Apr 18, 2016

Secular trends

Before the next long term update in June some thoughts about secular markets and money flowing between stocks and commodities. This is longer than long term:) it concerns your whole "investment life" which last roughly 40 years.

It is the most important chart you should know(the first one). This chart SP500 priced in gold is showing very clear - first when you have secular bull market in stocks and when you have secular bull market in gold and second that roughly every 20 years the money flow changes its direction from stock in gold and from gold in stocks.

It is very very important especially for non-active traders to know where you should park your money so that it brings you more value. All you need is the chart below no need of complicated economical/fundamental/chart analysis or to listen some "investment guru".

David Hickson has every two weeks webinars talking about Hurst cycles. In one of his webinars he was discussing SP500 priced in gold. I searched in Internet for a chart SP500 priced in gold and I have found this page where you can check almost everything priced in gold not only SP500.
I would say the chart is eye-opening. It confirms my expectation for one more cyclical market for stocks/gold before a secular trend change and now I am even more confident in my forecast. The most important conclusions:
- Expect one more cyclical bull market in gold and one more cyclical bear market for stocks.
- If history repeats we will see higher low for SP500 in nominal values, but lower low priced in gold/inflationary adjusted.
- Expect secular trend change around 2020-2022. I think the secular trend change will be a process lasting a few years with different assets bottoming/topping in a time-span of 2-3 years. I expect double top for gold (lower high 2022), important low for stocks around 2020 and lower low with divergences 2022 and end of the bond bull between 2020-2022.

Long term chart SP500 priced in gold - the secular markets are very well visible. We have great looking cycles for the secular trends roughly 40 years - 1898-1942 / 1942-1982 / 1982-2022. The next important secular trend change is coming in 2020-2022, but now you should be prepared for the next 40 years, knowing where to put your money for the rest of your "investment life":)
Stock bears usually bottom at 5-10 grams gold. Interesting is that the secular bull/bear markets are getting longer and the amplitude is bigger. I do not know why.... I suppose because of CB's interventions we have bigger moves higher and bigger crashes.
- bear market in stocks 1929-1942 - 13 years.
- bull market in stocks 1942-1966 - 14 years.
- bear market in stocks 1966-1982 - 16 years.
- bull market in stocks 1982-2000 - 18 years.
- bear market in stocks 2000-2022(expected) - 22 years - continues the trend of secular trends lasting longer.

DJIA long term chart in nominal values. The difference is that bear markets end with higher low in nominal values, but lower lows priced in gold. My current cycle calculations are pointing to 2022 as a low. This will be the third cyclical bear market to finish the secular bear market. I highly doubt that we will see a 80% drop for a lower low. I expect the price to be cut in a half as always.

A closer look shows 20 year cycle from 1980-1999, very nice M pattern - bottom of the first cycle and the top of the next cycle and the next 20 year cycle moving lower. It looks like the same pattern as in 1980 - one more cyclical move for stocks and gold to finish the secular trends.

I think the indexes will make higher low in nominal values. I expect the bear market to look like 2000-2003 lasting longer 3-4-5 years with two legs lower. It will feel worse compared to 2008 because it will last longer with very bearish sentiment expecting never ending bear below 666.

Gold with cycle analysis using tops instead bottoms(purple 8 year cycle high, gray 4 year cycle high). Gold should be hitting 4 year cycle high and the "baby bull market" should hibernate for 6-12 months waiting for major USD and Stocks high. The next 4 and 8 year cycle highs are around 2020 which should be the bottom of the first leg lower for stocks and 4 year cycle low(2016+4). Roughly estimates SP500 bottom at 1250 and sp500/gold ratio 10 gram means gold should triple and top around 3500.
And because stocks should bottom later I expect some kind of double top before the secular trends kick in.

Yields long term chart - it is interesting that yields are pointing to a major low around the same time like gold major top and stocks major low. It can not be a coincidence... I would rather bet on secular trend changes in different assets.
Look at the previous cycles - they vary from 5 to 7 years. Low in 2015 and if you add another 5-7 years the next major low is 2020-2022 probably the end of the bond bull market.

And back to reality what to trade in the next few years - I think cyclical trend transition has begun. Gold bottomed as expected before USD, but it should hibernate for a while. In the next 9-12 months USD/stocks should move higher to a major top with gold making higher low. This will be the second chance to jump on board on the new bull market for precious metals.
As I wrote gold and USD tops/bottoms are not synchronized, but do not expect major move in gold without major move in USD. Look at the chart below to see what I mean.
Gold bottomed in 1999 but made a higher low in 2001 when USD made its major top than the bull market for the precious metals begun.
The USD bottomed in 2008 and made a higher low in 2011. The bear market for gold started in 2011 when the USD really took off.
If history repeats you can not expect gold to continue moving higher without a major top for the USD and I do not think we saw it.


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