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Macro Cycles 2014-2018

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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.
 
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?
 
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!
 
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.
 
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.
 
Have I read you incorrectly?



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?
 
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.
 


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.
 
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!
Click to expand...

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

 
-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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