Is the FTSE100 heading for a massive fall?

April 15, 2013


With the FTSE100 index heading for 6500 again are we slowly but surely heading for a massive fall? With two previous major turning points at 6951 (30 December 2000) and 6751 (18 June 2007) will we be seeing a major downturn later this year?

Before we consider whether a substantial drop in the FTSE100 index is a possibility, I first want to introduce you to the workings of the so-called “Balenthiran Cycle”.

Once in a while I come across an investment book that I find both instructional as well as inspirational in particular when its about stock market cycles.

This book claims that the stock bull market will end before the Autumn 2013 while the bear market will reassert itself later in 2013 and continue until 2018. That kind of prediction got my immediate attention.

What are cycles?

Before we delve a bit deeper into these predictions, lets first define what cycles are.

Cycles are a sequence of events that repeat over time. The outcome won’t necessarily be the same each time, but the underlying characteristics are the same. A good example is the seasonal cycle. Each year we have four seasons, but the weather can, and does, vary a great deal from one year to another. And so it is with the stock market.

Cycles research is not something new. It is probably as old as when humans turned agrarians, confident in the seasonality of the sowing and harvesting cycle. Also 17 year stock market cycles have been documented by a number of different people.

Russell Napier, in his book Anatomy of the Bear: Lessons from Wall Street’s four great bottoms refers to a statement from professor Jeremy Siegel’s analyses of total returns since 1802 (albeit without much explanation):

“All an investor needs to do is hold for 17 years and they will never lose money in the stockmarket. If you sit it out and ignore market prices, history suggests that in sometime less than 17 years the bear will simply go away, leaving your real purchasing power undamaged”.

Even Warren Buffett believes in the 17 year cycle, as expressed in a rather long winded way in an article published in Fortune magazine in November 1999.

While Buffett is known for his fundamental value investment approach he rarely speaks about general stock market levels and doesn’t like to forecast where the market may go in the future.

However, Buffett’s consistent ability to grow his funds through many investment cycles can’t be based on him being ‘lucky’ all the time in growing and preserving his, and his investors’, fortune. An understanding when the major turning points happen and then making the big calls is clearly where Buffett distances himself from most other investors, private as well as institutional.

In fact the 17.6 stock market cycle is nothing new. Art Cashin from UBS was interviewed on CNBC in 2009, in which he discussed a bull market cycle lasting 17.6 years followed by a bear market cycle of 17.6 years. Cashin said if you take the top of the bull market to be 2000, then subtracting 17.6 years gives you the start of the bull market (April 1982), and adding 17.6 years gives you June 2017 – according to Cashin: the end of the current bear market.

Repeating 17.6 year cycles?

Forward looking stock market cycles are about forecasting future market activity based on historic performance. It comes as a surprise to many people that booms and busts occur surprisingly regularly, while, according to Kerry Balenthiran, there is a clear repeating 17.6 year cycle in the stock markets.

The “Balenthiran Cycle”, the subject of Kerry’s new book The 17.6 Year Stock Market Cycle: Connecting the Panics of 1929, 1987, 2000 and 2007, using Dow Jones Index data going back more than 100 years, identifies the turning points 2002, 2007, 2009, 2011, 2013…. together with specifics whether the cycle is anticipating highs or lows.

Using data from four previous 17.6 year stock market cycles, he is the first person who shows that within a 17.6 year stock market cycle the markets consist of regular downtrends lasting 2.2 years and uptrends lasting 4.4 years (2 x 2.2 years), with a combined cycle length of 17.6 years.

BAL1982-to-2018-cycle

His “Balenthiran Cycle” shows the intermediate turning points that match stock market behavior going back to the early 1900s and, in his book, extrapolate the cycle forwards to provide a market roadmap of the next secular bull market to 2035 and subsequent secular bear market to 2053.

Using the Balenthiran Cycle he forecasts that we are in a secular bear market that will last from 2000 to 2018, and the current uptrend will end in 2013 and that we will have a low by the end of October of 2013 (but, not lower than the 2009 low).

Following this low Balenthiran forecasts (using historic cycles) that we are likely to see a bounce in the markets with higher lows in 2015 and 2018 before the new secular bull market begins in 2018.

Imagine if you had sold at the highs of 2000 or 2007 and bought back 2.2 years later rather than waiting 5 years to make your money back?

The 2000 Balenthiran Bear Market Cycle

According to the research of Balenthiran there is a different sequence for secular bull markets and secular bear markets and together these form a secular cycle of 35.2 years. For instance, the bull market from 1982 to 2000 was a secular bull market, and since 2000 shares have been in a secular bear market.

While his research is based on the Dow Jones Industrial Average (DOW), due to reliable data being available for longer periods than the FTSE100, in recent interviews, Balenthiran confirms that his findings are equally applicable to the UK stock market. In fact, the DOW and the FTSE100 have been in the same sort of phase ever since the bull market high of 2000.

According to Balenthiran the current 17.6 year stock market cycle says that the next secular bull market in stocks will begin in 2018, while the end of 2013 may offer a great (last) opportunity to buy in at share prices we may never see again.

What is important to realise is that while Balenthiran is not trying to determine by how much the stock market may increase or decrease, during a Balenthiran Bear Market Cycle, instead it shows distinct phases of fixed time, turning points and direction.

In a Balenthiran Bear Market Cycle the bullish phases are based on a time span of 4.4 years – “the bear market rally” – and the bearish phases are 2.2 years in duration. In some cases during the bearish phases, according to Balenthiran, the exact low point may be towards the beginning of the 2.2 year period, but the general negative mood will persist during the whole period.

The phase 3 bear market often marks the lowest low of the whole bear market cycle, while the crash during the phase 5 high often marks the low prior to the new bull market, and, according to Balenthiran, can often be “a good place to buy equities at bargain prices prior to the new bull market” starting after phase 6.

Using data from the FTSE100 since 2000, I will now make an attempt to show you how the current Balenthiran Bear Market Cycle looks like.

It shows that, if future market behaviour is consistent with the Balenthiran Cycle, the coming low in 2013 should not be lower than the 2009 low (FTSE100 9 March low: 3461) but rather we should see a correction of between 20 to 30 percent from its 2013 high (current 2013 high: 12 March 2013 at 6534).

Duration* Cycle Date FTSE100 Comment
FTSE100 Market High 31/12/1999 6951
2.2 years Market low 24/09/2002 3610 actual duration: 2.9 years
4.4 years high 15/10/2007 6752 actual duration: 5.1 years
2.2 years Bear market low 9/03/2009 3461 actual duration: 1.5 years
2.2 years High 3/05/2011 6104 actual duration: 2.2 years
2.2 years Low Autumn? ? below 2011 high?
2.2 years Low 2015 ?
2.2 years End 2018 ? End of bear market

*Balenthiran Cycle duration

The Balenthiran Bear Market Cycle model has correctly identified 2000 (well almost), 2002, 2007, 2009 and 2011 as pivital points in the current bear market in so far that most of the highs and lows are within 5% to 10% of the actual market tops and bottoms even though the actual turning points may have been slightly early or late in the year.

In conclusion

According to Balenthiran “there is every reason to think that during 2013 there will be a final significant low for this bear market”.

If this scenario is to play out, as per the Balenthiran Bear Market Cycle model, the coming low should not be a new lower bear market low but rather we should see a correction of between 20 to 30 percent in the FTSE100 from its 2013 high (current 2013 high: 12 March 2013 at 6534) with the FTSE100 returning to levels between 5227 and 4574.

What will such a market drop cause?

If such a drop occurs, according to Balenthiran the coming low of 2013 will be the last significant market low of this bear market. Although there will be continued volatility after 2013, there should be higher lows after 2013. Therefore the 2013 market low “represents a good time to start accumulating equities for the next 23 years – five remaining years of this bear market and 18 years of the new bull market”.

The lows that Balenthiran expect in 2015 and 2018 are likely to be higher lows than the coming one in 2013, and, in his view, “the best approach is to start stake building in the stock market lows of 2013 and 2015, buying great stocks at low valuations and riding the next great bull market”.

What is interesting is, that the Balenthiran Cycle has fixed start and end dates with predetermined intermediate turning points. The cycle can therefore be rolled forward in perpetuity according to Balenthiran with the next bull market from 2018 to 2035 and the bear market from 2035 to 2053. Fascinating stuff!

Clearly, while one or more subsequent ‘black swan’ events can happen later this year, we will closely monitor stock market developments. At least we have a roadmap as we know which high quality dividend paying companies we want to own long term, in the Dividend Income Portfolio, and, at what price. We will just have to wait until Mr Market sells them to us.

What next?

{ 1 comment }

Kerry Balenthiran May 21, 2013 at 8:33 am

A great review of my book “The 17.6 Year Stock Market, Connecting the Panics of 1929, 1987, 2000 and 2007”, thank you.

Since the publication of my book in March 2013, and my appearance on CNBC to promote it, the FTSE 100 and US markets have continued in a relentless bull market surge. In fact I read that this is one of the longest runs without a 5% correction. However I still stick to my forecast of a low in the second half of 2013, most likely in autumn.

The Balenthiran Cycle is based on the Dow Jones Industrial Average as it has the most historical data, but the FTSE 100 has tracked the Dow pretty well since the 1980s and hence the forecast is applicable to the FTSE 100. I have gone back 100 years in order to demonstrate this cycle.

On CNBC I said that I expected a top in the following three months, so by the end of June, and a low in the autumn. I have recently looked at a shorter Dow cycle and this is flashing red right now and highlights a bottom around 13th September 2013.

More details on the shorter 17.6 week cycle are available here: http://www.17yearstockmarketcycle.com/

Regards,

Kerry

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