Newbie Lessons - All your questions answered

[Sir Osisofliver]

I had some time free up which is good for you as I can post a bit more...

So the clock is a general tool and it is the events on the outside of the clock that determine where you are in terms of the clock. I'm going to focus on the events at the start (bottom) and end (peak) of the share market cycle, rather than go through a full cycle, because I think that will be the limit of the time I can give and then open it up to questions.

Start of the Share Market Cycle

What is the trigger for the start of the new share cycle? As we approach the six o'clock position we've already gone through the optimal buying window for both Residential Property and Fixed interest. Interest rates, which started high, have been lowered by the Reserve Bank under their charter to stimulate the economy. This time around the guvmint also handed out great wads of cash in the form of stimulus packages to...you guessed it, stimulate the economy from the depths of recession.

The technical definition of a recession is two consecutive quarters of negative GDP. So this is one of the signals that you will use to determine your position on the clock...are we in a technical recesssion. (Note that the release of these figures is three months after the event so the lag can catch you if you are not aware of it.)

The other main indicator of the start of the new cycle is what is happening in the unemployment cycle. (See the image attached below).



When we look at the chart above you can see how in a general sense it follows a sine wave pattern...IE it's cyclical. You'll also hopefully note the correlation that exists between the peak of that cycle and the bottom of the share market that occured in March 2009. Yes there is a lag effect..it's not a perfect correlation as the unemployment cycle lags the start of the share market cycle, but the peak of the unemployment cycle is significant evidence that we are at the beginning of the new share cycle.

Let me explain what is happening and what drives our economy out of the correction. The guvmint draws back a vast amount of our overseas reserves whith which to employ capital expediture projects (and give free money away making Kevin Rudd everyone's best friend). Reserve Bank has lowered interest rates, making it cheaper and easier for business to do business. HOUSEHOLDERS however at this point in the cycle, are counting every penny. Businesses have been laying off staff. They have to if they want to survive in the corrective environment. The peak of unemployment however is when the company starts re-hiring. All the existing employees breath a sigh of relief because they now feel more secure in their jobs. All those expenses that they have been putting off to put some money away just in case now get paid. The car gets a much needed service, the kids get new school shoes, hubby takes the wife out to dinner etc etc etc and it's this activity and increase in consumer confidence that has a significant effect in driving us out of the recession.

Because these expenses build up and all occur within a very short period of time, this leads share prices to have a bounce at the immediate bottom, (the tipping point if you will) around people being fired and people being hired. See the picture of the All Ords below and note the rapid rise in share prices that occured after the tipping point. Now look at the Unemployment cycle picture. During that initial very profitable rise in share prices, the unemployment cycle only started to improve at the end of that run. Thats the correlated yet lagging effect I was talking about. So your trigger for the start of the new bull market run, is when the unemployment cycle reaches peak, NOT, when it starts to improve.



This is golden time for long-term and savvy investors. Yields are HUGE on some really great shares that have had the **** kicked out of them. Banks with near 10% yield? I'll have me some of that thanks. So Yields (particularly Aggregate yield or EPS) can be used as an indicator to tell whether you are near the bottom of the market. This is an expression of the cyclical market. Brokers are yammering on about great yield and technicals as if they are the be all and end of of analysis. Stochastic this, MACD that.

When the Reserve Bank starts to increase interest rates again (guess where we are in terms of the interest rate cycle), you can be assured that the beginning of the new market has occurred. If you look at one of the clock diagrams in the previous post...you'll see rising share prices as one of the indicators I was talking about. Hey look another cycle

A bit later and we start to see commodity prices begin to improve, because the stockpiles that were created when the market corrected, have now been eaten into by the increase in demand. Queue another indicator of improvement and the movement of the clock away from the 6 - 7 o'clock position. Good Grief yet another cycle within the broader cycle.

It's at this time that the Reserve Bank starts to rebuild our overseas reserves, and will continue to raise rates in order to get good purchasing against oversea's currencies. Heaven's yet another cycle within the broader cycle.

It's around this time (say about 8-9 o'clock) that Banks and lending institutions start to free up the credit market. They turn the faucet off in a BIG way as we approach the recession because they can't justify lending money to any tom, dick and harry because heads have rolled because of the stupidity they had when lending to unemployed people to buy houses. (Ok this wasn't us...it was the U.S. ) and look another cycle.

Mid Cycle

Mid cycle we've reached the old high of the market. Straight away you should be looking at the All Ords and saying OK we are not yet at 9 o'clock. we are between six and nine, but probably after seven because we've had that initial rise in share prices, and an improvement in commodity prices, so we're somewhere between seven and eight. It's this point where the clock tends to slow down. We can sit at this point for a long while whilst we wait for the Synchronisation in Global Economies to occur to lead us to those ecstatic peaks.

End of the cycle (Peak of the market)
Banks are giving credit away like's it's water with a use-by date. Commodities have razor thin stockpiles and prices are jumping like a cockroach on a hot barbeque. Share price yields are looking THIN and brokers are saying...Look its all about the fundamentals.

OK I have to stop again. I need to talk some more about what to look for at the end of the cycle, but I'll open this up to comments now. Be aware I have OBVIOUSLY pitched this at a newbie level. I'm happy to go into greater detail, but don't want to derail the thread.

Cheers

Sir O

 

[KurwaJegoMac]

Thats a really fascinating piece, thank you very much for sharing.

I'm very new to this but i'd like to hazard a guess that we are somewhere around 8-9?

Interest rates have been ever so slowly on the rise and consumption of commodities appears to be on the increase (potentially leading to stockpiles being used up as you mentioned). We didnt really see much of the 6 o'clock occur - house prices barely budged but i take it that with the clock representation a stage within the cycle can occur very rapidly and therefore can appear to 'jump' a category?

What are your thoughts? Am i on the right track?

 

[Sir Osisofliver]

Thats a really fascinating piece, thank you very much for sharing.

I'm very new to this but i'd like to hazard a guess that we are somewhere around 8-9?

Interest rates have been ever so slowly on the rise and consumption of commodities appears to be on the increase (potentially leading to stockpiles being used up as you mentioned). We didnt really see much of the 6 o'clock occur - house prices barely budged but i take it that with the clock representation a stage within the cycle can occur very rapidly and therefore can appear to 'jump' a category?

What are your thoughts? Am i on the right track?

Nine o'clock (or there abouts) is when the market reaches the old high, so we aren't there yet by a long stretch. I'd have to say we are closer to eight than seven at the moment.

I'm focussing on the share market rather than the broader economy itself. If you want to look for the start of the Property market...it occurs very near the 12 o'clock position, not the six o'clock position. It also tends to start at the highest population density areas before moving into less populated areas. So depending on where you are looking it could have occurred (and is still occuring as it moves away from higher density areas) a couple of years ago.

Clear?

Cheers

Sir O

 

[KurwaJegoMac]

Nine o'clock (or there abouts) is when the market reaches the old high, so we aren't there yet by a long stretch. I'd have to say we are closer to eight than seven at the moment.

I'm focussing on the share market rather than the broader economy itself. If you want to look for the start of the Property market...it occurs very near the 12 o'clock position, not the six o'clock position. It also tends to start at the highest population density areas before moving into less populated areas. So depending on where you are looking it could have occurred (and is still occuring as it moves away from higher density areas) a couple of years ago.

Clear?

Cheers

Sir O

Clear thanks.

Regarding 10 o'clock - what does it mean by rising overseas reserves? Is that reserves of precious commodities?

 

[burglar]

Clear? ...

Did the GFC blend in with the cycles?
i.e. was it driven or timed by the cycles.
I perceive we are in the turbulent wake of the GFC still.
Is that perception correct?

Would you include Volatility as an indicator within cycles?

Newbies are asking where are they going wrong,
especially those who joined the equities market after the GFC.

burglar

 

[Sir Osisofliver]

Clear thanks.

Regarding 10 o'clock - what does it mean by rising overseas reserves? Is that reserves of precious commodities?

No. A more common usage that is searchable is foreign reserves. IE reserves that are external or foreign to the economy. In the case of the cycle of reserves what we are talking about is the reserves of currency and bonds that are purchased by the Reserve Bank.

http://www.businessdictionary.com/definition/foreign-reserve.html

Obviously it is a careful balancing act for the Reserve Bank. They want to buy these overseas reserves at rates that are beneficial (IE when our dollar is worth more than the currency we purchase), but to do so they must raise interest rates (because of the effect on our currency price), without influencing inflation too much.

Hope that helps.

Cheers

Sir O

 

[Sir Osisofliver]

Did the GFC blend in with the cycles?
i.e. was it driven or timed by the cycles.

GFC was nothing new. When the bubble burst it wasn't unique in terms of the sequence of events I spoke about. To ask whether the cycles drive the event, or the events drive the cycles is a bit of a chicken and egg question. They happen concurrently, the trick is to be aware enough about what is happening that when these events occur that you can use them as roadsigns to tell you what is going to happen next.

I perceive we are in the turbulent wake of the GFC still.
Is that perception correct?

Look, I'd have to say that for a period of time after a major correction (aside from that initial spike in prices that I have already discussed) it is quite common to see a period of corrective pricing patterns emerge. Because of the nature of these major corrections (And if I was to go into depth here I'd discuss chaos versus Standard Deviation as a measure of risk and its relationship to multi economy synchronisation), it takes a period of time for these correlations to synchronise again.

You therefore tend to see a period of sideways momentum in the share market, where the economy is still heavily influenced by other economies that are yet to find their direction, before the next leg up. Anyone that purchased during the ideal buying window has the luxury of being able to hang on and get a level of comfort from the high yields that they achieved buying in that window. Anyone that waits for significant signs of recovery tends to find themselevs having to ride around in the wishy washy period of the market at it trends sideways. Same thing happened after the '87 crash and it is history repeating itself... an expression of the cyclical nature of the economy.

Would you include Volatility as an indicator within cycles?

No, but if you find a high correlation and it works for you don't let that stop you.

Newbies are asking where are they going wrong,
especially those who joined the equities market after the GFC.

burglar

It's too broad a statement Burglar. We're prior to the next leg up (back to the old high of the market) at this stage, but it's coming fairly shortly. Old high of the market is where we usually see a mid cycle corrective pattern and then leg up to new highs, as resistance changes to support.

For anyone trading right now, the same rules apply as trading in any other environment, it's just been a little more challenging of late.

Cheers

Sir O

 

[KurwaJegoMac]

No. A more common usage that is searchable is foreign reserves. IE reserves that are external or foreign to the economy. In the case of the cycle of reserves what we are talking about is the reserves of currency and bonds that are purchased by the Reserve Bank.

http://www.businessdictionary.com/definition/foreign-reserve.html

Obviously it is a careful balancing act for the Reserve Bank. They want to buy these overseas reserves at rates that are beneficial (IE when our dollar is worth more than the currency we purchase), but to do so they must raise interest rates (because of the effect on our currency price), without influencing inflation too much.

Hope that helps.

Cheers

Sir O

Thanks Sir O.

Are there any books you might recommend on general economics? You write quite well in a way easy for a beginner to understand - i'd love to hear/read more whether it be from yourself or from material you've found to be helpful in your own understanding.

 

[Sir Osisofliver]

Thanks Sir O.

Are there any books you might recommend on general economics? You write quite well in a way easy for a beginner to understand - i'd love to hear/read more whether it be from yourself or from material you've found to be helpful in your own understanding.

Unfortunately there isn't a lot of text around the subject of cycle analysis, synchronisation and the like. The reasons for this is that much of the academia is driven out of Wall Street and the major economies...and they tend to be very self orientated. It also tends to be very centered around a specific asset class. eg share market or property, not both. I've seen some research reports around cycle analysis specifically to do with the commercial property asset class, but nothing that takes a more holistic view.

Any general macro-economics text will give you a grounding about the mechanisms involved between interest rates/inflation/currency cycles but I haven't seen any that incorporate the other correlated cycles of Unemployment, commodity, property, shares etc and unify a theory around it.

Feel free to search though and let me know if you find anything interesting.

Cheers

Sir O

 

[burglar]

... it's just been a little more challenging of late.

Cheers

Sir O

Really appreciate your essay!
And your reply!

Challenging, yes, I found it to be so!

You should publish, call it:
"The Golden Toilet Seat"

Milk in the fridge, ...
petrol in the car, ...
I'm doin' alright in this country!!

 

[Sir Osisofliver]

End of the cycle (Peak of the market)
Banks are giving credit away like's it's water with a use-by date. Commodities have razor thin stockpiles and prices are jumping like a cockroach on a hot barbeque. Share price yields are looking THIN and brokers are saying...Look its all about the fundamentals.

OK so what do I look for to tell me that the peak of the market is approaching? What we need in this situation are indicators that are devoid of spin. Looking at the majority of media commentary tends to be next to useless as the media is reactive not proactive, and it can be challenging to wade through all the misinformation that abounds at that point of the cycle.

Yield curves
I hope everyone knows what a yield curve is. This is a simple yet great habit to get into to look at the yield curves that exist at various points of the cycle. It's great because it isn't subject to misinformation and relatively easy to understand. Essentially what a yield curve is, is an expression of the control mechanism used by the Reserve Bank by setting interest rates, combined with a perception of the market.

All the information that you need to build a Yield Curve is available from the RBA website (the statistics area). What you need is the Reserve Bank Cash Rate (Currently 4.75%), and then a selection of Bond Rates (A simple yield curve would just use 3 and 10 yr bond rates) The three year bond rate at present is 5.05% and ten 5.33%



and this is what it looks like. This is referred to as a normal or positive yield curve. What occurs however prior to a market correction is that the yield curve becomes an INVERSE or NEGATIVE yield curve.

(I attempted to laod up the RBA excel spreadsheets which contain this data but you'll have to trust me and/or go look for them yourselves.

If you look at the data around August 2007 this what you get...



and as you can see the inverse yield curve is telling us that the market was in for some very difficult times ahead.

The important thing to remember with yiled curves is the steeper the angle of the curve, the more severe the correction, or the more bouyant the recovery.

If you want to learn more about the theory behind yield curves you can look online for the following:-

1. The "expectations theory" states that expectations of rising short-term interest rates are what create a positive yield curve (and vice versa).

2. The "liquidity preference hypothesis" states that investors always prefer the higher liquidity of short-term debt and therefore any deviance from a positive yield curve will only prove to be a temporary phenomenon.

3. The "segmented market hypothesis" states that different investors confine themselves to certain maturity segments, making the yield curve a reflection of prevailing investment policies.

In the 1990s, Duke University professor Campbell Harvey found that inverted yield curves have preceded the last five U.S. recessions... and look, with all of the above you don't have someone yammering at you about the supercycle that China will create, that the Market is the strongest asset class, that its time in the market, not timing in the market and all that waffle. So on the face of it yield curves seem easy to understand and use right?


HOMEWORK

Go to the RBA website and locate the spreadsheets I was talking about.

Go create yield curve graphs for the following dates.

1 May 1995
1 July 1998
18th September 2001
17th of June 2002
30th May 2005
21st September 2006
19th January 2007

Can you find a negative yield curve in the 2002-2003 financial year?

The reason why I want you to do this is so that you can seet hat yield curves whilst useful need a) experience to interpret what you are looking at, and b) need other confirming indicators....

Which will be next lesson.


Cheers

Sir O

 

[kingcarmleo]

Awesome work Sir O, keep em coming mate

 

[ferretbiter]

Thanks for all the bullet proof newbie advice Sir.o, this thread is a godsend for any beginner investor.

 

[Sir Osisofliver]

Hi All,

Time pressures are starting to impact me. I was hoping to get time to add some more confirming factors to recognise the end of the cycle but won't have time to devote to a large piece.

Ergo....you get to choose the next piece...

Dividend yields as a confirming factor

or

Fractal Intercepts and Market Geometry?


Cheers

Sir O

 

[jaystar86]

I vote dividend yields... mainy because the other option reminds me more of drawing then actual market activity...

 

[jaystar86]

wow... just finished pouring through this thread.

I am really really impressed. I absolutely agree with the bit about the cycles. As I am a (strongly) left brained individual are you aware of any resources that can back up/justify the argument you have made? (Definately not disagreeing with it, in fact experience and common sense suggests it is spot on. Would just like to deepen my own knowledge about the issue)

regards,

J

 

[Sir Osisofliver]

wow... just finished pouring through this thread.

I am really really impressed. I absolutely agree with the bit about the cycles. As I am a (strongly) left brained individual are you aware of any resources that can back up/justify the argument you have made? (Definately not disagreeing with it, in fact experience and common sense suggests it is spot on. Would just like to deepen my own knowledge about the issue)

regards,

J

Hi Jaystar,

I did put some hints in the thread about where you can locate supporting information. You can look for Investment clock or economic clock to get a bit of history in the theory. You can also look at the market itself for confirmation. Amongst my postings on this forum you may also see a table I've put together which shows the start and finish of the economic cycles occuring since 1937 in the Australian Market. It's around somewhere, I'd attach it again but I think it was on my old comp and I'll have to rebuild it.

As I said any economic textbook will give you the linkages and mechanisms between interest rates, inflation, exchange rates, but there is no text I have seen that details out the correlation between the other components to the economic cycle. Probably because the cycles are not nice, neat and discrete. They are chaotic in nature and what I've highlighted is a general trend that occurs when these cycles align. It's going to require an academic with mad skillz in chaotic math to identify the chaotic influences and correlations of all these cycles.

You can look at the RBA website if you want more information around the effect of raising or lowering interest rates with regards to the RBA's charter. Bottom line is that actual data (the actions of the market) have proven to me time and again that this is what is happening. If you want to research it, use past corrections and bull runs in the market and compare it to what I have said.

Cheers

Sir O

P.S. Does everyone want Dividend yields as confirming factors rather than fractal intercepts?

 

[KurwaJegoMac]

P.S. Does everyone want Dividend yields as confirming factors rather than fractal intercepts?

I'd like to second Dividend yields please.

wow... just finished pouring through this thread.

I am really really impressed. I absolutely agree with the bit about the cycles. As I am a (strongly) left brained individual are you aware of any resources that can back up/justify the argument you have made? (Definately not disagreeing with it, in fact experience and common sense suggests it is spot on. Would just like to deepen my own knowledge about the issue)

regards,

J

I've picked up a book about the economic cycle that deals with the concepts that Sir O has presented. I haven't had a chance to read through it yet - but at a quick glance it's on par with what he's written. I'll have a read of it and post up on here if it's worth getting.

 

[jaystar86]

Sounds good, Kurwa.

And thanks, Sir O. I'l research those hints/tips. Thought it might be the way you suggested that it is... Academia rarely focusses on the important things...

J

 

[burglar]

If it's on the sellers side its called an "overhang"

Sizable block of securities or commodities contracts that, if released on the market, would put downward pressure on prices; prohibits buying activity that would otherwise translate into upward price movement.,

But what is the correct term if it is on the buyers' side?