📜 Is the Big Market Cycle About to Turn? (w/ Ron William)
RON WILLIAM: So my name is Ron William. I've been in the market for 20 years now as the market strategist, educator, and trader, currently consulting under the RW Advisory brand. And for most of the time that I've been in the market, I've had great mentors teaching me along the way, which has been a great benefit to have that foresight early on. During that time, I've also done a lot of training across the institutions globally and currently doing my best to give back. And that's a big mission of mine, really, just to kind of share the education for future professionals coming into the business. RON WILLIAM: So behavioral technical analysis driven by cycles. That's the big framework that I work within. Behavioral tech analysis is something that was coined by one of my prominent mentors, Mr. David Fuller, back in the 1960s, way before behavioral finance really came into the fray. But essentially, it's studying crowd and crowd psychology, when you mix it in with money, and you get to see that amplification effect. And it's become quite topical, of course, last year, 2018, when we had a lot of crowded out trades, cryptocurrency, vol-- on the short side, if you look at the ETF play-- and then, of course, the top of the pop trades. So for example, Momentum, Stocks Tech, all of them fell out of grace in a very short space of time. So it's crowd psychology-- studying it, adapting to it. But above all, not being blinded by it and getting hit by the herd. The cycle part is key. Because of course, nothing moves in a straight line. And so this is often reminding us that the trend is your friend and saw signs of a reversal emerge. And I think this was a big lesson, not just for market professionals across the board, but even technicians as well. Linear trends and linear extrapolation is a dangerous game. It's certainly more so in this current market environment. RON WILLIAM: So the main cycles that I've always looked at-- and this is in part from my most recent mentor Mr. Robin Griffiths-- are the economic cycles, and then they're well documented and researched. Essentially, it's the big cycle first, and that's the 10 year, otherwise known as the decennial or jugular cycle. I've done a lot of testing on that which I can go into a little bit further in our discussion. The four year, or four to six year, business cycle and the rotations that happen within that stage by stage, which can be very key to tactical or strategic opportunities. Of course, that doesn't work sequentially all the time, particularly in the recent cycle. So it's interesting to see these dislocations happen again and again, and ask why, and look for those opportunities that might come up. And then last but not least, the shorter term cycle, which is more the annual seasonal cycle. And seasonality exists not just for the equity market which we know so well-- so "Sell in May and go away," low vol when people are away from their desk. But also, you have seasonality across gold. You have seasonality on the dollar. Dollar tends to be positive early in the new year. The pound tends to be positive during April's tax and repatriation reasons for that. Gold, you've got the wholesale demand spikes usually during the autumn period. So seasonality is relevant across the board. Combine all of these cycles together, and it's the cluster of cycles that become most important. The only point I'd make is for a practical use of cycle work for the average day trader or investor that just really wants kind of a hands-on approach. Moving averages, or just some kind of momentum measure, is a great way of actually just tracking the changes of the trend. So for a long term strategic measure, the 200 day moving average is a good annual benchmark. The medium term average for more tactical measurements is a 50-day moving average, which is roughly the quarterly time frame. And then for a more active player in the market, a 20-day, which is basically your monthly benchmark. So if you combine all three of them, if they're all going up in the same way, it's a bullish market and vise versa for the downside. The big issue is when the spread between all the averages increase or decrease, then you get a gauge as to when the trend might be changing. RON WILLIAM: We had to test both qualitative and quantitatively a lot of the cycle works that I've just mentioned to you. What we discovered wasn't a big surprise. There is no certainty in markets. It's all based on probabilities. And so the cycles worked some of the time, but not all of the times. There was plenty of skew. In the end, the conclusion was the 10 year cycle, whether you call it decennial or jugular, isn't actually a 10-year cycle. It deviates, as with most things in the market, especially when it comes to timing. It's roughly a 9 to 11th year range. So it's a reasonably acceptable deviation, especially for that type of a long term cycle. And what's key is then looking at it from a quantitative perspective and actually gauging the trend itself-- how consistent is the trend, are there any signs of a potential loss of momentum, and even more, reversal. Because at the end of the day, it's the market that's telling us what's going to happen next, and we shouldn't really be doing the other way around and forcing the cycle onto the market, as it were. The 10-year cycle, just from a seasonality perspective, on average, if you measure it over the last 100 years, the stats basically say that the 5th year of most decades, not every, tends to be the outlier positive year. That's been true most of the time. But most recently, 2015, it was false. But that was great information in itself, because with that, then, engaged a deeper dive investigation as to why that may have been the case, what were the market anomalies of that time. What has been maybe a little bit more of a telling signal is the asymmetric risk in the second half of the decennial cycle. So as the decade closes to an end, i.e. 2020, a year from now, that's when things start to heat up. Now, this is more important and more relevant if the cycle is already overextended, because the skew basically increases. And so that asymmetric risk just basically heightens. I mean, a lot of long term cycle works probably turned a little bit more risk-averse in the last few years. And for the most part, we may be proven wrong on the timing. So that's a case in point. And the big reason for that, of course, is a lot of the exogenous influence is central bank policy, QE, and all the kind of policies post GFC 2008. Having said that, it goes back, again, to the original point I was making that we do need to then go back on our qualitative measures, whether it be macro, fundamental, or technical, and we need to combine that blend, and really just ask ourselves, what is the market telling us? And whatever that language from the market is is most relevant at that point. And so the whole behavioral technical analysis focus really is kind of measuring the ecosystem of the market and all its factors. I've never been one of these technicians, even early on, when, you know, we're kind of encouraged to take a tribal side-- this side versus that side. I've never been really encouraged to do that. RON WILLIAM: It's the study of crowds. And the best way to actually do that technically is to look at trends. So it's a momentum-based strategy, not that we have to trade in that way. But at the very least, you're looking for some kind of pattern in the market. Because ultimately, behaviors are patterns. Now, on an individual basis, we can be rational, maybe, for a moment in time when all things being equal. But when we're part of a crowd, mix that in with some money, and then we start to get some greed and fear kick in, and then the pendulum starts to swing. And that's essentially what we see in these chart patterns. Now, there's been great kind of research out of MIT university about how chart patterns can be created and identified. So there's a whole lot of good academic research now, adding more credence to the whole art. But let's not forget it's an art. And it's an art of just studying crowd psychology, seeing it on the chart visually. We're looking for consistent patterns, if we're looking for a trend up or down. And any time we see inconsistencies, then that's giving us some kind of a warning signal that change is about to happen. So there are the simple ways. Of course, the techie overlay to that would be to add some indicators. And I think for the most part, that can be a good thing. But adding too much of anything deviates from keeping it simple and having more of an actionable approach. I think also looking at things in relative currency terms is also critical, because that shows you the capital flows moving back and forth and invariably gives you lead and sometimes lag signals. RON WILLIAM: I've lost many a call and mismanaged trades when I haven't let the market tell me which way it wants to go. So I think that's the first point. I mean, it's great extrapolating views and in some cases kind of forcing, or massaging, numbers to make the market do what we want it to do. And this is the heart of behavioral finance and certain challenges that we have, just as human beings, letting our emotions come in the way. So I think it's key to let the facts speak for themselves and have an evidence-based approach. Just look at the price action. That is pure market dynamics, whether the market's going up or down, and looking for those consistencies and inconsistencies in the trend. Second thing I would say is be aware of your own-- I mean, as an individual investor/trader but also as a crowd-- behavioral biases. And one of the things I've been saying now for some time is this whole idea of falling in love with the market-- just in life, falling in love with anything is OK. But being blinded by it is the big issue. Flexibility and change itself is key. The most constant thing in life and markets has changed. And again, it brings back to the point of this is all about probabilities and not certainties. That's the great thing about studying crowd psychology. We see the changes of the crowd as we did in 2018, with crypto, with volatility, with momentum trades. You know, three stars of the year got shot down very quickly. So it's really important to see not just the herding side of behavioral technical analysis and that trend developing, but actually also being very aware of those turning points. And this is where I'm very passionate about cycles, exactly for that reason. Because I think it's one of the perfect risk management tools. Because you know, by definition, there's a sine wave that exists in the market. So at no one point in time should we, particularly for our planning cycles, be extrapolating linear trends. So let's do it for when we're in the mid good sweet spot stage of the market move. But let's get out, or at least measure our risk when necessary, at those turning points. So I think the combination of behavioral tech analysis and cycles is key. RON WILLIAM: I was fortunate to have called Bitcoin on the week. And that's the live interview that I gave then. It was also a very confident call to make, because I had a whole lot of people completely disagreeing with me and a lot of heat for doing that. Having said that, if I was wrong on that call, I had my risk management in play, like most people would have. Second thing to that is the flash crash. I was late on that call, so that's probably wrong on the timing. But like maybe a few people back then, the writing was on the wall ahead of time. But it is just very hard to actually just really fine tune that precise moment in time. I think what was probably a little bit more clearer thereafter, and I was fortunately able to get this last, third call, was the whole momentum trade debacle, particularly with the tech stocks. And I think that was partly down to actually just traveling from West to East, speaking to clients in Asia, talking about tech being overbought and overvalued. And they were already in the midst of a 20% correction on their bad stocks, the equivalent of FANG. At that point in time, seeing their behavioral reactions and their own sentiment and money flow, it just seemed as an obvious contagion risk from a psychological perspective. And so instead of the US having that famous sneeze which the rest of the world catches, it was the other way around, with a potential China slowdown or at least tech warning signal, which ended up being the canary in the coal mine. RON WILLIAM: Peak growth has become the new buzzword now. You've seen that the IMF, for example, has officialized that new downgrade. But essentially, what the markets are suggesting-- which is my main forte-- is that we are still within the big cycle asymmetric risk to the downside. And that kicks in in a much stronger way from 2020 onwards, from a multi-year period. Let's say, at the very least, two to three years is the average bear. What type of bear we get is different from one bear to the other. We've probably seen the biggest bear in drawdown risk in '08, and I think most counts agree with that point, if you look at various analogs. Either way, it's likely to be a high volatility churning market. So pretty ugly one to kind of trade or invest in. But before then, on a short term more tactical perspective, we are likely to get a new high in markets, like some of the most Western markets, particularly the US, which have a lot more kind potential leg room further. How people then trade that, I think this year, is going to be more of a two-way opportunity. Ultimately, there'll be some rotation continuing over the next few months into that setup. There's a question mark at the moment. We're in a wait and see kind of stage. Moving on from that is we're probably priming ourselves up for a potential upside-- potential tactical high moving later on in the year. But the one thing I'll circle back to is the baby seasonal cycle which we cited at the beginning. That is negative. High statistical evidence shows that this happens most of the time during the autumn period. So that's just one to continue to watch out for September, October. But actually, September's usually where we get the biggest drawdown risk. Well, I mean, latest statistics show that there's been a massive deleveraging out of funds, in terms of traditional positions, this Jan compared to 2017-- sorry, 2018. And so that shows that not only has the market volatility reshaped the market regime itself, but also our own kind of investment mindset. There's a whole lot of people now-- professional traders, investors-- that are potentially in the market, but not willing to expose as much of their portfolio in such a two-way volatile market. So there's a lot of revisions going on now to risk-- what is that new repricing of risk. So I think in that kind of situation, risk management is going to be key, but then also just a general reevaluation of those crowded out trades and the way that we manage them. RON WILLIAM: Europe is basically the weakest link for now, the UK being probably the weaker. I had this discussion recently and basically had the plug the good, bad, and the ugly. The US was the good, Germany was bad, and the UK was the ugly market. And of course, that's part of the Brexit proxy there coming in. As we approach that infamous date, we'll see what happens. But the charts are basically suggesting just further vulnerability. And I'm talking about the FTSE 100 here. That pushed through 7,000. We're much below that now. About 7,000 wasn't just around psychological level. It was also roughly the Y2K peak level. So just from a general market footprint, it's a very significant breakdown that we're having on the equity market. And of course, the pound is going to be so key. And if you look at the options market now on the pound, it's such a two-way market that we're likely to get some big swings there. Germany, I think, again, is in a wait and see mode, if you look at the DAX. RON WILLIAM: This has been the hardest call, I think, for most, including myself. And the trend in yields is still down. We have had some very viable tests to the upside, which have broken, I think, most technical trend lines. I eventually migrated away from trend lines, particularly with US long term yields, and applied regression. And so I can actually measure it more as a deviation from the mean. I think that can add more value, especially when you want to add not just a plus one sigma, but two, and maybe more, in these types of market environments. More specifically in terms of what will likely happen based upon the technicals I'm watching, I'd say the risk is probably more of a yield spike at some point in time, maybe not in the near term, but maybe in the next year or two and as an example analog of that back in the 1930s, 1931, I believe, and 1937. History rhymes. It doesn't necessarily repeat. So there'll be different causal factors behind it. But the analog is quite convincing of that. And the amount of yields isn't necessarily the big issue. It's the speed of the move. So speed is, I think at this stage, going to be the bigger kiss of death for the bond market. And from that, we could either retrace back within the downtrend for a little while or make new lows. I think it's an open debate on either. But at some point in time, yields will turn from down to up. And that's more of the long term secular call. The average secular trend in US yields-- and you have to go a long way back-- I found data going back about 200 years. And you can see the [INAUDIBLE] 60-year cycle, which is roughly 30 years up, 30 years down. We're obviously on borrowed time now, because we have overextended that. I think we're in this 37th, 38th year now. So on that basic yardstick, at some point, the long cycle will turn, and we'll start to see inflation and growth. But I think that will be more of a bullish. Once we get the equity reset, as it were, the winter season passing, then we can start to see that growth play kicking in. The dollar index is still in a decade-long uptrend. And let's remember, that decade long uptrend began in '08. Again, history doesn't necessarily repeat. But it does rhyme. And I think as and when vol starts to pick up even more in 2019, as it basically did in 2018, the dollar's one of the very last safe havens still around. RON WILLIAM: This is certainly a tactical trading market. More astute risk management is going to be key. I think we'll go back to just using a standard blended approach, but driven by market technicals. I think we'll always keep you on the better side of both performance and risk. And that's why I mentioned on the onset using simple moving averages-- 20, 50, and 200-- will at least keep you in the market when you need to be there and get you out otherwise. So that, at least, these are active tools that can be used and applied for both entry and exit signals. The biggest cycles are the things that I'm just keeping as a risk metrics for the coming time. And they can be proven wrong in terms of the cycle can be skewed or it can be inverted. That does happen. I just think at this stage in time, there's too much of a cluster effect taking place. And that's what's key. It's not just one cycle. It's multiple cycles. And also, various factors, external factors-- macro, fundamental, technical-- are also converging, at least from my perspective and others in the market. So which side of the trade do you want to stand on, I think, is everyone's choice. But ultimately, if you want to be in the market, it's more of a tactical two-way market, certainly for 2019. And thereafter, I just think risk management is going to be key. And cash will be the preferred position for the longer term investor in order to be set up for that buying opportunity thereafter. There's no point in kind of waiting for the wolf to cry several times over and the signal not to happen. We still have to make money. We still have to be in the market, those to choose to do so. So continue to follow. But let's not forget. 2018, probably the best performing asset was cash. And there's a reason behind that. So I think sometimes, unless you are event driven or just very good on the macro side, it's very difficult to trade in a crisis alpha period.