Vanguard FTSE 100 Ucits ETF (G1XE)

 

Trading our way to FTSE 45,000

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Kerry Balenthiran, an expert in market cycles, is trading his way to 2018, when he predicts the start of a 17.6 year golden age for buy and hold investors.

Judging by the state of commodity prices, Kerry Balenthiran’s prediction that the bull market in commodities would end in 2015 seems prescient. Judging by market corrections in 2015 and early this year, his prediction that it would provoke the “final crisis” of a 17.6 year bear market in shares could be coming true (see Part 1: The next bear market low is on 22 May).

But quiz Balenthiran about the detail, and the apparent precision in his cycle fades a little. His book, published in 2013, breaks the long 17.6 year cycle down into 2.2 year and 4.4 year subcycles, but only gives the year of turning points and ignores some of the biggest crashes of recent times, like 1990 and 1998, because they reversed so suddenly, making them insignificant in practice even though they were dramatic at the time.

The book billed the cycle as a guide to sentiment rather than a trading system giving precise signals. It advocated building stakes in growth companies in the five years to 2018, despite the volatility of the dog-days of the bear market. That way investors would be ready for the ensuing bull market. During this intermediate period after the lowest low of the bear market in 2009 but before the bull market had taken hold, Balenthiran would be guided by the shorter 2.2 year cycles to reduce his exposure to shares in years in which they anticipated lows. He would be cautious and not use leverage.

Essentially, Balenthiran was gearing up for a massive buy and hold trade.

In practice Balenthiran the trader has been less patient. He’s started to track even shorter cycles, a 17.6 week cycle, he’s identified back to 2009, and a 14-15 day cycle. He’s following these cycles, gut extinct, and the confirmatory power of subsequent price movements to trade the FTSE 100 using a Vanguard index tracking exchange traded fund (VUKE). If the cycles predict a market move, but the moving average of the share price shows it didn’t happen, he’s not afraid to reverse the trade.

It’s very early days, but Balenthiran says he’s missing the bumps and not the lumps. In 2015 he made a 6% return (including dividends). The total return of the FTSE 100 was -1%.

The day after I meet Balenthiran in Windsor, we exchange emails. He mentions: “The recent positive period finishes tomorrow [today - Friday 19]. As you can see it [The FTSE 100] is up 150 odd points in the most recent period ~2.5% which is not bad for 2 weeks.”

Balenthiran’s fascination with ever smaller increments of similar sequences of numbers, reminiscent of Fibonacci and Pythagoras, is undiminished the smaller the durations those numbers represent. In some ways, though, I wish he hadn’t mentioned shorter cycles, which are also documented in an ad-hoc fashion on his blog. Discussing the long cycles that describe, and perhaps predict so much of what will happen in the economy and the stockmarket has been thrilling, but, for a business oriented investor like me, exploring the other end of the scale, predicting index moves of a few percent in a few weeks, is less interesting and I wonder how successful such predictions will be over the long term.

We may not find out. Once this bear market is over (in 2018, according to the cycle), Balenthiran says he will probably revert to investing in individual shares again. If everything is going up, he says, there should be big trends to follow. He may also experiment with contracts for difference, using leverage to improve returns, because markets are more predictable and less volatile in bull markets.

He believes we won’t see the 2009 low again. The absolute lows of previous bear markets happened early on and Balenthiran doubts the current fear consuming traders, a second serious banking crisis, will happen. Using technical analysis, he reckons the low in May will be around 5,300, but that, like 2009, won’t be the start of the next bull market. It will start when we’ve said goodbye to the volatile but sideways movement of the previous 17 years, and leave the 6,000’s, the level the FTSE has bounced around, behind forever in 2018.

Balenthrian admits its an even more tendentious calculation than his Dow 100,000 prediction, which was based on the average rise of three previous bull markets, but the FTSE could get to 45,000 by 2035, roughly seven times its dot.com peak, based on the rise during the preceding 17.6 year bull market.

Usually predictions of massive gains in the index are made at the height of optimism, when bull markets are raging and about to turn, not at the end of long periods of stagnation.

Balenthiran knows too much about cycles for that, though.

Comments

Did he predict the bull market in commodities would end in 2015?
Wow.
Look at the chart:
http://www.bloomberg.com/quote/BCOM:IND
Only 4 years off.
Hopeless Kerry.

Richard and I discussed how oil peaked in 2008 and that gold and most commodities peaked in 2011. As you are aware, my book is about changes in sentiment specifically related to the stock market and the resultant peaks and troughs in price. In it I talk about how the deflating commodities bubble will eventually fuel the next secular stock bull market:

“Although not shown in the Balenthiran Cycle, I am forecasting a peak of the secular commodities bull market in 2015. I believe that this is likely to cause the final crisis in the stock bear market and the subsequently deflating commodities bull market will form the basis of the new secular stock bull market.”

Whilst most miners and oil explorers share prices peaked in 2011 along with the underlying commodity, investor sentiment towards miners and oil explorers drastically changed in 2015 and my Dow Jones Industrial Average and FTSE 100 top prediction of 15th May 2015 worked out very well as a place to sell.

I am happy to accept I was wrong about the commodities top being in 2015, but the fallout accelerated in 2015 and continues to negatively impact stock markets, and the FTSE 100 in particular. I stand by my claim that “the subsequently deflating commodities bull market will form the basis of the new secular stock bull market”.

People have to make their own investment decisions that suit their attitude to risk. I don’t trade commodities as they are far too volatile. I also don’t short as having an open short position makes me feel uneasy. I only trade UK stocks to remove the FX volatility and I am not a big fan of leverage either (although I have opened a CFD account). Therefore what I am left with is a SIPP with a long only, unleveraged UK focussed investing strategy, when being in cash to avoid big correction is a conscious investment decision. This is where my 6% gain came from.

However I don’t have a time machine or a crystal ball and do not know what the future will bring (as I am sure you have seen I make very clear in my book). I am however using cycle analysis to inform my investment decisions and hope that my book will be of interest to others and encourage them to do their own reading around the subject.

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