Article first published on Advisor Perspectives August 9, 2012
In my article The Ultimate Death Cross – False Harbinger of Doom I showed that the spread between the 50-month moving average (MA) and the 200-month MA of the S&P will form a trough before the end of this year, irrespective of the level of the S&P over the next few months. This event provides a positive outlook for the stock market and could herald a new bull market to 2025.
Most of us are not familiar with Terrence Laundry’s T-Theory, which is a method of analyzing general investment trends using a time symmetry property. It basically states that the duration over which investors can obtain “superior equity returns” will always be equal to the previous time period in which returns were subnormal. The practical purpose of the theory is to anticipate the runs of “superior returns”.
The left side of the T represents the period when investors are shunning equities and putting their assets into money-market-fund-like reserve – the “Cash Buildup Phase”. The longer this period lasts, the more money is transferred from the stock market to the bond market and cash. As a consequence long cash buildup periods provide the potential for longer bull markets for stocks (the right side of the T), once the tide turns.
T-Theory is very useful to estimate the time period of any advance, but the initial move can be missed. The main problem is finding the buy point – the location of the center post of the T.
This is where the ultimate death cross’ moving averages come in handy. Figure 1 shows the S&P composite together with the spread of the moving averages. The inception of the four major bull markets (since 1880) was always indicated when the spread formed a trough after periods of subnormal returns lasting more than 10 years and when the level of the spread was close to, or below zero. (The 1936 trough does not count because the preceding cash buildup period was too short.)
The next trough of the spread will occur at the end of this year, which would make the preceding cash buildup phase about 12 years long. Thus according to the T-Theory we can expect a 12 year long bull market for equities to start at the beginning of 2013.
According to Terrence the greatest profit opportunities come at the end of the longer cash buildups and one must manage ones affairs to be mentally ready, and financially healthy so as to be 100% invested at this key juncture.
Note: Values of the spread were increased by 3.3 to make them all positive. Negative values can’t be plotted on a log scale.
Hallo Georg, even though the article is not that recent I do have a question, since I have just approached stock market. Based on this metric and hence the graph, an investor should have started investing in 10/2012 when the bull market started, but at that point the S&P was 1412. If an investor would have started when the Great recession officially ended (06/2020) and the S&P was 919, then the actual return as per today, would have been higher. And yes, looking backward is easy to say 2009, but I think that using other ratios, like the difference between the CAPE ratio and the CAPE-MA35, you would have in hands the information that in 2009 (in March based on this ratio) the recession was ended. So I do not understand why to wait until 10/2012 and not start in 2009 when the recession ended. What am I missing? Thanks
This article was published in Aug-2012 when the majority of the financial commentators were predicting another recession.
https://www.advisorperspectives.com/articles/2012/02/21/evaluating-popular-recession-indicators
Of course it would have been better to enter the stock market in March 2009, but there is no bell ringing when the market trough has been reached. We only developed the CAPE-MA35 method early in 2019, so we did not have it in 2009.