Beating the Business Cycle
06/07/2012 12:10 pm EST
Each stage of an economic expansion calls for a different mix of portfolio assets, says technical analyst Martin J. Pring of Pring.com.
The Dow Jones Pring Business Cycle Index. We’re here with the author of the index, Martin Pring. Martin, how does your index work; why did you decide to build it, and how does it work?
Well, for years I’ve been working on what I call my six stages, and that is the business cycle goes through a series of chronological sequences, and the turning points in bonds, stocks, and commodities are part of that sequence. So since there are three markets, there’s a top and bottom to each one, three two’s equal six, which give us six stages.
So the idea was to figure out which, first of all how to identify the stages, and then go back to the 1950s and identify which are the best performing asset classes in each of these six stages. From that, we build an index.
And, do you use the index in your money market business, or your trading, or…?
Well, the index has only been published since March 2012, so it’s in its infancy here. But in our money-management firm, Pring Turner Capital, we’ve been using those strategies devised in the index for the last 15 or 20 years.
Could you run us through how it would work, let’s say with stocks, for example?
Well, the stages work that at the beginning of the cycle, bonds bottom, and then as the economy weakens, people in the stock market then begin to realize there’s going to be another recovery, so that’s stage two when stocks bottom.
Stocks are bullish from stages two to what we call stages three, when commodities start to peak up and then when interest rates start to come down. So those are the three stages which are suitable for stocks, and then stages one to three are suitable for bonds, and three to five is suitable for commodities, so it gets a little complicated without a chart to show you, unfortunately.
Right, but what you’re doing is allocating through the three sectors, essentially, and whenever it’s best to move when the risks are lowest and the rewards are highest.
Yeah, we have models that identify which stage we’re in. So if we know we’re in stage one, we go back to the 1950s, for example, and we look at all the stage ones, and we say, well the best-performing asset in stage one during the recession is bonds, and some interest-sensitive stocks like utilities or financials and so forth.
So we say to ourselves, which is the best asset mix for stage one, and come up with that asset mix, and do it for the other five stages, and then as the models change from stage to stage, so the index reflects that in its asset allocation.
And, you’ve been using this but you haven’t formalized it until recently?
Well, AdvisorShares have put into registration an actively managed ETF that will use the Dow Jones Pring Business Cycle Index as the basis of the strategy, and Pring Turner Capital has proposed to be the sub-manager for that fund.
More than that I can’t say at this point, because we’re in what they call the quiet period where the SEC won’t let you talk about anything. So, I don’t really want to get into any more details on the fund, except to say it is possible to get a preliminary prospectus if you go to Pringturner.com.
So what we’ll be looking for is an ETF that’s the Dow Jones Pring Business Cycle Index-centered ETF?
We’ll use that as its basic strategy, but it will try and beat the index because our firm has had a lot of experience in this technique of business cycle investing for the last 15 or 20 years. So we think we can beat the index, or do better than the index, and also keep the cost of management down.