Riding the Tech Tiger

It’s been a wild couple of months for stocks and, once again, Tech stocks have been at the forefront.

Does this mean that all things non-Tech are non-starters? Are long-held investment principles now outdated? Do primary drivers like changes in the money supply growth rate no longer matter?

We don’t think so.

We remain firmly of the view that observing the money supply is of vital important. This allows us (and, hopefully, you) to determine where we are in the central-and-commercial-bank-driven boom-bust cycle and how to navigate it successfully.

We’ve shown previously that an approach focussed on allocating via the boom-bust monetary cycle can generate superior notional performance over the medium and longer term. Below are tabular results of the approach as applied, for example, to sectors in the US market:

As readers know, we repeatedly show that changes in money supply constitute a leading indicator and that they produce the classic cycles of boom and bust that characterise the economy and the markets.

We also show that there are time lags between when new money is created and when that new money ripples out from earlier recipients to later recipients - and thus from one part of the economy to another.

We utilise changes in money supply to establish a forward-looking framework indicating which stage of the cycle we anticipate the economy to be entering. By modifying the standard money supply definition to better reflect the true nature of money we are able to better predict the business cycle and its stages.

We know, too, that different assets (and indeed different segments within an asset class) perform better at different stages of the cycle and it is possible to measure and record historical performance by stage. Then, by mapping the upcoming stage of the cycle to the potentially optimum asset mix, it is theoretically possible to improve portfolio decision-making.

This is what we attempt do on a systematic, rules-based basis, dividing the cycle into four stages and mapping these stages to asset returns.

Thus if we know the forthcoming stage – which we do thanks to the lagged effects of money supply changes - we can position portfolios to potentially benefit from this stage. We also add an overvaluation metric to avoid being caught in blow-off tops in any sector.

A more detailed discussion of our process and the logic surrounding it can be found in our previous post here.

This report reflects the application of our approach to the allocation of capital across different stock market sectors.

Here are our two key framework charts:

This template is varied slightly according to the industrial structure of each particular economy.

In this month’s edition of our sector allocation modelling we update subscribers with our latest portfolio changes.

Contents

• US Sector Allocations

• European Sector Allocations

• Japanese Sector Allocations

• Australian Sector Allocations

• UK Sector Allocations

• Canadian Sector Allocations

We begin with the US.

The US Boom-Bust Cycle

The US Boom-Bust Cycle remains in Stage 2 - the rebound period. The dotted line reflects the trajectory over the next 12 months.

This predisposes our model to pro-cyclical, “risk-on” allocations.

US Sectors for June

Read more

March was indeed “sell-off” month as the geopolitical circumstances spiked volatility and a flight to safety in financial markets (most likely to cash since historical safe havens such as long term Treasuries and Gold also were not immune to the sell off)

We continue to try to look beyond the noise and identify, using techniques that have survived turbulent times in the past, where we are in the cycle and how that can guide allocations. We have shown over many months that it is possible to systematically allocate capital based on the business cycle and then use changes in the money supply growth rate to predict the business cycle. This is our approach.

We’ve also shown that using this approach it appears possible to generate superior notional performance:

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Methodology

As readers know, we repeatedly show that changes in money supply are a leading indicator and that they produce the classic cycles of boom and bust that characterise the economy and the markets.

We also show that there are time lags between when new money is created and when that new money ripples out from earlier recipients to later recipients - and thus from one part of the economy to another.

We utilise changes in money supply to establish a forward-looking framework indicating which stage of the cycle we anticipate the economy to be entering. By modifying the standard money supply definition to better reflect the true nature of money we are able to better predict the business cycle and its stages.

We know, too, that different assets (and indeed different segments within an asset class) perform better at different stages of the cycle and it is possible to measure and record historical performance by stage. Then, by mapping the upcoming stage of the cycle to the potentially optimum asset mix, it is theoretically possible to improve portfolio decision-making.

This is what we do, dividing the cycle into four stages and mapping these stages to asset returns.

Thus if we know the forthcoming stage – which we do thanks to the lagged effects of money supply changes - we can position portfolios to hopefully benefit from this stage. We also add an overvaluation metric to avoid being caught in blow-off tops in any sector.

A more detailed discussion of our process and the logic surrounding it can be found in our previous post here.

This report reflects the application of our approach to the allocation of capital across different stock market sectors.

Here are the two key framework charts:

This template is varied slightly according to the industrial structure of each particular economy.

In this month’s edition of our sector allocation modelling we update readers on our latest portfolio changes.

Contents

• US Sector Allocations

• European Sector Allocations

• Japanese Sector Allocations

• Australian Sector Allocations

• UK Sector Allocations

• Canadian Sector Allocations

We begin with the US.

The US Boom-Bust Cycle

The US Boom-Bust Cycle remains in Stage 2 - the early rebound period. The dotted line reflects the trajectory over the next 12 months. With the exception of the Energy sector, the current geopolitical uncertainty saw all other sectors end up in the red in March, although so far in late April we have seen a rebound in most sectors with the greater response being in cyclicals such as Technology and Discretionary.

We continue to present the outlook from a perspective that has generated a performance edge over the long run that has, as mentioned, included periods of extreme market turbulence.

US Sectors for May

Read more

We do indeed live in interesting times. The Iran war is complicating – and will increasingly complicate – investment decision-making.

We don’t do geopolitical strategy. Instead we apply systems which have navigated difficult waters in the past incorporating oil shocks and financial crises.

As readers know, have shown over many months that it is possible to systematically allocate capital based on the business cycle and then use changes in the money supply growth rate to predict the business cycle. This is what we continue to do even as the Iran conflict intensifies.

We’ve also shown that using this approach it appears possible to generate superior notional performance:

As readers know, we repeatedly show that changes in money supply are a leading indicator and that they produce the classic cycles of boom and bust that characterise the economy and the markets.

We also show that there are time lags between when new money is created and when that new money ripples out from earlier recipients to later recipients - and thus from one part of the economy to another.

We utilise changes in money supply to establish a forward-looking framework indicating which stage of the cycle we anticipate the economy to be entering. By modifying the standard money supply definition to better reflect the true nature of money we are able to better predict the business cycle and its stages.

We know, too, that different assets (and indeed different segments within an asset class) perform better at different stages of the cycle and it is possible to measure and record historical performance by stage. Then, by mapping the upcoming stage of the cycle to the potentially optimum asset mix, it is theoretically possible to improve portfolio decision-making.

This is what we do, dividing the cycle into four stages and mapping these stages to asset returns.

Thus if we know the forthcoming stage – which we do thanks to the lagged effects of money supply changes - we can position portfolios to hopefully benefit from this stage. We also add an overvaluation metric to avoid being caught in blow-off tops in any sector.

A more detailed discussion of our process and the logic surrounding it can be found in our previous post here.

This report reflects the application of our approach to the allocation of capital across different stock market sectors.

Here are the two key framework charts:

This template is varied slightly according to the industrial structure of each particular economy.

In this month’s edition of our sector allocation modelling we update readers on our latest portfolio changes.

Contents

• US Sector Allocations

• European Sector Allocations

• Japanese Sector Allocations

• Australian Sector Allocations

• UK Sector Allocations

• Canadian Sector Allocations

We begin with the US.

Read more

If you can predict the business cycle and those sectors that do better within that cycle, then you should be able to get a performance edge.

Doable?

Yes, and here are some numbers that support that conclusion. Below (and shown graphically above) are proforma results of our ongoing notional US portfolio of sectors, created and rebalanced by predicting the business (or “boom-bust”) cycle.

We have outperformed year-to-date, last year and since inception.

The Logic

As readers know, we repeatedly show that changes in money supply are a leading indicator and produce the classic cycles of boom and bust that characterise the economy and the markets.

We also show that there are time lags between when new money is created and when that new money ripples out from earlier recipients to later recipients - and thus from one part of the economy to another.

We utilise changes in money supply to establish a forward-looking framework indicating which stage of the cycle we anticipate the economy to be entering. By modifying the standard money supply definition to better reflect the true nature of money we are able to better predict the business cycle and its stages.

We know, too, that different assets (and indeed different segments within an asset class) perform better at different stages of the cycle and it is possible to measure and record historical performance by stage. Then, by mapping the stage of the cycle to the potentially optimum asset mix, it is theoretically possible to improve portfolio decision-making.

This is what we do, dividing the cycle into four stages and mapping these stages to asset returns.

Thus if we know the forthcoming stage - thanks to the lagged effects of money supply changes - we can position portfolios to hopefully benefit from that stage. We also add an overvaluation metric to avoid being caught in blow-off tops in any sector.

A more detailed discussion of our process and the logic surrounding it can be found in our previous post here.

This post reflects the application of our approach to the allocation of capital across different stock market sectors.

Here are the two key framework charts:

This template can be varied slightly according to the industrial structure of each particular economy.

In this month’s edition of our sector allocation modelling we update readers on our latest portfolio changes.

The Sectors

• US Sector Allocations

• European Sector Allocations

• Japanese Sector Allocations

• Australian Sector Allocations

• UK Sector Allocations

• Canadian Sector Allocations

• Summary Sector Selections

We begin with the US then move on to the other markets where we also demonstrate a performance edge on an absolute and risk-adjusted basis.

The US Boom-Bust Cycle

The US Boom-Bust Cycle remains in Stage 2 - the early rebound period. The dotted line reflects the trajectory over the next 12 months.

US Sectors for March

Read more

What if it were possible to systematically allocate capital based on the business cycle and then use changes in the money supply growth rate to predict the business cycle?

What if doing this generated superior results - like these:

As readers know, we repeatedly show that changes in money supply are a leading indicator and produce the classic cycles of boom and bust that characterise the economy and the markets.

We also show that there are time lags between when new money is created and when that new money ripples out from earlier recipients to later recipients - and thus from one part of the economy to another.

We utilise changes in money supply to establish a forward-looking framework indicating which stage of the cycle we anticipate the economy to be entering. By modifying the standard money supply definition to better reflect the true nature of money we are able to better predict the business cycle and its stages.

We know, too, that different assets (and indeed different segments within an asset class) perform better at different stages of the cycle and it is possible to measure and record historical performance by stage. Then, by mapping the stage of the cycle to the potentially optimum asset mix, it is theoretically possible to improve portfolio decision-making.

This is what we do, dividing the cycle into four stages and mapping these stages to asset returns.

Thus if we know the forthcoming stage - thanks to the lagged effects of money supply changes - we can position portfolios to hopefully benefit from this stage. We also add an overvaluation metric to avoid being caught in blow-off tops in any sector.

A more detailed discussion of our process and the logic surrounding it can be found in our previous post here.

This report reflects the application of our approach to the allocation of capital across different stock market sectors.

Here are the two key framework charts:

This template can be varied slightly according to the industrial structure of the particular economy.

In this month’s edition of our sector allocation modelling we update readers on our latest portfolio changes.

Contents

• US Sector Allocations

• European Sector Allocations

• Japanese Sector Allocations

• Australian Sector Allocations

• UK Sector Allocations

• Canadian Sector Allocations

We begin with the US.

Read more

As reader know we show time and again that money supply is a leading indicator – there is a time lag as new money ripples from new recipients to later recipients and thus from one part of the economy to another. One can thus utilise changes in money supply to establish a forward-looking framework as to which stage of the cycle we anticipate the economy to be entering. By modifying the standard money supply definitions to better reflect the true nature of money we are able to better predict the business cycle and its stages.

We know, too, that different assets (and indeed different sub-classes within an asset class) perform better at different stages of the cycle. By mapping the stage of the cycle to the potentially optimum asset mix we can help with portfolio decision-making.

This is what we do, dividing the cycle into four stages and mapping these stages to asset returns. Thus if we know the forthcoming stage - thanks to the lagged affects of money supply changes - we can position portfolios to hopefully benefit from that stage.

A more detailed discussion of our process and the logic surrounding it can be found in our previous post here.

This report reflects the approach as applied to the different stock market sectors.

Here are the two key charts:

This template can be varied slightly according to the industrial structure of the particular economy.

How do various assets and countries line up now?

Read more

We show time and again that money supply is a leading indicator – there is a time lag as new money ripples from new recipients to later recipients and thus from one part of the economy to another. One can thus utilize changes in money supply to establish a forward-looking framework as to which stage of the cycle we anticipate the economy to be entering. By modifying the standard money supply definitions to better reflect the true nature of money we are able to better predict the business cycle and its stages.

We know - both logically and empirically - that different assets (and indeed different sub-classes within an asset class) perform better at different stages of the cycle and we measure and record those difference in returns. By mapping the stage of the cycle to the potentially optimum asset mix we can help with portfolio decision-making.

This is what we do, dividing the cycle into four stages and mapping these stages to asset returns. Thus if we know the forthcoming stage - thanks to the lags in money supply changes - we can position portfolios to hopefully benefit from that stage.

A more detailed discussion of our process and the logic surrounding it can be found in our previous post here.

This report reflects the approach as applied to the different stock market sectors.

Here are the two key charts:

This template can be varied slightly according to the industrial structure of the particular economy.

Where are we now in the cycle for various of the markets that we follow?

Read more

As we have noted previously, some asset prices tend to perform better in different stages of the economic cycle.

The question for asset allocators is whether it is possible to both determine the stages of the Boom-Bust cycle and simultaneously determine the optimal asset mix for those stages?

Our research suggests that it is.

The central reason for this assertion is that money supply is a leading indicator – there is a time lag as the new money ripples from new recipients to later recipients and thus from one part of the economy to another. One can thus utilize changes in money supply to establish a forward-looking framework as to which stage of the cycle we anticipate the economy to be entering. By modifying the standard money supply definitions to better reflect the true nature of money we are able to better predict the business cycle and its stages. If we expect the economy to be in Stage 1, for example, for the next three months, then we can position ourselves in assets which have performed best historically in Stage 1.

A visual representation of our cycle staging approach is shown below, along with sectors which tend to historically outperform in each respective stage.

A more detailed discussion of our process and the logic surrounding it can be found in our previous post here.

Here are the two key charts:

Where are we now in the cycle for various markets that we follow?

The US Boom-Bust Cycle

Currently, the US Boom-Bust Cycle remains in Stage 2. From the description above, we have entered the early rebound period. The dotted line reflects the trajectory over the next 12 months.

US Boom-Bust Sector Signals for November

By using our Boom-bust model for Stage 2 and an overvaluation metric to try to avoid being caught in blow-off extremes, we derive the following preferred sectors for November:

• Consumer Discretionary

• Technology

• Small allocation towards Energy & Basic Materials

Below, we show the notional performance from 1973 of a portfolio of US sectors constructed and rebalanced according to our cycle staging methodology.

Transaction costs are included with the US modelling and for all markets as well.

The Eurozone Boom-Bust Cycle

Similarly, to the US, the Eurozone Boom-Bust Cycle also remains in Stage 2. As per the above we have entered the early rebound period. The dotted line reflects the trajectory over the next 12 months.

Eurozone Boom-Bust Sector Signals for October

Using our combined cycle and overvaluation model the preferred sectors for November are:

• Consumer Discretionary

• Technology

• Industrials

• Small allocation towards Energy & Basic Materials

Below, we show the notional performance since 1999 of a portfolio of Eurozone sectors constructed and rebalanced according to the above cycle staging methodology. Transaction costs are included.

Japanese Boom-Bust Cycle

For the upcoming month, we see that the Japanese Boom-Bust Cycle also remains in Stage 2 - the early rebound period.

Japan Boom-Bust Sector Signals for November

Using our combined Boom-Bust model the preferred sectors for November are:

• Consumer Discretionary

• Technology

• Industrials

• Small allocation towards Energy & Basic Materials

Below, we show the notional performance since 1988 of a portfolio of Japanese sectors constructed and rebalanced according to the above cycle staging methodology.

Australia Boom-Bust Cycle

For November, the Australian Boom-Bust Cycle now rotates into Stage 3. From the description above, we are now moving into the later expansion phase.

Australia Boom-Bust Sector Signals for November

Our combined cycle and overvaluation model delivers the following updated sector preference for November:

• Consumer Staples

• Health

• Financials

• Telecom

• Slightly smaller allocation to Basic Materials & Energy

Below we show the notional performance of our model from 2000 to the present.

UK Boom-Bust Cycle

The UK Boom-Bust Cycle remains in Stage 3 for November. From the description above, we are in the maturing rebound period.

UK Boom-Bust Sector Signals for November

Our model-preferred sectors for November are:

• Consumer Staples

• Financials

• Telecom

• Slightly smaller allocation towards Energy & Basic Materials

Once again, we show the model’s notional performance from 1999.

Canada Boom-Bust Cycle

The Canadian Boom-Bust Cycle remains in Stage 2 for October. This places Canada in the early rebound period.

Canada Boom-Bust Sector Signals for November

Our model (Stage 2) gives us the following allocations for November:

• Consumer Discretionary

• Technology

• Industrials

• Small allocation towards Energy

Here are the notional results.

Summary Matrix - November

As we have noted previously, some asset prices tend to perform better in different stages of the economic cycle.

The question for asset allocators is whether it is possible to both determine the stages of the Boom-Bust cycle and simultaneously determine the optimal asset mix for those stages?

Our research suggests that it is.

The central reason for this assertion is that money supply is a leading indicator – there is a time lag as the new money ripples from new recipients to later recipients and thus from one part of the economy to another. One can thus utilize changes in money supply to establish a forward-looking framework as to which stage of the cycle we anticipate the economy to be entering. By modifying the standard money supply definitions to better reflect the true nature of money we are able to better predict the business cycle and its stages. If we expect the economy to be in Stage 1, for example, for the next three months, then we can position ourselves in assets which have performed best historically in Stage 1.

A visual representation of our cycle staging approach is shown below, along with sectors which tend to historically outperform in each respective stage.

A more detailed discussion of our process and the logic surrounding it can be found in our previous post here.

Here are two key charts from that earlier post:

Where are we now in the cycle for various markets that we follow?

The US Boom-Bust Cycle

Currently, the US Boom-Bust Cycle remains in Stage 2. From the description above, we have just entered the early rebound period. The dotted line reflects the trajectory over the next 12 months.

US Boom-Bust Sector Signals for October

Using our Boom-bust model, which uses Stage 2 for the US and an overvaluation metric, delivers the following preferred sectors for October:

• Consumer Discretionary

• Technology

• Smaller allocation towards Energy & Basic Materials

Below we show the notional performance from 1973 of a portfolio of US sectors constructed and rebalanced according to our cycle staging methodology. Transaction costs are included.

The Eurozone Boom-Bust Cycle

Similarly to the US, the Eurozone Boom-Bust Cycle also remains in Stage 2. From the description above, we have just entered the early rebound period. The dotted line reflects the trajectory over the next 12 months.

Eurozone Boom-Bust Sector Signals for October

Using our cycle and overvaluation model, which is in Stage 2 for the Eurozone, the preferred sectors for October are:

• Consumer Discretionary

• Technology

• Industrials

• Smaller allocation towards Energy & Basic Materials

Below we show the notional performance since 1999 of a portfolio of Eurozone sectors constructed and rebalanced according to the above cycle staging methodology. Transaction costs are included.

Japanese Boom-Bust Cycle

For the upcoming month, we see that the Japanese Boom-Bust Cycle rotates into Stage 2. From the description above, we have just entered the early rebound period.

Japan Boom-Bust Sector Signals for October

Using our Boom-Bust model, which now rotates into Stage 2 for Japan, the preferred sectors for October are:

• Consumer Discretionary

• Technology

• Industrials

• Telecom

• Smaller allocation towards Energy & Basic Materials

Below, we show the notional performance since 1988 of a portfolio of Japanese sectors constructed and rebalanced according to the above cycle staging methodology. Transaction costs are included.

Australia Boom-Bust Cycle

The Australian Boom-Bust Cycle remains in Stage 4 as it has all year. From the description above, we are still in the softening period.

Australia Boom-Bust Sector Signals for October

Our combined cycle and overvaluation model (currently in Stage 4) delivers the following sector preference for October:

• Consumer Staples

• Health

• Utilities

Below we show the notional performance from 2000 of a portfolio of Australian sectors constructed and rebalanced according to the above cycle staging methodology. Transaction costs are included.

UK Boom-Bust Cycle

The UK Boom-Bust Cycle remains in Stage 3 for October. From the description above, we are in the maturing rebound period.

UK Boom-Bust Sector Signals for October

Our model-preferred sectors for October are:

• Consumer Staples

• Financials

• Telecom

• Smaller allocation towards Energy & Basic Materials

Once again, we show the notional performance from 1999 of a portfolio of UK sectors constructed and rebalanced according to the above methodology. Transaction costs are included.

Canada Boom-Bust Cycle

The Canadian Boom-Bust Cycle remains in Stage 2 for October. This places Canada in the rebound period.

Canada Boom-Bust Sector Signals for October

Our model (Stage 2) gives us the following allocations for October:

• Consumer Discretionary

• Technology

• Industrials

• Smaller allocation towards Energy & Basic Materials

And here are the notional results. Transaction costs are included.

Summary Matrix - October

For us, the phenomenon of boom-bust cycles (in product and asset markets) is associated with increases in the money supply out of “thin air”. Whenever money is generated out of thin air and then employed in an exchange this results in nothing being exchanged for money. Consequently, when the recipient of this money is exchanging it for something we have an exchange of nothing for something. The money out of thin air is not supported by anything. This type of money leads to consumption without any preceding production.

This results in the diversion of real savings from wealth generators towards the holders of the new money out of thin air. As a result, this weakens the wealth generation process. As long as the growth rate of the money out of thin air continues to strengthen the various activities (i.e. bubble activities) that emerge on the back of this type of money we see what appears to be economic expansion. This expansion is called an economic boom.

Once the growth rate of money supply out of thin air starts declining, let us say because of the Fed’s tighter monetary stance, economic growth follows suit i.e. an economic bust emerges as these thin-air dependent activities suffer reduced revenue and reduced access to funding.

What does this mean for Asset Allocation?

Some asset prices tend to perform better in different stages of the economic cycle.

The question is whether it is possible to both determine the stages of the Boom-Bust cycle and simultaneously determine the optimal asset mix for those stages?

We believe that it is.

The central reason for this assertion is that money supply is a leading indicator – there is a time lag as the new money ripples from new recipients to later recipients and thus from one part of the economy to another. One can thus utilize changes in money supply to establish a forward-looking framework as to which stage of the cycle we anticipate the economy to be entering. By modifying the standard money supply definitions to better reflect the true nature of money we are able to better predict the business cycle and its stages. If we expect the economy to be in Stage 1, for example, for the next three months, then we can position ourselves in assets which have performed best historically in Stage 1.

A visual representation of our cycle staging approach is shown below, along with sectors which tend to historically outperform in each respective stage.

Cycle Stage 1: Rapidly deteriorating conditions – optimal to be defensive

In Stage 1 of the AASE cycle the economy is declining at a rapid pace and, in general, it is better to adopt a defensive strategy.

This typically entails higher allocations to defensive equity sectors. Reducing overall exposure to equities may even be considered for capital preservation in this Stage where negative returns are more probable than in other Stages.

Cycle Stage 2: Early rebound period

In Stage 2 of our cycle schema the economy is declining at a slower pace or may be starting to show signs of positive growth. The economy at this stage is commonly patchy but with the emergence of some momentum in a number of assets, including equities and in particular some of the more cyclical sectors. Different economies, with different industrial structures, will have slight variations as to which sectors are, in their cases, more “cyclical”. There will thus be some slight differences in sector composition across countries but the pro-cyclical theme prevails.

On occasions there may be some small pickup in commodity prices (although this is more common in Stage 3). As such there is a smaller allocation towards commodity related sectors (Basic Materials/Energy) compared to Cyclicals.

Cycle Stage 3: Late recovery period

In Stage 3 of the cycle the economy is expanding at a more rapid pace. The conventionally measured end products of the monetary distortions created by the central and commercial banks appear to be strong as the multitudinous micro-bubbles are diffusing across the entire economy and attracting resources.

Now the cyclicals may be performing well, but the risks are increasing & some of the more “non-cyclical” sectors come into favour. Often, industrials will be performing well, enjoying the pull-up demand from other sectors.

At this stage it is often common to see increases in commodity prices (which may also appear earlier in the cycle in some economies where capacity may be more constrained due to greater destruction during Stage 1). Therefore, a higher allocation to commodity related sectors (compared to Stage 2) is more likely in this stage. Property (REITs) may also perform well over this period. It may even be beneficial to shift weightings towards the overall market (via the index) in order to spread risk.

Cycle Stage 4: Downturn

In Stage 4 of the cycle the economy is growing at a slower pace as measured economic activity has peaked and begins to weaken. At this time a defensive posture is warranted, rotating into sectors such as staples, utilities, telecom and healthcare.

Allocations to commodities (either directly or via equities) are typically a liability in this stage as de-stocking in manufacturing industries has dramatic effects on commodity prices, and so weightings here are typically zero.

The US Boom-Bust Cycle

Currently, the US Boom-Bust Cycle is in Stage 2. From the description above, we have just entered the early rebound period. The dotted line reflects the trajectory over the next 12 months.

We have analysed sector and asset average performance in different stages of the Boom-Bust cycle since 1973 & these are shown in the table below.

The table above illustrates that in the more defensive phases (Stage 1 & Stage 4), defensive sectors tend to perform relatively better than other sectors. Likewise in Stage 2 & Stage 3 cyclicals and commodity related sectors tend to outperform.

For Gold enthusiasts, we also observe that the price of Gold tends to perform best in the defensive Stage 1 and also in Stage 3. This is not surprising since in Stage 1 Gold’s attractiveness as a protective instrument becomes relevant while in Stage 3 it reflects commodity-related sector outperformance.

Sectors which have not only performed relatively well in historical Stage 2 phases, but also more importantly adhere to economic theory, include cyclicals such as Consumer Discretionary, Technology, with a smaller allocation to the commodity-related sectors, Energy & Basic Materials.

We also apply an overvaluation metric (based on extreme price excursions) to reduce sector exposures during extreme bubbles in those sectors.

It is important to note that because of the predictive lags in our approach we know the changes to make to next month’s portfolio structure at the end of the current month.

Below we show the notional performance since 1973 of a portfolio of US sectors constructed and rebalanced according to the above cycle staging methodology. Transaction costs are included.

US Boom-Bust Sector Signals for October

Using our Boom-bust model, which is in Stage 2 for the US and overlaying this with our overvaluation metric, the sectors chosen for October are:

• Consumer Discretionary

• Technology

• Smaller allocation towards Energy & Basic Materials

As with our Stock/Bond timing model, we shall be providing regular updates to our sector positioning and performance in this Substack.

We also plan to add sector models for other countries.