Share Sleuth’s notepad: A twice in a lifetime investment opportunity

Mathematician Kerry Balenthiran says a 17.6 year bear market is entering its final phase. It will be followed by a 17.6 year bull market.

Despite its precision Kerry Balenthiran is not the first to propose a 17.6 year stock market cycle. He’s not even the second. But he’s confirmed cycles identified by other analysts and elaborated on them to identify 2.2 year sub-cycles.

Balenthiran concludes the stock market follows the 17-18 year commodity bull markets identified and popularised by trader Jim Roger’s writings. Rising commodity prices fuelled by demand reduce corporate profits, while falling commodity prices fuelled by over-supply, increase profits. Other business fundamentals may have an effect and human psychology does the rest, exaggerating the impact of higher or lower expectations for profit on share prices to create 17.6 year bull and bear markets.

“As we can’t change human nature,” says Balenthiran, “It is likely that the behaviour patterns of the past will continue into the future.”

According to the Balenthiran Cycle a 17.6 year bull market consists of three four to five year uptrends punctuated by two mid-cycle corrections lasting approximately two years. A bear market also has bullish periods of approximately 4.4 years and much sharper crashes lasting 2.2 years, typically.

Absolute highs and lows can occur at any point in an uptrend, mania, downtrend or crash and Balenthiran says nothing about the magnitude of price changes, so traders hoping to bet on specific market movements are unlikely to find much use for the Balenthiran Cycle. Extrapolated back to the Great Depression for example, the cycle identified a bear period ending in 1931. The low was in 1932 and was 50% lower.

Balenthiran identified his cycle and retrofitted it into the Dow Jones Industrial Average index to demonstrate its repetitiveness through trial and error, allowing plenty of scope for quibbling about where exactly particular bull and bear markets start.

Imprecision may be construed as a weakness but it’s reality. History repeats but not exactly. The cycle may be sufficient to provide a road map to the future but not to give us sat-nav like accuracy about when exactly we need to turn.

With that caveat in mind, Balenthiran predicts the final significant low of the current bear market will happen this year, 2013 and after a period of volatility in which the market could rise somewhat, the next bull market will start in 2018. The 2013 low, he says, “Represents a great opportunity to start building long positions for the next 23 years – five remaining years of the bear market 18 years of the bull market.”

To trade an 18 year bear market Balenthiran suggests a value approach focused on earnings, dividends and cash flows and trimming share portfolios to adjust to the circumstances. Hold more cash in bearish phases and be fully invested in bullish phases. To trade the 18 year bull market he advocates buying and holding companies that are expected to grow strongly, as these expectations power the bull market and ultimately bring it crashing to an end.

From 2018, the 17.6 year bull market and the 17.6 year bear market are detailed in the book, but you can work out much of it yourself if you add 4.4 years for each of the the bull phases and 2.2 years for the intermediate corrections. Just remember the magnitude and precise timing of each shift is unknown.

Happily the next bull market ends in 2035, near my 69th birthday and, I imagine, semi-retirement. By that time Balenthiran predicts the Dow might reach 100,000 based on the scale of previous bull markets. I can’t think of a better time.

There’s a tendency among value investors to dismiss technical analysis as astronomers might dismiss astrology, but in identifying cycles powered by business fundamentals and psychology Balenthiran is channelling respected names in finance and economics, Keynes, Shiller, and Soros, for example, as well as heroes of cycle theory like Kondratieff.

I think the value discipline is the most effective method of asset allocation and hold cash only when I can’t find suitable investments so I won’t use the Balenthiran model to determine what I invest in. But I have no doubt these cycles exist even if their durations and start and end points are slightly more variable than the book’s very precise title implies.

The 17.6 Year Stock Market Cycle is a relatively slight book because it contains so few wasted words. I enjoyed the brief tours of cycle theory and stock market history and take some comfort from the conclusions Kerry Balenthiran draws.

The future, in terms of share prices, is likely to be much like the past.