Revealing BAAC Supercycle

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This Chart is worth a careful look:








Revealing BAAC Supercycles: Our unique 139-year monthly database for the U.S. stock market is now available
by Robert E. Bronson, III
Bronson Capital Markets Research
February 19, 2010

The Supercycle mean-reverting nature of the stock market – that is, its cyclical, extreme-to-extreme oscillation over 12- to 20-year periods – is best seen in its real total returns (returns adjusted for price inflation and dividends reinvested), as illustrated in the chart below.

The U.S. stock market's performance over the ten alternating Bronson Asset Allocation Cycle (BAAC) Supercycle Bull and Bear Market Periods (green and red shaded areas, respectively) since 1870 creates a robust high-low volatility channel with parallel upper and lower boundaries, showing growth of 6.6% annualized over the 139-year period.

Notice how Supercycle Periods have become increasingly emergent, as seen especially in rolling 16-year annualized returns peaking rather predictably at 15% +/- 1% and troughing at 0% +/- 2%  (see the lower panel of the chart), which further establishes 16  +/- 4 years as the average length of a BAAC Supercycle Period (Bull or Bear).

The stock market, using the S&P 500 index as a proxy, is currently at the same level as it was four months ago, 17 months ago and 12 years ago – that is, there are 0% gains over each of those periods, the latter of which in particular has caused the 16-year Supercycle Oscillator to be approaching its predictable 0% +/- 2% trough (see the blue dotted arrow in the lower panel).

We continue to expect that the end of the current, secular period of essentially no gain, which we fundamentally and technically quantify and identify as a deflationary BAAC Supercycle Bear Market Period, or in shortened and economic form, a Supercycle Winter (a term reserved to our work and unlike terminology used in conjunction with work by Kondratieff, Schumpeter or anyone else - see endnote 1) will be signaled by the Oscillator declining still further from its 16-year annualized return of about 5% at present to probably below 1% during the next several years.  This forecast is supported by our other Supercycle fundamental valuation metrics (such as price in relation to: various measures of corporate earnings, Tobin's Q replacement value, book value, dividends, and Warren Buffett's favorite, GDP), as well as other indicators in our forecasting models.

BAAC supercycles

The monthly real total return index used in this chart is our uniquely compiled capitalization-weighted index (CWI) of all publicly-owned, exchanged-traded U.S. common stocks which, along with several important enhancements explained below, splices the S&P/Wilshire 5000 Composite Index with a database going back to 1870 that is maintained by well-known Yale professor of economics Robert Shiller: http://.econ.yale.edu/~shiller/data.htm.

Our CWI contains only common stocks, which currently comprise 4,330 of the more than 10,000 exchange-traded securities on the NYSE, NASDAQ and ASE.  It excludes some 6,000 non-common stocks, which would otherwise constitute statistically-distorting data that are duplicative or irrelevant. http://www.wilshire.com/Indexes/Broad/W ... stics.html

Shiller's database splices the Cowles Commission database from 1870 to 1926 with the high-quality, no-survivor-bias, Center for Research in Security Prices (CRSP) database, as explained here: http://en.wikipedia.org/wiki/Center_for ... ity_Prices   While Shiller essentially smoothes data by using the average of daily closing prices during each month, thus grossly understating bull and bear markets by a huge 10 to 15 percentage points on average (see endnote 2), we prefer not to smooth and instead to track very important mean-reverting bull/bear volatility.  Our CWI uses for its monthly prices each of the intra-month, cyclical bull- and bear-market high and low prices for the months in which they occurred in the 33 bull and bear markets identified in exhibit E: http://www.financialsense.com/editorial ... /model.pdf, and the month-end prices for all other months, thus capturing more of the volatility than a monthly average, and using the prices from the S&P 500 Index since December 1949 and from the S&P Wilshire 5000 Composite Index since April 2001.  

Further, in order to capture as much meaningful price volatility as reasonably possible for the even earlier monthly data prior to 1950, we've replaced Shiller's monthly averaged data with Dow Jones Industrial Average intra-month cyclical, bull- and bear-market high and low prices for the months in which they occurred, going back to the Dow's first availability in 1896:
http://www.djaverages.com/index.cfm?vie ... symbol=DJI  

All of this spliced, expanded and more refined monthly CWI data are further enhanced by presenting it as a real total return index, which reveals BAAC Supercycle Bull and Bear Market Periods, as well as normal bull and bear markets, better than more popular presentations of stock market data that do not adjust for either dividends or price inflation.

Subscribers to our private email list may request a fully detailed and easy-to-maintain spreadsheet of the 139-year price-only, nominal-total-return and real-total-return history of our monthly CWI index, not otherwise available at any price, for their private, non-commercial use.

Endnote 1: We have documented our discussions with others who have used the terms K-Cycle, K-Wave or Kondratieff Wave, with Season(s), and the like, and have clearly established that we were the first to use these terms with the Season(s) nomenclature, as well as the first to quantify them economically or otherwise fundamentally (Kondratieff and Schumpeter did not) or even technically.  Most importantly, we were also the first to apply these concepts – well in advance and in writing – to our long-range forecast of the entirely predictable secular bear-market period that did emerge, starting  variously from the late 1990's through March 2000, depending on the metric under consideration.  More than simply bragging, which is certainly more fun, these discussions were necessary to establish and defensively document our intellectual property rights on these often contested issues. We more than welcome further inquiries.

Endnote 2: For example, our CWI fully reflects the two-month 1929 Crash of 47.9%, which was the first phase of the history-making 34-month bear market decline of 89.2% from 9/3/29 through 7/8/32.  These declines are understated by a whopping 26% and 48%, respectively, using Shiller's intra-month averaged data.  Similarly, our CWI fully reflects the eight-week 1987 Crash of 35.9% from 8/25/87 through the morning low on 10/20/87, which followed the infamous 20.5% (close-to-close) Crash Day. That was the first part of the 14.5-week, 34.5% bear market decline that lasted through 12/4/87.  By using only month-end stock market prices, not only is the extraordinary history-making volatility of the Crash Day completely missed, but also the whole bear market decline is understated by 12 percentage points.  Our monthly CWI picks up all of this important volatility, resulting in a single spreadsheet column of numerical data to enable easier and more meaningful fundamental, technical and quantitative analysis without the cumbersomeness of, for example, the three times as dense high, low, close price data used in bar chart spreadsheet data.

 


© 2010 Bob Bronson
Bronson Capital Markets Research
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