will take a bit of explaining (Recommend double clicking to expand, look for the direction of the lines rather than the numbers).

*I've gone back to 1982 and found the 7 times out of 35 years, the ASX has started with a -10% drawdown in Q1 (end of March).*

Top Row - 3 Occassions involved a Global Recession that led to big yearly losses (2008, 1990, 1982).

Middle Row - 2 Occassions involved no global recession and had an early bounce to finish with a yearly gain (2003, 1988).

Bottom Row - 2 Occassions involved no global recession and had a mid-year bounce to finish with a mild yearly loss (2010, 1984)




*So basically since we are at a similar point in 2016 with a -10% drawdown to start the year, we can look back at these 7 occassions and see what has happened / might happen this year:
*
- If there is a Global Recession, we could have a strong downtrend for most of the year and end up with a significant loss.

- If there is no global recession, we could either bounce early and turn it into a gain for the year, or bounce mid year and make up most of the losses to end with a slight yearly loss.


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## shouldaindex

Bonus Information using the same graphic, but with Time information shaded in and collated as a factor.  

*How long do intra-year downtrends go for?  *

(Double click to expand)




- You can see the most common amount of time for each intra-year downtrend period is between 2-4 months (2 months means going into the 2nd month not necessarily the full 2 months etc)

- Applying that to our current situation probably indicates a bottom between Feb and April for this current intra-year downtrend.


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## shouldaindex

These are the Bottom to Bottom (+ % Gains) from Bear Market Lows on the All Ordinaries since 1990.

1991 - 1204 
1992 - 1379 (+14%)
1995 - 1815 (+24%)
1998 - 2365 (+30%)
2003 - 2666 (+11%)
2009 - 3090 (+13%)
2011 - 3829 (+19%)
201X - XXXX (+XX%)

With a Fill in the Blanks currently going...

What is interesting is that even if we applied the maximum gain of (+30%) from this sample for this cycle, we'd still only project a maximum bottom of 4977.  

Easy perhaps to say in hindsight, and not so much when the XAO is in a bull market going from 5000 to 6000 with predictions of 6000+?


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## shouldaindex

Peak to Bottom Drawdowns:

Shanghai -49%
Hang Seng -35%
DAX -27%
Toronto -26%
Nikkei -23%
FTSE -20%
------
XAO -18%
Dow Jones -16%

The Dow Jones is now -8% away from hitting a bear market.  It is also +25% overvalued compared to historical CAPE and PE ratio averages, and at 16000 it is about 2000 points higher than Q1 2013, when Earnings were the same as today.


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## fraa

Might be a stupid question, but are your historical comparisons re earnings & PE inflation adjusted?



shouldaindex said:


> Peak to Bottom Drawdowns:
> 
> Shanghai -49%
> Hang Seng -35%
> DAX -27%
> Toronto -26%
> Nikkei -23%
> FTSE -20%
> ------
> XAO -18%
> Dow Jones -16%
> 
> The Dow Jones is now -8% away from hitting a bear market.  It is also +25% overvalued compared to historical CAPE and PE ratio averages, and at 16000 it is about 2000 points higher than Q1 2013, when Earnings were the same as today.


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## shouldaindex

CAPE is inflation adjusted.


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## shouldaindex

-20% Drawdown on the All Ordinaries Intraday was hit today to mark an official Bear Market.

Looking forward to see how it plays out from here.


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## Wysiwyg

shouldaindex said:


> - Applying that to our current situation probably indicates a bottom between Feb and April for this current intra-year downtrend.



From last highest high, the downtrend has been going for over 9 months and I like the above probability scenario. Certainly more room for a rise in stock prices now. Piling in.


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## shouldaindex

3 Month Returns after the ASX hits -20% (since 1989):

*Recession / GFC Occurs:*

1990 -10%
2008 -12%
-------------
Average - 11%

*No Recession / GFC:*

1992 +19%
1994 +0%
1997 +17%
2003 +9%
2011 +7%
-----------
Average +10%


_We hit -20% today, so it'll be interesting where 2016 ends up in this data, due in May._


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## shouldaindex

Here's an interesting one:

*Using S&P 500 Total Returns Inflation Adjusted:*


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## fraa

shouldaindex said:


> Here's an interesting one:
> 
> *Using S&P 500 Total Returns Inflation Adjusted:*
> 
> View attachment 65854




Do you know what range of data they used to calculate that graph ?

i.e. are they using data going all the way back to the Great Depression ? or post WW2 ? etc


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## shouldaindex

1871 to 2014.


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## Junior

Loving all this data, good work shouldaindex.

My only concern is the amount of leverage in the system...is at unprecedented levels.  Does this mean more aggressive swings in either direction?  

Faster/deeper bear markets, and more aggressive bulls/recovery from lows?


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## shouldaindex

Personally no idea and I like it that way!

The less pre-conceived ideas and subjective judgements in my head the better.

You've probably read how I've split outcomes after a -20% Drawdown scenario into YES / NO to the question of 'Will there be a Recession / Financial Crisis Event?'.

That allows me to play 'time and information' and not overplay my actual economic knowledge, which isn't very much.


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## Smurf1976

Junior said:


> My only concern is the amount of leverage in the system...is at unprecedented levels.




I won't speculate on the details but if we're in unprecedented territory then it's wise to consider the possibility of an unprecedented outcome.

This is one, perhaps the only, reason why "it's different this time" might actually be true in this case since there is an actual, known difference when compared to otherwise comparable situations historically.


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## shouldaindex

There have been 8 years since 1980 that have started with a -10% drawdown in Q1.

7 went on to have +10% rises during the following periods:

Feb to April
Feb to April
March to May
March to May
March to April
April to July
June to August

5 of the 7 years ended in losses.
3 of the 7 went onto recession.

2016 is the 8th.

So, we're currently playing out the -10% drawdown in Q1, followed by the +10% gain in similar time periods as the 7 instances listed above.

The prototype I give the likeliest chance of occurring (which is against my intuition) is that there is no recession and we have in fact reached a bottom. This occurred in 1988 and 2003, where a downtrend started the year before, went through this -10%, +10%, then in the absence of recession or crisis type event, was able to gain and not fall back for the rest of the year to make a slight yearly gain.

If known information changes, then this will change, but I'd be surprised if the above doesn't turn out to be a very good guide.  

As mentioned, this goes against my intuition - that there will be further downside due to all the risk factors prevelent currently, but simplying the criteria and using past years as a prototype, the no recession for a downtrend started the previous year, forecasts pretty solid and in fact not very volatile growth for rest of the year.

If anything this is a good case of research vs instinct.  We'll see which was right.

Have added the chart I've used.  The scenario I've described is highlighted in pink:


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## shouldaindex

Just note we just achieved the expected +10% on the XAO (4706 to 5178) that has occurred in the previous 7 years when there was a -10% drawdown in Q1.

Hard to say what happens from here, as this is where the divergence starts to take hold based on macro outcomes.


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## shouldaindex

Probably have included this somewhere already, but this is the U.S Recession timeline for the past 100 years:

U.S Recessions:
2007
2001
1990
1981 
1980
1973
1969
1960
1958
1953
1948
1945
1937
1929
1926
1923
1920
1918 

Years in between Recessions (Starting from 1918): 2, 3, 3, 3, 8, 8, 3, 5, 5, 2, 9, 4, 7, 1, 9 ,11, 6 

We are currently at 9...


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## Smurf1976

So it seems that the US is due for a recession about now.

Food for thought....


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## Wysiwyg

Smurf1976 said:


> So it seems that the US is due for a recession about now.
> 
> Food for thought....




High oil price? - probably not with Iranian oil now available and the oil shale in America ready to enter the market when price is economically viable. Liquefied natural gas recently began exports from U.S. and Australia.

Inflation? - isn't evident yet with FOMC responses as guide

War? - North Korean regime defiant 

Unemployment rising? - low and stable, no signs yet

Left field? - ???????


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## ggkfc

interesting read
so pretty much 50/50 now


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## Wysiwyg

ggkfc said:


> interesting read
> so pretty much 50/50 now



Yes. It is always a matter of when and when is statistically quite varied.


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## DeepState

Oil and the Middle East were so much a part of the last 50 years' experience.

1973: OPEC
1980/81: OPEC / Volcker wash out
1990: Iraq 1
2001: Sep 11, Iraq/Afghanistan
2007: Nominally a credit event, but preceded by a very large spike in oil prices


But, no problem now.  The Middle East is an oasis of peace and, so, all is well.


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## Smurf1976

DeepState said:


> Oil and the Middle East were so much a part of the last 50 years' experience



2015 - oil price crash makes the US shale industry unprofitable and raises concerns about credit and other broad financial implications.


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## ggkfc

What do you guys think about the oil prices.. will it stay surpressed?

Increased production + US coming online


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## Smurf1976

ggkfc said:


> What do you guys think about the oil prices.. will it stay surpressed?
> 
> Increased production + US coming online




US production is now in decline once again. The tight oil ("shale") fields aren't profitable at the present price of oil, so there's no point drilling more (and the rig count has collapsed pretty spectacularly) whilst those fields already in production have a very high decline rate when compared to conventional oil fields.

Short term, anything could happen and quite likely will. Long term, either we're going to use less oil or the price is going to have to go up in order to make production profitable.


----------



## fraa

One thing to watch for is more positive news out of the US (see Citi Economic Suprise Index trend up). News good, USD up, commods/oil back down might be worth watching.

Re Fundies also read there is a cap on oil price as higher movement will bring shale producers back into play by opening wells again.


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## shouldaindex

Oil Price History:




What is interesting to me is look how far away the bottoms tend to be from the tops in the real money line.

EG. 1920 to 1931 / 1980 to 1998

It tends not to actually reach a bottom in real money (inflation adjusted) for 10-20 years as the macro cycles tend to be around 30 years.


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## shouldaindex

Some interesting data I found regarding the number of months between the First Fed Rate Hikes and next Recession since WW2 in the U.S.

I've put the year in (brackets), if you applied that number of months to this current cycle that started Dec 2015.

98 (2024)
84 (2023)
---
37 (2019)
36 (2018)
35 (2018)
33 (2018)
29 (2018)
---
19 (2017)
11 (2016)

I find it extremely difficult to believe we will avoid a recession (and a likely -30% drawdown) by end of decade.

A -30% drawdown has passed through every decade in Australia since WW1.


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## Craton

shouldaindex said:


> I find it extremely difficult to believe we will avoid a recession (and a likely -30% drawdown) by end of decade.
> 
> A -30% drawdown has passed through every decade in Australia since WW1.




Is that -30% from the highs or current levels?

TIA


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## shouldaindex

Yeah past peak (April 2015), so that -30% drawdown level would be around 4150.


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## shouldaindex

This is the XAO and an Oil Price ETF, you can see over the past 6 months, where oil goes the market goes, symbolised by matching peaks and troughs.  Oil Price movements are magnified by about a factor of 5 compared to the XAO.


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## shouldaindex

Done some more research on U.S Recessions and Market Tops and Bottoms.

This is the data on the S&P 500 since 1928:

How long before a recession starts, do we reach a market top (in months):

12, 12, 10, 8, 8, 6, 5, 3, 2, 0, 0, 0, 0, 0

How long before a recession ends, do we reach a market bottom (in months): 

10, 9, 8, 7, 6, 6, 6, 6, 4, 4, 4, 3, 3, 0

So you can see the market is forward looking up to a year.


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## odds-on

Excellent thread. Great reading.

Have you come across the Coppock Curve? If not, you might be interested in it.

https://en.wikipedia.org/wiki/Coppock_curve
http://www.investopedia.com/articles/active-trading/031814/using-coppock-curve-generate-stock-trade-signals.asp

I find it interesting that the economist discussed mourning with the church bishops. Basically, give it 12 to 14 months for people to get over a loss.

Cheers


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## shouldaindex

Hi,

I'm currently focused on Recession research rather than markets at the moment, as I think we're at the stage where that is the primary factor that has a high level probability of swinging the market outcome roughly 40-50% over the coming years (EG. XAO 4000 vs 6000).

Interesting Info:

- Since 1780, the longest time from the end of a U.S Recession to the start of the next U.S Recession is exactly 10 years.  This would mean a centuries old record would be broken if the U.S lasted exactly 3 more years (until April 2019) without a Recession.

- Since 1926, 2 out of 3 recessions have started in the 2nd half of the year.


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## GFD

odds-on said:


> Excellent thread. Great reading.
> 
> Have you come across the Coppock Curve? If not, you might be interested in it.
> 
> https://en.wikipedia.org/wiki/Coppock_curve
> http://www.investopedia.com/articles/active-trading/031814/using-coppock-curve-generate-stock-trade-signals.asp
> 
> I find it interesting that the economist discussed mourning with the church bishops. Basically, give it 12 to 14 months for people to get over a loss.
> 
> Cheers




Coppock is interesting and well worth back testing yourself on the charts to see how well it works as a leading indicator and the typical lag between the signal and markets change in direction. Looks bearish to me right now in US and here, but please try it yourself.


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## GFD

shouldaindex said:


> Hi,
> 
> I'm currently focused on Recession research rather than markets at the moment, as I think we're at the stage where that is the primary factor that has a high level probability of swinging the market outcome roughly 40-50% over the coming years (EG. XAO 4000 vs 6000).
> 
> Interesting Info:
> 
> - Since 1780, the longest time from the end of a U.S Recession to the start of the next U.S Recession is exactly 10 years.  This would mean a centuries old record would be broken if the U.S lasted exactly 3 more years (until April 2019) without a Recession.
> 
> - Since 1926, 2 out of 3 recessions have started in the 2nd half of the year.




If you look at the yield curves below what do you forecast?


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## GFD

Yield curves below.

While there havent been two consecutive quarters of negative GDP since '91 for a classic recession, the GFC and 2011 would be near enough for me. The current GDP growth is rather weak and trending in range which I would imagine won't change until after the US elections and interest rates start rising.

Also, the unemployment rate has peaked in Jan'15 supporting the view that the economy has peaked for the current cycle...so are we in a recession now? If this bear market continues, its a good leading indicator of economic malaise.

Thoughts?


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## shouldaindex

I've kept an eye on Yield Curve and Unemployment in the U.S, at this stage it's all fine.

I think there are some key cyclicals that don't look good at all for around 2018 though.

Just looking at some seasonal market data this decade, the May-November seasonal weakness, peak to trough drawdowns:

2010 April to June -16%
2011 April to September -24%
2012 May to May -10%
2013 May to June -11%
2014 August to October -9%
2015 April to September -17%

Also I remember the strong seasonal period of 30th November to 30th April has only lost 3 times in the past 25 years (or something very similar):

November 30th 2015 = 5218
Februrary 12th 2016 = 4762 (All but defeated)
April 14th 2016 = 5187 (The champ is back / winning total return inc. dividends)

Much rather have history on your side.


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## kitdoctor

Hi shouldaindex, really appreciate your thread.

As the end of the calendar year approaches do you have any further commentary?


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## Smurf1976

So where are we now after the "Trump rally"?

I'm thinking of the US and other markets as well as Australia here. A few points:

S&P 500 p/e ratio is the third highest since 1870. The only two periods that were higher were associated with the year 2000 "dot.com" bubble bursting and more recently with the Global Financial Crisis.

The Dow to US GDP ratio is very high by historic standards, being roughly the same as late 1999 and higher than the lead up to the GFC. 

The present US business cycle, time between recessions, is the third longest since WW2.

Australia's period since the last recession is now the second longest on record globally. If we go more than another year without a recession then we'll hold the global record.

US Federal Reserve is raising interest rates. Historically this has ended with either the share marker or the economy (or both) falling in a heap. The extent and duration of rate raising required to bring about that outcome has varied but in the vast majority of cases Fed raising rates = something goes "bang" sooner or later.

House prices in Australia would be another one to add to the list.

And so on. By most historic measures we seem to be at an extreme at the present time.

I'm not going to try and call a top in the market but my overall thought is that we're much closer to a major top than to a major bottom at this point. The overall market could still rise but whether it's later this year or next year that it changes direction I think we're much closer to the end than to the start of this post-GFC bull run.

Anyone else have any thoughts on where we're at right now?


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## MrChow

http://www.pionline.com/article/201...-next-recession-likely-to-start-in-march-2019

This is an economist I follow as he's statistics based, rather than projecting biases or narratives that you find a lot in articles online.

Based on length of expansions he has benchmarked March 2019.

I've seen research that suggests markets tend to peak at sometime in the 12 months prior, so if that all plays out we might have another 12-18 months of the Trump rally.


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## Bill M

kitdoctor said:


> Hi shouldaindex, really appreciate your thread.
> 
> As the end of the calendar year approaches do you have any further commentary?



I miss shouldaindex's posts, he hasn't been seen around for almost a year now. Come back shouldaindex, we miss ya.


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## craft

Smurf1976 said:


> The Dow to US GDP ratio is very high by historic standards, being roughly the same as late 1999 and higher than the lead up to the GFC.




But not as high as where it spent a fair bit of time in the 50's & 60's


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## craft

Smurf1976 said:


> So where are we now after the "Trump rally"?
> 
> I'm thinking of the US and other markets as well as Australia here. A few points:
> 
> S&P 500 p/e ratio is the third highest since 1870. The only two periods that were higher were associated with the year 2000 "dot.com" bubble bursting and more recently with the Global Financial Crisis.
> 
> The Dow to US GDP ratio is very high by historic standards, being roughly the same as late 1999 and higher than the lead up to the GFC.
> 
> The present US business cycle, time between recessions, is the third longest since WW2.
> 
> Australia's period since the last recession is now the second longest on record globally. If we go more than another year without a recession then we'll hold the global record.
> 
> US Federal Reserve is raising interest rates. Historically this has ended with either the share marker or the economy (or both) falling in a heap. The extent and duration of rate raising required to bring about that outcome has varied but in the vast majority of cases Fed raising rates = something goes "bang" sooner or later.
> 
> House prices in Australia would be another one to add to the list.
> 
> And so on. By most historic measures we seem to be at an extreme at the present time.
> 
> I'm not going to try and call a top in the market but my overall thought is that we're much closer to a major top than to a major bottom at this point. The overall market could still rise but whether it's later this year or next year that it changes direction I think we're much closer to the end than to the start of this post-GFC bull run.
> 
> Anyone else have any thoughts on where we're at right now?




My Fairly uninformed opinion about USA is similar to what you expressed - Overvalued but I don't have the data to confirm or rebuke my opinion, so its a worthless, however I'm stuck with it as holding no opinion seems to be really difficult.

In relation to Australia, I have just been updating my data and despite a 'gut' opinion which is more negative - the data sway me to being a lot more positive.

If it wasn't for housing valuations I would be very positive - So I will go with cautiously positive as housing valuations and the debt associated could (but not necessarily) throw a spanner in the works for a decade or so.

The conundrum for me with housing is if it stays elevated then Australia has created an intergenerational class system based on home ownership. Whether this development stands long term (I hope it doesn't) largely falls into the realm of politics and about that I wouldn't have a clue.

Some of the data driving the optimism is contained in this thread.
https://aussiestockforums.com/threads/xao-bull.30571/


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## craft

Bill M said:


> I miss shouldaindex's posts, he hasn't been seen around for almost a year now. Come back shouldaindex, we miss ya.



By my quick reckoning XAO has now been in drawdown for 112 Months which is an all time record for the Aus index.

Miss Shoulda who woulda put it in perspective of other historical drawdown durations endured both on the XAO and in other countries.

Hope he pops back up some time.


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## skc

Smurf1976 said:


> US Federal Reserve is raising interest rates. Historically this has ended with either the share marker or the economy (or both) falling in a heap. The extent and duration of rate raising required to bring about that outcome has varied but in the vast majority of cases Fed raising rates = something goes "bang" sooner or later.
> 
> Anyone else have any thoughts on where we're at right now?




Historically the share market does really well at the _beginning _of the rate rise cycle. So it wouldn't surprise me to see continued strength for 1-2 years. But then... our current starting point is like no other times in history. We never had the negative rate or the level of leverage like we have now. So may be a relatively small and slow pace of change in rate will have a quicker and larger impact than history suggests.

I often look back at "history" and found history to be so inadequate. The history of major markets and global capitalism is really really young. Just because something happened a few times during this early development stage, doesn't mean it is guaranteed to happen again in the future. It's a bit like someone charting the height of a 12 year old child and projecting that she will be 2.6m tall by age 30. We don't know what "stop growing" means in the capitalist world yet... I think I will see it in my lifetime (with 40-50 years to go), and history might tell us whether we are at a major major high or not.


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## Smurf1976

craft said:


> But not as high as where it spent a fair bit of time in the 50's & 60's




Agreed although it went up a bit further after that chart to be about the same as it was immediately prior to the GFC and higher than any time except the 50's and 60's as you mention. Even then, it would only take a 20% or so rise in the market to reach those 50's and 60's levels.

It might not even matter, but whenever I see a measure of something at an extreme value I start to ponder what happens next. Be it something financial or even with a technical / engineering system, extreme readings tend to mean one of two things. Either it's about to reverse or you really are operating in uncharted territory with the associated uncertainty as to what that may or may not result in.

So at the risk of using a government anti-terrorism slogan, I'm alert but not (yet) alarmed. Being at about the same level as immediately prior to the GFC is the bit that worries me.


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