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Visualizing Business/Market Cycles Through Market Momentum: 1

CMT Association's Market Insights features timely technical analysis of current global markets by veteran CMT charterholders. Each post appears on www.tradingview.com/u/CMT_Association/ in an effort to explain process, tools, and the responsible practice of technical analysis. Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.

Visualizing Business/Market Cycles Through Market Momentum: 1

SPDR Select Sector Fund – Industrial AMEX:XLI

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Visualizing Business and Market Cycles Through Market Momentum: Part 1

Effect of liquidity: Change in regime:

It is often said that markets are discounting mechanisms, anticipating changes in the business cycle. I believe that it is generally true, and while it has been less true for most of the last two decades, that it is about to become true again. It is my view that the bull markets of the last fifteen years were largely an artifact of the flood of liquidity that followed the 2008 financial crisis. The deflationary forces created by globalization and technology enabled continued central bank activism and allowed fiscal authorities to run massive deficits without readily apparent repercussions.

The combination of low inflation and immense liquidity effectively changed the nature of the markets. The willingness of monetary authorities to support asset prices rendered the business cycle benign and economic signals generated by the markets less useful. Bullish trends became longer and more entrenched, dips better supported, overbought conditions persisted longer while oversold conditions were fleeting. Counterproductive trading and investing behaviors and bad analysis were continuously bailed out by policy.

I believe that a policy inflection has occurred. Central banks and fiscal authorities will become more and more constrained as inflation becomes a greater risk than deflation. Asset prices will again become more connected to the real economy and less connected to policy. Effective analysts recognize that changes in a fundamental regime can damage (or enhance) the effectiveness of a favored techncial approach. This series is going to focus on a technique that became less effective as asset prices were driven uniformly higher but that is now likely to become informative again.

When I worked in the institutional setting I would place hundreds of assets, ratios, spreads of individual corporate bonds and equities into a 4 quadrant MACD momentum matrix. I would then condense the raw data into thematic groups and see what the matrix implied about the business cycle. In that setting I had help and systems to accomplish this. But, most of the value can be extracted by following thirty or so auctions and ratios. While there is no end to the number of permutations that can be utilized inside the matrix, most of the value can be extracted in a few hours at quarter end.

The illustration is the distilled matrix info. In part 2 I will cover how the matrix is constructed and in subsequent installments how the information can used to help inform a macro viewpoint and investment process.

And finally, many of the topics and techniques discussed in this post are part of the CMT Associations Chartered Market Technician’s curriculum.

Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Taylor Financial Communications

Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.