Wykoff: Four important phases of market trends

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Rx 4 investing
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Wykoff: Four important phases of market trends

Post by Rx 4 investing » Sun May 01, 2016 8:56 am

From the article:

“…one thing that everyone can probably agree on is that markets are cyclical and that securities do have recurring chart patterns. They aren’t predictable all of the time, but learning the fundamentals around market cycles can only help an investor in furthering their understanding of how things work.”

"Distribution: Occurs after a prolonged price advance. Sellers gain control of prices, which leads to decline."

It is likely given the mostly sideways action of the US market the last two years, and referencing the info-graphic (below) of Wyckoff's phases, that the US market is transitioning from "mid-distribution" to "late-distribution." In this phase of the market cycle, Wykcoff suggests investors begin exiting long positions.

Article: http://www.visualcapitalist.com/this-ma ... uy-stocks/

It's interesting to me that Nobel winner Robert Shiller, who built upon Graham and Dodd's notion of the cyclical nature of corporate earnings with his CAPE methodology , also believes that investors should vary their level of stock exposure through out the market cycle. Here's Shiller's thoughts on the use of CAPE:

"So I think the bottom line that we were giving – and maybe we didn’t stress or emphasize it enough – was that it’s continual. It’s not a timing mechanism, it doesn’t tell you – and I had the same mistake in my mind, to some extent — wait until it goes all the way down to a P/E of 7, or something...but actually, the lesson there is that if you combine that with a good market diversification algorithm, the important thing is that you never get completely in or completely out of stocks. The lower CAPE is, as it gradually gets lower, you gradually move more and more in."

Article: http://www.businessinsider.com/robert-s ... pe-2013-11

For those long-term investors who believe the stock market is cyclical in nature, and that periodic changes to asset allocation has merit, our mentor Jack Bogle has suggested the utilization of guard rails around changes...

"Another sort of tactical allocation strategy involves changing the stock / bond ratio based on the relative outlooks for the respective financial markets. But since no one can ever be sure of the future path of the financial markets, the tactics I recommend would place severe restrictions on the extent of the allocation changes. Specifically, I would vary the desired strategic balance by no more than 15 percentage points on either side. A portfolio targeted at 50/50 would never have less than 35% in stocks nor more than 65%."


WYCOFF'S UNDERSTANDING MARKET STRUCTURE:

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Re: Wykoff: Four important phases of market trends

Post by adamthesmythe » Sun May 01, 2016 10:25 am

> one thing that everyone can probably agree on is that markets are cyclical and that securities do have recurring chart patterns

Lost me right there. Humans find patterns in data- it's what they do. The hard part is distinguishing real phenomena from the patterns that appear in random data.

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Re: Wykoff: Four important phases of market trends

Post by SimpleGift » Sun May 01, 2016 10:40 am

Cordially, Todd

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Re: Wykoff: Four important phases of market trends

Post by Rx 4 investing » Sun May 01, 2016 10:42 am

adamthesmythe wrote: "one thing that everyone can probably agree on is that markets are cyclical and that securities do have recurring chart patterns Lost me right there. Humans find patterns in data- it's what they do. The hard part is distinguishing real phenomena from the patterns that appear in random data."


Shiller won the Nobel prize. Benjamin Graham studied the markets his entire life, and was a professor at Columbia University and mentor of one of the greatest investors on the planet, Warren Buffett.

IMO: To dismiss their work with such a platitude is badly disrespecting Shiller's work and Graham's legacy.
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Re: Wykoff: Four important phases of market trends

Post by Rx 4 investing » Sun May 01, 2016 11:05 am

Simplegift wrote: "Never try to time the market"

Jack Bogle has often referenced Ben Graham in his writings. He gave Graham credit for giving him the notion for an "indexed" approach to long-pull investing. Graham wrote about "timing" relative to market pricing in Chapter 8 of The Intelligent Investor:

"A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels."


There is a shortage of insights offered by the valuation-agnostic, oft-published gurus in the Forum as to when to "not pay too much for your stocks." I, like Mr. Bogle who I quoted above , think it's a reasonable approach to vary stock allocation based on the investor's outlook for the market. An risk-averse investor can benefit from a systematic approach. Shiller's and Wycoff's approaches offer alternatives to "buy and hold."

There are lurkers who shy from attacks of the dogma-oriented die-hards, but it is healthy in the "theory" Forum to occasionally offer a different perspective. Jack Bogle is much too smart to adhere to dogma. He has changed his perspective numerous times throughout his investing career. investing is much too complicated, and "group think" can be dangerous to the pocket book. There are many roads to Dublin. :moneybag
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Re: Wykoff: Four important phases of market trends

Post by nedsaid » Sun May 01, 2016 11:11 am

adamthesmythe wrote:> one thing that everyone can probably agree on is that markets are cyclical and that securities do have recurring chart patterns

Lost me right there. Humans find patterns in data- it's what they do. The hard part is distinguishing real phenomena from the patterns that appear in random data.


I would 100% agree that markets have cycles. The problem is that we don't know when the cycles will occur or if we are in a cycle, how long it will last. As far as chart patterns, this smacks of technical analysis, which I think Burton Malkiel pretty well shot holes in it. Technical analysis has some value, it can tell us what happened in the past and perhaps why it happened but as far as I know, it has no predictive power. I think of Louis Rukeyser's elves who were almost always wrong. They were bearish when they should have been bullish and bullish when they should have been bearish. Their market calls were almost the perfect contrary indicator. That is why Rukeyser eventually fired all of them.
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Re: Wykoff: Four important phases of market trends

Post by nisiprius » Sun May 01, 2016 11:16 am

Rx 4 investing wrote:From the article:
“…one thing that everyone can probably agree on is that markets are cyclical and that securities do have recurring chart patterns.
Nope. Not everyone can agree on that.

Securities do not "have" recurring chart patterns. People perceive recurring chart patterns. The problem is that people also perceive recurring patterns in patternless data, because it is what the human perceptual system does.

At the seashore, sooner or later someone says "every seventh wave is bigger." It's not, of course, but watch what people do when they count them. They will count a big sixth wave because it was almost the seventh. Two big waves one right after the other will be counted as a double confirmation and not as one confirmation and one counterexample, and so forth. They will find excuses for every departure from the "recurring pattern." And despite being mildly disappointed by the number of exceptions, they will remain convinced that "every seventh wave is bigger" is basically valid.

The National Bureau of Economic Research won't even call a recession until after they are sure it is over. And this guy thinks he can identify four phases and three subphases of each and tell which one we are in while we are in it?

So if those patterns are so cyclical, exactly what happened in 2011 when everyone got spooked? Obviously, a huge, long "markup" phase. Obviously, 2011 was "a distribution." So why wasn't it followed by a decline phase?

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Re: Wykoff: Four important phases of market trends

Post by tyler_cracker » Sun May 01, 2016 11:32 am

but nisi, you ignored rx's appeal to authority!

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Re: Wykoff: Four important phases of market trends

Post by Rx 4 investing » Sun May 01, 2016 12:07 pm

tyler cracker wrote: " but nisi, you ignored rx's appeal to authority!"


Some times more seasoned investors have important insights to offer amateur, part-time forum investors. Are you an investment expert and your full time job is to study the markets?

As Dr. Bernstein has reminded: "equanimity to market declines depends on time horizon."

--If you are young, and you have not accumulated significant assets, by all means "buy and hold" through payroll deduction.

Caution: Generic advice, and platitudes dispensed in the Forum are not intended to be "one size fits all." Not many of us can afford in our last 10 years before retirement to experience "sequence of returns risk". Ignorance of the iron law of valuation is one way to ensure working longer and postponing one's retirement date.

It's really not that hard to grasp. The more expensive stocks get, the lower the future returns, and the increased risk. According to back-tested results from portfoliovisualizer.com , $10,000 invested from 2014 to April 2016, long-duration treasuries have trounced stocks.

FYI... The ave. duration of Vanguard's long-term treasury is 17 years. The modified duration of the S & P 500 at current valuation levels is 47 years.

An often forgotten financial planning principal: If a buy-and-hold investor with no particular view about market conditions or future returns wishes to have a fairly predictable amount of wealth at some future date, that investor should hold a portfolio with a duration that is roughly equal to the investment horizon.

If an investor only has 10-15 years to retirement, should he/she load up their portfolio for their bucket #1 with assets that have a 47-year duration?

Time Frame / Asset / Final Balance / Sharpe Ratio

1/1/14-4/30/16 / (TLT) / $13,494 / 1.15

1/1/14 - 4/30/16 / (VTI ) / $11,480 / 0.55

I'm sure it's a tough pill to swallow if only drunk the kool-aid of valuation-agnostism, but an expensive stock market has been beaten quite handily in the last two years by less risky treasury bonds. The start to 2016 bodes more of the same. (Y-T-D : TLT + 7.9%; VTI +1.6% )
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Re: Wykoff: Four important phases of market trends

Post by nedsaid » Sun May 01, 2016 12:30 pm

Rx 4 investing wrote:FYI... The ave. duration of Vanguard's long-term treasury is 17 years. The modified duration of the S & P 500 at current valuation levels is 47 years.


You are working with very inexact numbers. First of all, there is something to the concept of duration for stocks. But both the concept and the calculation of that number is very inexact. You have the combination of a fuzzy concept and fuzzy numbers and then using that to make precise statements of how much an investor should have in stocks. Pretty much garbage in, garbage out. I couldn't help but notice the word "modified" when describing duration. So a fuzzy concept and fuzzy numbers are made even fuzzier with the qualifier "modified." What you have are very rough numbers to help you see if you are "in the ballpark" or not. But what you have, while a worthwhile concept and a ballpark estimate, is anything but precise.

I also think you are not really addressing the valuation of bonds. We have been in a rip-roaring 34 year Bull Market in Bonds. The current Bull Market in Stocks by contrast is only 6-7 years old and that after a 50% drop. Are bonds, particularly long term treasuries, really a bargain here?

What I will say is that you are on to something. Investors should keep valuations in mind. I believe that valuations matter and matter a lot. Near retirees and retirees should be mindful of the sequence of returns risk.
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Re: Wykoff: Four important phases of market trends

Post by nisiprius » Sun May 01, 2016 1:40 pm

Rx 4 investing wrote:...Some times more seasoned investors have important insights to offer amateur, part-time forum investors. Are you an investment expert and your full time job is to study the markets? ...
Nope, which is why I took the time to look at Wykoff's article to see what it had to say and whether there was something I could learn.

Once again, in his model, what happened in 2011? In his formulation, are these not perfect examples of a "markup" phase and a "distribution" phase? If not, why not? Why isn't the markup a markup, or why isn't the distribution a distribution? They look exactly like his charts to me.

Image

In his model, distributions are followed by declines, and accumulations are preceded by declines. So, what about late 2011?

Image
Either:

a) that was a "distribution," in which case it was not followed by a decline, and therefore the market did not follow his cycle, or
b) that was actually an "accumulation," in which case it was not preceded by a decline, and therefore the market not follow his cycle.
Last edited by nisiprius on Sun May 01, 2016 2:18 pm, edited 1 time in total.
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Re: Wykoff: Four important phases of market trends

Post by anil686 » Sun May 01, 2016 1:57 pm

Rx 4 investing wrote:
Simplegift wrote: "Never try to time the market"

Jack Bogle has often referenced Ben Graham in his writings. He gave Graham credit for giving him the notion for an "indexed" approach to long-pull investing. Graham wrote about "timing" relative to market pricing in Chapter 8 of The Intelligent Investor:

"A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels."


There is a shortage of insights offered by the valuation-agnostic, oft-published gurus in the Forum as to when to "not pay too much for your stocks." I, like Mr. Bogle who I quoted above , think it's a reasonable approach to vary stock allocation based on the investor's outlook for the market. An risk-averse investor can benefit from a systematic approach. Shiller's and Wycoff's approaches offer alternatives to "buy and hold."

There are lurkers who shy from attacks of the dogma-oriented die-hards, but it is healthy in the "theory" Forum to occasionally offer a different perspective. Jack Bogle is much too smart to adhere to dogma. He has changed his perspective numerous times throughout his investing career. investing is much too complicated, and "group think" can be dangerous to the pocket book. There are many roads to Dublin. :moneybag


Actually I take Mr. Bogle at his word in his writings - especially Common Sense on Mutual Funds - still IMO one of the best books written about investing via mutual funds. He describes many ways to construct a portfolio - yours is mentioned with an eye to valuations but the primary recommendation is a static asset allocation of one's age in bonds. Of course you can be even more conservative and use an age in bonds or even higher bond amount which will reduce your risk - and probably - but not certainly -- reduce your long term returns. The problem with cycles is one does not know when it begins nor when it ends. IMO, having a stock/bond allocation you can live with is more important than trying to adjust your AA depending on one's expectation of valuations. Mr. Bogle also wrote in the book referenced above that your method of tactical asset allocation may perhaps yield slightly better returns but with more risk and can be prone to more behavior errors. I tend to believe the latter part of that statement the most - our own personal behavior issues of either being greedy or scared will likely supersede valuation errors for those who DCA - again JMO...

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Re: Wykoff: Four important phases of market trends

Post by Rx 4 investing » Sun May 01, 2016 2:19 pm

Nedsaid asked: "I also think you are not really addressing the valuation of bonds. We have been in a rip-roaring 34 year Bull Market in Bonds. The current Bull Market in Stocks by contrast is only 6-7 years old and that after a 50% drop. Are bonds, particularly long term treasuries, really a bargain here?"

I have addressed the bond question before. Here's my perspective...

The yield on the 30 year treasury bond, not the 10 year , is a function of inflationary expectations. (Fisher equation). Thanks to a recent study by the SF Fed, simply extrapolating the current inflation rate (+ 0.9% Y-o-Y), one to two ( 1-2) years into the future was found to be as accurate as an expert forecasts.

For the past 140 years, the 30- year treasury bond has delivered a 2% "real" return. Using a simplified Fischer equation, here's an approximation of the current "real" yield:

The current yield on the 30 year T bond is 2.66% less 0.90% inflationary expectations = 1.76% "real" return at the present time.

While long-duration treasuries are not the "bargain" they were in late 2015, when the real yield was in the high "2's" , the current "real" yield suggests only about a +12% valuation premium to the historical average mean "real" return of 2%. The "real " return is so volatile in the short term, you really are wasting your time measuring it. But we don't have to worry about it because it is mean- reverting.

On the other hand, the 50- year mean of the Shiller P/E is 20. The current Shiller P/E is roughly 26. Relative to the 50 year mean, US stocks are about 30% higher than the mean. We can also refer to a heuristic, "The Rule of 20", for a ball park of "fair value". This rule incorporates the interplay between cash flow and the inflation rate:

Twenty (20) minus the inflation Y-o-Y inflation rate =fair value P/E. Fair value P/E = 19.1. Current market P/E 23.9. Based on this rule of thumb, stocks are about 25% over-valued.

Surveying current global macro-economic conditions, stocks are clearly a much riskier proposition at these valuation levels. It is a challenge to find a few stocks in the top 10 in Vanguard's Total Stock Market Index, using Graham methodology, that offer a "margin of safety" for new purchases. Indexing, and NIRP and ZIRP policies, are "hunger for yield", are all keeping a floor under stock prices and are negating normal price discovery.

With the currency wars going on around the world (trashing of home currencies to stimulate exports), US stock investors may be "fighting the last war" (stocks will outstrip inflation). Financial writer and expert Peter Bernstein once explained that when you squeeze all of the inflation out of an economy (prices of commodities have dropped, and import prices will continue to drop--0.9% is well below the Fed's expectation of 2% ) the return on risk assets (like stocks) can fall to zero (0) This is because corporations lose their ability to pass on price increases, and revenues flatten and/or decline. This is pretty much the scenario that is playing out right now.

Graham cautioned and counseled:

“The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.”


Good luck in the months ahead. As I have counseled my 26- year old daughter and new son-in-law, "stocks for the long-run." But time horizon matters. My near-term outlook for stocks as a pre-retiree is not as sanguine as many in the Forum. I would caution my fellow pre-retirees regarding one-size fits all advice at current stock valuation levels. Many S & P 500 members have seen earnings and revenues in multi-quarter decline. How long will it be before "an event" causes the big investment houses and hedge funds to become disillusioned and start dumping stocks? :moneybag
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Re: Wykoff: Four important phases of market trends

Post by nedsaid » Sun May 01, 2016 2:32 pm

Rx for Investing,

The deflationary scenario you are painting might be playing out before our eyes. You could well be right and there are some very smart people who agree with you. Indeed, I have wondered about this very thing in many of my posts. I certainly am not a bull on China and if my thesis is correct that China is Japan on steroids, this could add to deflationary pressures. My belief is that China peaked with the Beijing Olympics in 2008 and events so far have borne me out.

The thing is that things don't always happen as we might expect. I certainly am not going to bet the farm on any one economic scenario. If deflation does happen, the Intermediate Term bond funds that I own will do well enough though not as well as Long Term Treasuries.

I certainly am not allowing my stock allocation to increase, I have been on a mild rebalancing program since about July of 2013, rebalancing from stocks to bonds. If stocks continue to go up more, I will continue to harvest those gains and buy more bonds. I also am aware of my advancing age and my need to reduce my risk profile.

We will see how it goes.
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Re: Wykoff: Four important phases of market trends

Post by adamthesmythe » Sun May 01, 2016 3:21 pm

Rx 4 investing wrote:
adamthesmythe wrote: "one thing that everyone can probably agree on is that markets are cyclical and that securities do have recurring chart patterns Lost me right there. Humans find patterns in data- it's what they do. The hard part is distinguishing real phenomena from the patterns that appear in random data."


Shiller won the Nobel prize. Benjamin Graham studied the markets his entire life, and was a professor at Columbia University and mentor of one of the greatest investors on the planet, Warren Buffett.

IMO: To dismiss their work with such a platitude is badly disrespecting Shiller's work and Graham's legacy.


I was responding to the claim that "chart patterns" have predictive value (or indeed that they exist at all).

Graham was a fundamentals- oriented investor, and in my opinion that is as far as you can get from looking for patterns in the markets.

Don't know much about Shiller. However I had had conversations with a couple other Nobel prize winners, and I am persuaded they can be sometimes right and sometimes wrong.

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Re: Wykoff: Four important phases of market trends

Post by patrick013 » Sun May 01, 2016 3:49 pm

Chart patterns should relate to the business cycle. One could
say that a slowdown then some type of recession is approaching.

I get enough info from nominal measurements to conclude that
could occur, within the 10 year business cycle expected lifespan.

Charting earnings can visually support that also. Surprise market
trends really shouldn't occur, some factor just isn't apparent then.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Wykoff: Four important phases of market trends

Post by Rx 4 investing » Sun May 01, 2016 3:51 pm

adamthesmythe wrote: "I was responding to the claim that "chart patterns" have predictive value (or indeed that they exist at all). Graham was a fundamentals- oriented investor, and in my opinion that is as far as you can get from looking for patterns in the markets. "

Graham was a "quant", and he believed in the cyclical nature of corporate earnings and the business cycle. So you are saying if Graham had put the CAPE patterns into a chart (like the one below constructed by Wade Pfau ) , that would not fit with your knowledge of Graham's work?

FYIs...

--Graham and Dodd once proposed a decision tree of 25%-50%-75% stock allocations within valuation ranges based on historical "patterns" of cyclically-adjusted earnings. (graphic below)

--He also wrote in The Intelligent Investor:

"The investor should impose some limit on the price he pay for an issue in relation to its average earnings over , say, the past seven years. We suggest that this limit be set at 25 times such average earnings, and not more than 20 times those of the last 12 months period."


Sure sounds to me like he thought earnings were cyclical or followed patterns over long periods. He proposed that earnings be averaged to get a more accurate reflection of how a corporation has historically fared throughout phases of the business cycle.

Referring to Graham's suggestion of "not more than 20x the last twelve (12) month period" , as for the twelve months ending Dec 31, 2015 from multpl.com, EPS for the S & P 500 was $ 87.12. Therefore:

$87.12 EPS x 20 = $1,742 .40 This means Graham would not recommend purchasing the S & P 500 index fund unless it were to decline to this level.

Current price of the S & P 500: $2,065.

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Re: Wykoff: Four important phases of market trends

Post by JoMoney » Sun May 01, 2016 4:32 pm

It's always advisable for someone risk averse to take some off the table while times are good, and a standard policy portfolio with a percentage of stocks/bonds will do just that. No chart patterns or CAPE ratios needed. If using some valuation formula helps settle things in your own mind, that's great, but some people are lured in by a guise that following such schemes/strategy like this will enhance returns or allow them to out-trade the other guy... and while it may on occasion work as perfectly as a broken clock, it simply can't be the case for most people. If anything, people scrambling to beat the other guy out and back in to stocks or bonds would bring even more dis-equilibrium then whatever perceived imbalance the valuation formula you were trying to use suggested.
Decide whether or not your objective is to be an 'enterprising' active investor, looking to take advantage of opportunities that you believe you're skilled in finding, or a 'defensive' or passive investor who's primary objective should be to avoid making mistakes and being fodder for the active types and wall street salesmen. If you're the defensive passive investor (and most people should be), aiming for the market return at your particular tolerance level for stock market risk and sticking to it seems to make the most sense.
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Re: Wykoff: Four important phases of market trends

Post by patrick013 » Sun May 01, 2016 5:04 pm

Rx 4 investing wrote:
$87.12 EPS x 20 = $1,742 .40 This means Graham would not recommend purchasing the S & P 500 index fund unless it were to decline to this level.



I told somebody that both stocks and bonds were overbought. Better time
to hold than to buy. But then I think when Energy sector reappears and the
Financial sector has another mini-crash and the exchange rate supports
foreign investment by domestic corps., all in the next few years, we'll be
right back at the flat level we are today or somewhat better. So, the market
wants the 500 priced into the future. I agree tho, historical PE's are just
trending so high, a little drop in volume could start another correction. I
think there will be a another sizable correction in 2016. A recession ? ?
age in bonds, buy-and-hold, 10 year business cycle

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Re: Wykoff: Four important phases of market trends

Post by APB » Sun May 01, 2016 5:52 pm

I'm unaware of any "Warren Buffett of charting" and believe that charting has all but died as an investment methodology outside of the financial porn industry.

Burton Malkiel has a great chapter on charting in a very BH book, "A random walk down Wall Street".

CAPE being a far better predictor, I believe the 10 - 20 year expectation on equities is underwhelming (about 4-5% real return). seeing as TIPS yield 0% real return, you will be hard pressed to find a desirable alternative with your money.

Not advocating timing, just stating that even if I thought it a worthy pursuit, I wouldn't act here.

I suggest betting $20 -$50 or a round of beers against your friends if you want to get the timing out of your system. :sharebeer
My posts represent my own opinion and do not constitute financial advice. I am simply a hobbyist. :)

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Re: Wykoff: Four important phases of market trends

Post by Rx 4 investing » Sun May 01, 2016 6:07 pm

Patrick013 wrote: " I told somebody that both stocks and bonds were overbought. Better time to hold than to buy. But then I think when Energy sector reappears and the Financial sector has another mini-crash and the exchange rate supports foreign investment by domestic corps., all in the next few years, we'll beright back at the flat level we are today or somewhat better. So, the market wants the 500 priced into the future. I agree tho, historical PE's are just trending so high, a little drop in volume could start another correction. I think there will be a another sizable correction in 2016. A recession ? ?"

Speaking of the so-called "value sector", energy, check out the chart below. The S&P 500 Energy Sector currently trades at 101.5x analysts' expectations of next 12 months earnings. (Source: ZeroHedge.com)

If an investor believes that as valuations rise, risk rises, and long-term returns fall, (and vice versa) then one non-emotional approach to arrive at a stock allocation might be to use John Kingham’s simple transformation function:

Stock allocation = 100 – [(CAPE – AvgCAPE/2)/(AvgCAPE*2 – AvgCAPE/2)]


The logic behind Kingham’s formula: If an investor can rationalize the canonical 60% stocks /40% bonds portfolio when the market is at or near the long- term mean, then..

--He/she might rationalize a higher stock allocation when the market is below the mean, or

--Rationalize a lower stock allocation when the market is above the long- term mean.

First, here’ s a reminder of Pillar # 7, “The Powerful Magnetism of the Mean" from our mentor Jack Bogle’s “Twelve Pillars of wisdom” speech:

“In the world of investing, the mean is a powerful magnet that pulls financial market returns toward it, causing returns to deteriorate after they exceed historical norms by substantial margins and to improve after they fall short. Reversion to the mean is a manifestation of the immutable law of averages that prevails, sooner or later, in the financial jungle.”

Using Kingham’s formulaic approach, the investor then needs to decide on a key input into the formula , i.e. which “AvgCAPE” to use?

--Larry Swedroe periodically argues that due to accounting changes, the CAPE mean for the last 50 years is pretty close to ‘20’.

--Or a more conservative investor might use Nobel laureate’s Robert Shiller’s long-term (100 year +) mean of ‘16.7’.

Reminder: In the last market meltdown in 2008-09, the Shiller P/E did mean revert to the 100 year + long-term mean range. Perhaps worth mentioning because the current market CAPE is a lot farther from 16.7 than 20.

Here’s the approximate output from the formula using Swedroe’s and Shiller’s means:

--Swedroe’s 50 year- mean: 50% stocks

--Shiller’s long-term mean: 30% stocks

Best wishes for continuing success. :beer

Image
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes

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patrick013
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Re: Wykoff: Four important phases of market trends

Post by patrick013 » Sun May 01, 2016 7:04 pm

APB wrote:I'm unaware of any "Warren Buffett of charting" and believe that charting has all but died as an investment methodology outside of the financial porn industry.


I'm not advocating charting as an investing methodology but rather an
information source, which is all it's designed for anyway, a visual aid.
To do what ? Talk to intermediate investors about charting. :)
age in bonds, buy-and-hold, 10 year business cycle

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patrick013
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Re: Wykoff: Four important phases of market trends

Post by patrick013 » Sun May 01, 2016 7:13 pm

Rx 4 investing wrote:Speaking of the so-called "value sector", energy, check out the chart below. The S&P 500 Energy Sector currently trades at 101.5x analysts' expectations of next 12 months earnings. (Source: ZeroHedge.com)


Well whoever comes out of the energy sector is going to be better off than
today. It's sad.....some good companies being hurt financially. Exxon
recently had it's bond rating downgraded, one of the strongest companies
in the nation before. I really don't have a desire to talk about it except
that I could pray for a drought. :D
age in bonds, buy-and-hold, 10 year business cycle

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in_reality
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Re: Wykoff: Four important phases of market trends

Post by in_reality » Sun May 01, 2016 7:57 pm

Rx 4 investing wrote:Image


Interesting.

As the Forward P/E has been skyrocketing, I have been increasing allocation to energy and I call myself a value investor.

Energy allocation comparison:

~7% US (Large Caps):
~9% US (Large Cap Value)
~14% Russell Fundamental Index (US Large/Mid)

Whether or not an increased allocation will be rewarding is something only time will answer, but investing in energy now is a value investment (low price due to current earnings struggles) according to the methodology employed by fundamental indexes.

Come what may, value investing makes sense to me and is about half my equities.

Anyway, posts like this is why I think there actually might be value in robo-advisors. Schwab Intelligent portfolio's for example will keep you in a small value tilt despite the cries of "go US only - international has underperformed for X years" and "the market is overvalued - get out". It's hard to know what to think -- even on this board of supposedly good advice.

Of course, a standard three fund market cap weighted portfolio to some degree reduces those nagging doubts, which is why it is such a gem.

If you don't want to overweight energy as a value play, I see absolutely nothing wrong with holding it in it's market cap weighted proportion and absolutely no reason to get out of it due to concerns over earnings after a bad stretch.

Actually, go ahead abandon energy. The more you do, the more I will pick it up. Not every value play is going to turn out roses, but I think as a strategy it'll be rewarding because it's tough to do. This thread is case in point.

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