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13 February 2013

MARTIN PRING:
Pring model says sell bonds and buy commodities

Martin Pring, renowned technical analyst and chairman of Pring Turner Capital, believes we are at the start of an inflationary cycle. In an interview with Ron William of the Swiss Association of Market Technicians, he says we have just entered Phase IV of his ‘Six Business Cycle Stages’, which would mean that, "bond prices have peaked, stock prices are still going up, but within the terminal phases of the cyclical bull market, and commodity prices are just beginning their cyclical [bull] phase."

The Pring Turner Six Business Cycle Stages is the foundation of an asset allocation method that is now tracked by the Dow Jones Pring US Business Cycle Index (DJPRING) and which has significantly outperformed both the S&P 500 and an equally-weighted hypothetical benchmark of bonds, stocks and commodities since its inception in 2006.

The model defines a full business cycle in the US economy as the sum of two periods – expansion and recession – which according to Pring takes approximately four to five years to complete. The theory assumes that each of the three major markets – bonds, stocks and commodities – would normally have two turning points during each cycle: a top and a bottom. Therefore a typical cycle would normally have a total of six turning points. Pring defines these turning points as ‘Six Stages’:

Stage 1 – bonds bottom out
Stage 2 – stocks bottom out
Stage 3 – commodities bottom out
Stage 4 – bonds peak
Stage 5 – stocks peak
Stage 6 – commodities peak

See Figure 1. Pring’s Six Business Cycle Stages

Pring uses a mixture of fundamental and technical indicators to determine individual scores for each of the three markets. The status of each market tells us where we are in the chronology. For example, when all three are bullish that tells us we are in Stage III. Once the current ‘stage’ of the business cycle is identified, re-allocation is made amongst a universe of 13 ETFs (comprising one bond ETF, one commodity ETF and 11 equity ETFs) and a cash component (3m US T Bills). Equity allocation is itself divided among 11 different Dow Jones equity sector ETFs, according to calculations that take account of the defensiveness and inflation-sensitivity required.

In idealized form, the stages should follow in sequential order, but this isn’t always reflected in reality. Earlier this month, Pring announced that the model had skipped from Stage II to Stage IV at the end of January. “That means that the current environment is negative for bonds but positive for the other two asset classes. The individual Stage IV’s in the last 50-years have returned a negative 8.3% for bonds, and plus 9.4% and 12.8% for stocks and commodities respectively.” Stocks consistently gain in Stage IV but the environment favours stocks that can thrive in an increasingly inflationary environment. According to the model Stage IV allocation is 80% in equities and 20% in commodities (compared to the previous Stage II which was 80% in equities and 20% in bonds).

REFERENCES
Martin Pring interview with Ron William, SAMT. Read interview >>;
"What’s the Best Asset Allocation When the Business Cycle Moves to Stage IV?" by Martin Pring. Read article >>
Dow Jones Pring US Business Cycle Index. Brochure >> / White Paper >>

Market Anomalies Point to Bullish Outlook for US Stocks

January’s stock market anomalies have suggested a particularly bullish outlook for 2013 according to a report from Jeff Hirsch at the Stock Trader’s Almanac. The Santa Claus rally, January Barometer and January Effect state the following:

Santa Claus Rally: The market will rally in the last 5 days of December and first 3 days of January

January Effect: If the first 5 days end higher, so will the year as a whole

January Barometer: If January ends higher, so will the year as a whole

While it is not unusual for one or two anomalies to be positive in any given year, it is much rarer for all three anomalies to point in the same direction simultaneously. For the S&P500 this year we have had a Santa Claus Rally up 2%, a January Effect up 2.2% and a January Barometer up 2.5%. When all three are positive the outlook for stocks for the rest of the year is particularly bullish. Since 1950, all three indicators have been positive 27 times and full-year gains followed 25 times. Losses occurred only in 1966 and 2011. Excluding January’s performance, the last eleven months of these years were up 24 times and 11-month gains averaged 12.3%.

One Third of US Equity Funds Use Technical Analysis

A new study by Albany University in New York has shown that of 10,000 US and international/global equity and balanced portfolio managers, around one third use some form of technical analysis. Of these, international/global balanced fund managers use it the most and US balanced the least.

Figure 1 below shows how portfolios managed using technical analysis slightly outperformed those that do not when tracking the cumulative value of $1 invested since 1993. On the basis of benchmark adjusted returns, managers who consider technical analysis to be “very important” outperform those who do not use it by an average of 19 basis points per month. The results also show that the the skewness of performance measures generally tends to be higher for portfolios that use technical analysis with extremely high skewness and kurtosis figures for funds whose managers consider technical analysis to be “very important.”

The individual fund managers surveyed split their investment strategy decision making process into three distinct categories: fundamental, quantitative/computer screened and technical analysis-based. Although the most common investment methods used were named as fundamental or quantitative/computer screening strategies, David Smith, director of the Centre for Institutional Investment Management at the University observed, “Many of the quants/computer strategies themselves sound a lot like technical analysis”. Read more >>

Click on thumbnail below for Figure 1

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