Source: Amanita

2. By Eurodollar COT it would be now:

Source: Nowandfutures

3. By the historic seasonality of geomagnetism it would be June or July:

4. By actual geomagnetism we have the potential for a top here, due to the SP500 pulling away from the model, which has lost its uptrend looking out to mid-June:

5. By Pug’s EW a top should be now (and this is echoed in Alphahorn’s EW projections):

Source: PUGSMA

6. Using MRCI’s historic matching tool, 1987 is the closest mirror, which kept rising until October at which point it made one the biggest crashes of all time:

Source: MRCI

7. To add to that, the lunar/solar eclipse configuration of 1987 which occurred prior to that crash matches this year but instead falls now in May-June, and this is the basis of Puetz’s crash windows:

Source: Kim Rice

8. Gann Global draw out the closest historic rhymes as the 1950s and 1920s. The former suggests a retreat is overdue, the latter that the market can keep going until August:

Source: Gann Global

9. The Presidential cycle echoes the projection for an August top:

Source: Seasonalcharts

10. By my work, the closest historical mirror is 1946-7. Stocks topped in Q2 1946, with money switching from that point to commodities. With a normal lag in feeding through, inflation took off as of July 1946 and was elevated for 2 years from then, through the solar peak of May 1947.

Source: Matthew Claassen

Note treasury yields reversed course along with stocks topping, and commodities took over. Note also though the backdrop to this was the lifting of price controls and the Fed reducing its control over the treasury market.

OK, it’s up to you to decide which of the above are valid, if any, as forecasts for a market top. I am not convinced by some, but it does no harm to round up and compare. But I’ll summarise like this. There are generally two types of tops, parabolic peaks that collapse down the other side, or topping processes that are rounded lasting several months. The move in (US) stocks is starting to be parabolic. If this continues and steepens – and some of the models have room for further gains into June, July or August, to allow this – then we might rather expect an ugly subsequent collapse once ‘everyone is in’. If on the other hand we see a pullback shortly and this turns into a topping process, then we can look for a range to be carved out near the peaks whilst internals, and leading indicators, deteriorate. Perhaps most usefully, all the models, bar none, suggest a top should occur between now and August.

Milton Friedman wrote a paper on investor reactions to the 1940s and 1950s government policies – which were similar to today (ultra low rates, interfering in the bond market) – and concluded that the rise in equities into 1946 was not considered durable by investors because of the government artificial supports. That would suggest the current rally in stocks may be on borrowed time, as there has been as yet no reversal in policy, and in fact recent global actions have been to double QE in Japan and drop interest rates yet further in various countries.

I suggest the solar phenomena are influencing human behaviour in the economy and financial markets alike, and that is why we find treasury yields, interest rates, money velocity, inflation and commodities largely correlated together. Optimism, excitement and positive sentiment driving all up, or pessimism, fear and negative sentiment driving all down. Just waves of sentiment supplied by nature. Plus, when increasing numbers join the investor age bracket of the population versus old and young over a period then enduring bull markets in stocks and housing can occur simply due to the growing demand the demographic trend provides. No complex interaction of fundamentals, just more people investing for retirement.

So I figured the next step was to produce a composite model of sunspots, geomagnetism and demographics for the USA over the last century to see to what degree this correlates with the long term US risk asset composite that I charted earlier in the week: namely real stocks and commodities, real house prices and treasury yields. To do make the triple ‘agent’, I used annual mean sunspots, annual average geomagnetism (inverted, because low geomagnetism is pro-risk, high geomagnetism anti-risk) and for the demographics the middle-young ratio up to 1950, then a composite of middle-young, middle-old and percentage of net investors from 1950 to current. To make the quadruple ‘subject’ I used real SP500 annual values, the Schiller real house price index, the commodities index and 10 year treasury yields.

This chart shows how geomagnetism relates to sunspot cycles over the long term:

Source: NASA

Peaks in geomagnetism occur typically 1-3 years after sunspot peaks, averaging 2 years later. This fits with recessions and unemployment peaks usually occurring within a couple of years after the solar peak, as peak geomagnetism escalates pessimism and fear. The strength in a geomagnetic peak is also a reasonable predictor of the strength of the next solar cycle.

Once I had worked back half a century, compiling the data, this is what popped out (click to view charts larger):

The model didn’t work out so well in the periods around 2006, 1974 and 1951. I then discovered what united the three: real interest rates were negative:

Inbetween, the model worked very well. When real interest rates were negative, risk assets (particularly commodities) got an uplift, regardless of sunspots, geomagnetism and demographics. This is because this type of inverted evironment discourages cash and savings, and encourages borrowing and speculation. People are not being compensated by leaving their money at the bank to offset the gradual erosion of purchasing power, so they seek hard assets and risk investments instead.

So I added negative real interest rates to the model (netting them from the composite where they occurred in the last century) and completed the history, and this is the result:

Overall a very close match with the moves into and out of stocks, commodities, housing and t-yields over 100 years.

Therefore, I am suggesting there are 4 main agents in moving financial risk asset markets: sunspots, geomagnetism, demographics and negative real interest rates. On a yearly basis, they collectively mapped the bull and bear waves up and down, with little missing.

I then attempted to project the model into the future for the next 20 years.

Demographic projections to this end are fairly reliable as those entering the key age groups over the next 20 years are largely already alive so we have a good idea of numbers moving through. I therefore used all three measures again – middle / old, middle / young and net investors – and combined into a composite.

For sunspots, there is a historic rhyme with a past period of solar cycles as shown:

Source: WattsUpWithThat

So I projected sunspots forward based on solar cycles 5 and 6. Then, using the link between a geomagnetic peak with the next solar peak, as referenced further up the page, and its typically peaking 2 years after a solar peak as well as general relations with the sunspot cycling, I constructed a geomagnetism model for the next 20 years.

Lastly, for negative real interest rates, I used the late 1940s and 1950s as a guide due to its historical mirror, with high government debt meaning rates had to be kept low, whilst modelling inflation based on its correlation with solar maxima.

The result:

Clearly, there are assumptions and a reasonable tolerance allowance in my 20-year forecasts for the three datasets that make up the model other than demographics. One assumption is that the solar maximum is ahead this year. If that proves correct then there is a fairly potent combination of a sunspot peak with negative real interest rates, which contribute to the 2014 spike, before dwindling sunspots and peak geomagnetism arrive along with fading demographics. From 2022 to 2027 a bull market in stocks and housing should be enabled by an upturn in demographics and the next solar maximum. Overall, however, the future model is downward sloping, as demographics are poor relative to a golden period like 1980-2000, and the sun potentially enters a new ‘minima’ period as shown in the SC5 and SC6 historic rhyme above.  This is also despite the built-in expectation that real interest rates may oscillate in the negative for some time yet, as the Fed only slowly and gingerly moves up rates, balancing servicing high debt with keeping inflation in check.

As time progresses, the assumptions in the projections can be confirmed or denied and the forecasts within it refined. As this is a long term model, forward validation is going to take some time. Nonetheless, the backwards validation that came out of the data confirmed the validity of what I believed mainly moves the markets over time, with negative real interest rates added to the three that I set out to test. I am well aware that this is not the mainstream view and would be a hard sell to investors: that the four agents of risk asset markets over the long term are sunspots, geomagnetism, demographics and negative real interest rates. However, drawing those together into a composite appears to account for all the major bulls and bears that we have seen in equities, bonds, real estate and commodities over the last century.

I am still formulating my thoughts on the findings of this last week, but here’s one to end the post: maybe the Fed isn’t as foolish as many make out. The reason the Fed intervenes at all in periods of ‘bust’ or cleansing is to prevent a depression, which would be much harsher on the population and likely bring about social conflict. By pushing down interest rates into the real negative, it can induce risk-asset rallies, which make the people feel better if their investments are rising, and housing rising. The problem is this action typically produces commodity inflation, which is bad for the people. Now there is a large block correlation between official interest rates, t-yields, money velocity, real commodities and inflation, and then recession and unemployment. The first five typically rise together and then produce the latter two. By acting on t-yields through QE, rather than just acting on official rates, might the Fed be able to keep the 5-correlated from rising, and thus also prevent the recession and unemployment that follows too? It would seem worth a try. If that worked, they would perhaps be able to maintain an environment of negative real rates with the beneficiaries stocks and housing, whilst preventing the undesirable trio of commodities inflation, recession and unemployment from rising until they end QE. Right now, that overall scenario seems to be what’s in play in the markets, doesn’t it? However! I am doubtful this actually works. Commodities staged a big rally in 2011 despite QE2. I believe they will do so again and normal correlations will apply.

Update: 

One additional chart to ponder – is global temperature correlated too? It’s tempting to shift this along and see how it matches up, but I’d need a good reason to apply a lag. Any ideas folks?:

Source: Bloomberg

If a trend change occurred in late April then commodities and Euro-USD have yet to meaningfully participate. Stocks and bond yields however, have been strong.

The sharp rise in treasury bond yields continues to be reflected in German bunds and UK gilts, and the rush for the exits in bonds has been at its greatest in Japan:

Source: Bloomberg

Here is the Japanese Nikkei monthly – an amazing six months:

If equity markets are on track, per my forecasts, for a top around June, then the Nikkei has a potential resistance there from which it could pull back.

Gold so far is progressing like the Nasdaq correction which I drew attention to HERE. I am looking for a higher low than in mid-April, or a lower low on positive divergence.

Crude oil is still in is large triangle, failing again at resistance:

As we are in the lunar negative period, we may need to wait until late May if it is going to eventually manage to break out upwards.

This chart suggests that an upturn in G10 economic surprises is required to shift outperformance away from defensives to cyclicals, which would include energy:

As economic surprises is a mean reverting indicator, the G10 indicator may have reached low enough to warrant a reversal.

Leading indicators also look supportive for this to occur as they remain overall positive. The latest Conference Board data revealed +0.4 for the UK, +1.2 for Korea and +2.1 for Japan. The latest OECD leading indicator picture is very healthy:

Source: OECD

My overall projections remain the same. A mid-year topping process for equities and rotation into commodities. Leading indicators are showing sufficient health for this to occur, and narrow money predicts emerging market outperformance going forward, which would tie in with increased strength in commodities. I am looking to see a gold bottoming formation, and an eventual break upwards in oil, as supporting developments. The sharp rise in bond yields bodes well for my overall scenario as that was a missing piece of the puzzle, and should be accompanied by a rise in money velocity. Geomagnetism has flattened out, but by seasonality there should be improvement into June/July before a trend change donwards into the Fall. Daily sunspots currently remain close to the record so far for this solar cycle – strength that looks more promising for a solar cycle maximum ahead in the Fall.

Let’s start with a couple of the highest correlations:

Combining the two, 10 year treasury yields, official US interest rates and MZM money velocity all move in almost perfect lockstep. They are currently all together at record lows. If one begins to rally, we should expect all to rally – with implications for the Fed.

Now let’s look at another closely correlated pair:

Real commodity prices and inflation show a strong correlation. There is a feedback looping between the two as rising commodity prices cause price inflation but price inflation spurs money into commodities (hard assets) as an inflation hedge. There was a lot of debate around the 2008 and 2011 commodity spikes as to whether speculators were to blame. The trading of commodity futures has been around for 150 years in the US, and price spikes are more speculator-heavy because of the feedback looping. Regardless of which kicks off the process, the two occur together.

The next chart shows the relationship between US official interest rates and inflation. Most of the time there is a strong correlation, and as the Fed is the sole agent in rate-setting, we can say that the Fed move rates up and down either in response to or in anticipation of inflation, but largely in line with. However the late 1940s and the current period don’t match up as well as the rest.

The picture becomes clearer when we look at real interest rates (net of inflation), and extend further back in time:

We see three clear periods of negative real interest rates – which notably coincided with secular commodities bull markets. Inflation was higher during these periods. If you subscribe to the Shadowstats calculation of inflation (that official inflation stats have been significantly doctored over the last 3 decades) then the purple and red lines would be somewhat higher and lower respectively than shown at the current time. If you take the official CPI data as true, then annual inflation would be currently running around 1.5% which would still maintain the real rates line in the negative. I suggest true inflation is likely somewhere between the two, and thus as shown. As things stand currently, therefore, the environment for the secular commodities bull is still in tact.

Here is another correlation with inflation. US unemployment brought forward two years has a correlation over +0.5 with US inflation:

This is because recessions occur following inflation spikes:

So we see inflation spikes bringing about recessions which bring about peaks in unemployment around 2 years after the inflation spike (due to unemployment being a lagging economic indicator).

Now let’s draw together unemployment (brought forward 2 years) and inflation, and bring solar sunspot cycles into the picture:

Sunspot solar peaks correlate with inflation peaks, and unemployment brought forward 2 years. This is not a lockstep relationship – it is a correlation specifically related to the solar maxima – and the reasoning for that is the ‘excitement’ that Aleksandr Tchijevsky discovered around solar peaks in human history which is backed up by more recent research revealing bilogical changes in humans at sunspot peaks. If this ‘excitement’ translates into buying and speculation at solar peaks then we can justify spikes in inflation (with subsequent recessions and unemployment spikes).

If it is true that humans are biologically disposed to buying and speculation at solar maxima then a composite of risk assets, namely real stocks, commodities, real estate and treasury yields, should spike up at each solar maximum. Here it is:

The composite uses Schiller real house price data and real SP500 index annual values. Each solar peak is accompanied by a spike in what can be termed risk appetite. There are other spikes inbetween the maxima, but what is key here is whether solar maxima reliably bring about spikes in risk assets, given that we are likely in the year of a solar maximum in 2013.

Within the risk asset composite, there are broadly speaking two pairs:

10 year treasury yields have a distinct relationship with real commodities, whilst real equities and real house prices correlate very positively together:

Yet commodities and stocks display an inverse relationship over time of around -0.5, with the result that the two above pairs are often going separate ways. Indeed, thus far in 2013 we have seen US equities and real estate rallying whilst commodities and treasury yields have been languishing. Is it time for a reversal?

If we bring in demographics at this point, and combine stocks and real estate into a composite, this is what we see:

All three demographic measures – middle to old ratio, middle to young ratio and percentage net investors – are all pointing down for the next couple of years. The stocks and real estate composite has historic correlations with the three measures ranging from +0.54 to +0.7, so all strong positive. It would therefore seem more likely that there is another leg down for real equities and real housing into circa 2015, rather than secular bull upwards action from here. Another leg down in real terms would also help satisfy secular p/e, Q ratio and regression to trend measures for equities, which all call for further washout.

Drawing all the above together, along with my previous analysis, I suggest it remains the most likely scenario that we see an inflationary peak to coincide with the solar maximum (allowing for a reasonable time window), within which commodities and treasury yields rise and stocks and real estate decline in real terms, but due to significant inflation hold up in nominal terms. A recession and peak in unemployment should then follow the inflationary peak. As of around mid-decade demographics improve sufficiently to remove the headwinds for equities and housing, which could enable a new stocks bull, with real interest rates turning positive again.

Once again, your observations and suggestions are welcome, as I believe there is more to be teased out.

Out of the 24 I studied, South Africa, Nigeria, Poland, Russia, India, Turkey, Brazil, Malaysia and Indonesia had the best demographics looking foward. Out of these I have chosen Brazil, India and Malaysia to track on my site. I selected them because of relatively low corruption, sufficiently diversified economies, and healthy reserves versus debt. Brazil has an advanced tech sector, good oil supplies and one of the richest biodiversities. Equally important was having access to them on my trading platforms and having access to the data for their respective indices. I would have liked to have added one of Poland or Turkey to make even better geographic diversification, however data for both is not readily available. I plan to still invest in one or the other – most likely Turkey – but will limit the modelling on my site to Brazil, India and Malaysia.

Of course having positive demographic trends does not make for guaranteed good returns. Political and economic mismanagement, conflict, regional crises, large natural disasters and a number of black swans are all possible. But all three countries are fairly established and large economies, on the cusp of leaving emerging to becoming developed, and my plan is to spread my risk by investing in all, with the addition of Turkey or Poland, in case one stumbles.

So, I have compiled data for the last 4 years: sufficient to judge lunar and geomagnetic responsiveness, whilst balanced against time demands. Here is the geomagnetic model for the last 4 years versus Brazil, India and Malaysia stock indices:

All three demonstrate fairly good relations with the geomagnetic model. It is tentative of course, but none are so out of sync with the model as to render its use redundant, and this is largely to be expected as geomagnetism should affect sentiment globally. The geomagnetic forecast and models will be updated tomorrow as usual, so these three will now join the updates.

I then studied returns in relation to lunar phase oscillation over the last four years and here is the summary:

All three countries demonstrated higher returns within the lunar positive period (buy on the 4th day after a full moon, sell on the 4th day after a new moon) compared to the lunar negative period (buy on the 4th day after a new moon, sell on the 4th day after a full moon). The least powerful differential was found in Malaysia, yet in the Dichev and Janes study which covered a longer timespan, they found the Malaysia KLCI to be one of the most sensitive to the lunar oscillation. Dichev and Janes did not include India or Brazil in their study, but the results in the table above suggest fairly potent lunar oscillation, with India particularly impressive. I therefore (again tentatively) suggest trade-timing using lunar oscillation should work in these countries.

In conclusion, the Brazilian Bovespa, Indian Sensex and Malaysian KLCI have demographic tailwinds looking out over the next 10 years, which should add to the probability of strong secular equity bulls in these countries. They also compare more favourably to other positive-demographic countries, such as Nigeria, Russia and South Africa in terms of lower corruption, unemployment or more economic diversification. Collectively, they provide sufficient risk diversification and geographic diversification, to which I will be adding Turkey or Poland. However, due to data availability, my tracking on the solarcycles.net will be limited to Brazil, India and Malaysia, and all three demonstrate sensitivity to geomagnetism and lunar phasing, which should provide two tools with which to improve trading returns in these indices.

The first chart (click to view larger) reveals historic spikes in US interest rates, 10 year treasury yields, MZM money velocity and US inflation (averaging official CPI and Shadowstats data) all within a 2 year period around the solar maximum (note the 1968 solar max was November and the 1979 solar maximum December, hence the 2 year boxes following; also note some of the measures have been scaled to share the same chart).

Stepping back further in time, the 1947 solar maximum was accompanied by a 1947 inflationary peak, followed by spikes in corporate bond yields by 1948 and treasury bond yields by 1950.

If the next solar maximum is ahead in Autumn 2013, then by history we should see spikes in rates, yields, velocity and inflation within around 2 years of each other and of the solar maximum. Is it different this time because the government has acted to surpress both interest rates and bond yields? With velocity correlating closely with bond yields, is an inflationary peak not going to happen this time? I believe it will happen, as the same surpression occurred in the 1940s and yet the spikes took place.

The second chart (click to view larger) adds in real commodities using the CRB index adjusted for inflation (and again scaled). Interestingly, real commodities behave very similarly to rates, yields, inflation and velocity – all moving together into peaks (orange boxes) and troughs (red boxes), over periods lasting around 3 years.

There is a general pattern of collective peaks around each sunspot peak, and additional collective peaks before solar mimima. I don’t yet understand why we see rallies leading into solar mimina, however they have historically set up the panics and crashes that occur at the solar minimum. Nonetheless, yields, commodities, velocity and inflation all acting together is suggestive of waves of ‘human exctitement’ that brings about speculating, buying and circulating money in the economy, or the opposite.

The third chart adds the real inflation-adjusted S&P500 and US demographics trends (middle to old and middle to young ratios combined) into the picture. Here we again see evidence of ‘human excitement’ correlating with sunspot peaks as some combination of real stocks, real commodities and inflation spike up around the solar maximum.

Demographic trends appear to be important for real stocks to peak, whilst commodities appear to behave opposite to demographics.

In summary, there appears to be a 4-way correlation between equities, sunspots, demographics and inflation, whilst there appears to be a 5-way correlation between rates, yields, velocity, inflation and real commodities. My solar-theory take on it is that the same phenomenon of human excitement (driven up and down by the solar cycle) translates into trends in buying, asset speculation and circulating money, hence the united correlations, whilst demographics (which also have a solar input: solar maximum peaks (and occasionally troughs) in births) additionally feed into equities due to investment/disinvestment in equities, relating to retirement.

I’d be interested in your thoughts on any of the correlations in the charts. I suspect there is more to be teased out.

Source: Bloomberg

Developments are still very much in keeping with 5-models-in-alignment (this post), and if their collective forecast holds good then the next and final top should be June/July for equities. As it happens, the last two cyclical bulls in equities ended with a steep wave up lasting around 12 months:

Source: MSCI

The current wave up began June 2012 and so its termination around June 2013 would fit with the last two cyclical bulls and also the 5-models prediction.

A top right here in equities appears unlikely as divergences in breadth have been largely rectified over the past couple of weeks, which combined with breakouts in US and German stock indices, looks good for further near term gains. Plus the overall geomagnetic trend remains upward, looking out to the end of May.

Note on the Bloomberg chart the sharp upturn in treasury bond yields over the past week, and this is also reflected in action in German bunds, UK gilts and even Japanese bonds, despite the government’s doubling of QE:

Source: Bloomberg

An interesting development. Recall the close relationship with money velocity, and the potential basing that has been occurring in both over the last 12 months. We need to see follow through on this if it is to be meaningful.

Another interesting development is in crude oil:

Crude failed at an upwards breakout attempt in mid-April, but then failed at a breakdown attempt, and has now completed a reversal of a reversal back to the top of the large triangle. Can it break out this time?

Meanwhile gold has partially retraced its falls and we see how it shapes from here. Some kind of W-base would be normal, i.e. a second low. If that is a higher low, then that would be bullish for gold.

Central banks are acting supportively for gold. Their combined gold purchases came in at record levels in 2012, and they continue to ease, devaluing currencies and cash, with both the Australian and Eurozone central banks cutting again in the last couple of weeks:

Source: Action Forex

This is in response to a weakening that we have seen in economic surprises and leading indicators. Here is the latest global PMI reading, still positive (i.e. growth) but weaker than last month:

Source: Markit

However, there are reasons to be optimistic for a renewed strengthening ahead in the global economy. Falling commodity prices over the last 6 months should have pulled down input costs giving the economy a boost. Plus, narrow money is still positive as a leading indicator of industrial production (normally by 6 months):

Source: Moneymovesmarkets

Furthermore, breaking down narrow money trends, emerging markets look set to outperform developed markets from here, which should produce a strengthening in emerging market industrial production:

Source: Moneymovesmarkets

And there is historically a correlation between commodity prices and emering markets industrial production:

Source: TheFaintOfHeart

Agricultural commodities could also benefit from continued global wierding extremes. In the US, 60% of the country is in drought or dangerously dry, it is the second coldest Spring start on record, but then there is record breaking heat in the Southwest and record high river levels in the Midwest. Drought, flood, freeze and bake – really an ideal mix to decimate crops. And returning to crude, geopolitics have the potential to push oil higher if hostilities in the MiddleEast continue to escalate.

The other potential driver for commodities is the normal rotation into cyclicals at the end of a bull run. Money should switch out of defensives into oil and industrial commodities, amongst others.

One step at a time as always, but I see improving chances of my primary scenario coming good, namely that a solar-maximum inspired inflationary peak and secular commodities peak lies ahead. Sunspots have been in a solid uptrend of late, and if there is a correlation between rising sunspots into a solar maximum and speculation in the markets then speculative behaviour has certainly been in evidence. The primary scenario likelihood would be much further enhanced if treasury yields can continue to rise and with them money velocity, plus if oil can break upwards out of its triangle, and the outperformance in emerging markets and commodities takes hold. We need to see a renewed strengthening in economic data, particularly leading indicators, to provide the backdrop for speculation into risk assets. Inflation will follow if yields, velocity and commodities all rise.

In the near term I see good chances that pro-risk can rise together into June/July, so I am holding all positions for now. However, the lunar positive period ends on Monday so there is higher risk of a correction or consolidation in the subsequent fortnight.

The data points are 5-yearly and I have modeled the period from 1995 through to 2050, so that we can see the trend leading into our current point in time and the projections forward. Based on the wider research on my site, my forecast is for a secular transition to a new K-Spring from the period around 2013′s solar maximum, namely that secular bull markets in bonds and commodities should give way to new secular bull markets in stocks and real estate in a gradual transition, with the first phase of momentum in stocks likely from around 2015 through to the next solar maximum of around 2025. By my recent analysis, not all major countries around the world will participate in secular stocks bulls in that period, as those with particular negative demographic trends are likely to miss out. The strongest secular stocks bulls should be in those nations with particularly positive demographics based on the four measures.

So let me cut to the conclusions from the data. Those countries with the strongest demographics 2015-2025 out of the 24 modeled are South Africa, Nigeria, Poland, Russia, India, Turkey, Brazil, India, Malaysia and Indonesia (with at least 3 out of 4 measures trending positive). Those countries with the weakest demographics 2015-2025, and likely to struggle to carve out secular bull markets in equities, are China, France, Spain, Germany, Italy, Australia/New Zealand and Canada (with at least 3 out of 4 measures trending negative). And lastly those that are in between (more ‘neutral’ demographics) are USA, UK, Mexico, Canada, UAE, Ireland, Vietnam and Japan.

Therefore, based on demographics, the best returns for equities are likely to come in East Europe, South America, South Asia, ASEAN and Africa. Unimpressive returns should be made overall in the ‘developed’ world, with Western Europe perhaps struggling the most. Out of the top 10 largest economies in the world, we might expect Brazil, India and Russia to play a greater role in pulling the world economy and stock markets along, whilst China, Germany and France may be dragging their heels.

Compare Nigeria and France, at opposite ends of the demographic trend spectrum. Here is Nigeria, showing all four demographic measures (which have been scaled to share the same chart) trending positive between 2015 and 2025.

And here is France, with all four measures trending negative in the same period:

Some potential investment vehicles to capture the best demographics would be Spdr S&P Emerging Europe which is Russia(56%)-Turkey(23%)-Poland(13%), or Market Vectors Africa ETF with the two largest country holdings Nigeria and South Africa, or Advanced Frontier Markets ETF whose biggest holdings are Nigeria, Vietnam and Gulf countries, together with smaller holdings in many of the less accessible countries with better demographics. There are multiple investment options for the bigger countries such as India and Brazil. Beware ‘emerging markets’ ETFs as they often include China, Taiwan and others.

If my primary forecast plays out for a secular commodities peak then a cyclical stocks bear and mild recession before a momentum ‘go’ point as of 2014-15 then the opportunity to load in to these stock markets may not be until then. However, I may be wrong with the timeline of developments, and not all markets will take off at the same point, so another consideration would be which of those positive-demographic markets are currently ‘cheap’ and therefore unlikely to be at risk of much price downside. The cheapest current by p/e include Turkey 12, Poland 10, and Russia at 5.6 with a 4.6 yield. Alternatively, Japan’s stock market appears to have technically broken into a new secular bull already and is belatedly catching up with demographics which turned upwards (not all 4 measures) as of around 2005, so I suspect could already be a buy.

Many of the ‘emerging’ markets in the positive demographic list look similar to this, India’s combined chart:

Three positive trends and one negative, with the negative being the middle-old ratio. This is because until recently people in relatively poorer nations rarely reached old age. In the first half of this century they should see an increasing amount of people reaching old age and therefore the ratio versus the middle aged goes from negligible to something of significance. Nonetheless, the old age populations in these developing nations largely does not become problematic until much further out, unlike the large relative numbers reaching old age in many developed countries as of now.

Source: Bloomberg

It still looks like a correction has been in place since the turn of February, but global equities as a whole have managed to carve out a sideways range rather than down. By 5-models-in-alignment the next move would be up from here into mid-year to make a cyclical top. PFS forecast that recent soft commodity prices will provide economic improvement ahead again, as cheaper input costs make for growth. If solar/secular history is to reoccur here, then commodities and treasury yields should start to make their move. I would like to see some evidence of change in trend in economic surprises and a renewed pick up in leading indicators to bolster this likelihood.

Back to demographics. Here is a reminder of real UK equities:

The biggest real gains came in the two solar cycles from 1980 to 2000. I have used the population pyramids to draw out the three demographic trends that have been shown to have a correlation with stock market performance, namely the middle/young ratio (m/r), middle/old ratio (m/o) and the proportion of net investors. We can see that the period of bumper gains in UK stocks was one in which all three measures were trending upwards – a kind of demographics ‘holy trinity’:

Looking forward there is no such golden period ahead for the UK. The caveats, as some of you pointed out, are that immigration policies can change (changing the demographic projection) and investor behaviour may change (disturbing the correlation with the local stock market). But barring any major changes, the UK stock market may struggle going forward.

So here are three countries that do have such a demographic positive unity ahead, i.e. all three measures trending up for a period.

The first is Japan. The black lines are the solar maxima. The outer green box is the overall positive period, and the inner green box when all three are trending upwards together. The window of opportunity is now.

The second is Poland. This next solar cycle, from circa 2013 to circa 2025, is one where all three measures are rising. That makes Poland a likely secular bull market in that period.

And the last for today is Russia. The positive alignment runs from around 2015 to 2025 for a decade.

Russian stocks are still very cheap, at p/e 5.6 and paying a 4% dividend. If commodities can accelerate once more, as per my prediction, then I believe Russian stocks can mean revert to some degree. The positive demographics just ahead also suggest that if the trade does not come good quickly that it should with time.

So my trade for today has been to add to (and average down a little) JPM Russia. The lunar positive period, the expectation that commodities will outperform, plus the picture just outlined.

Source: Monevator

Green circles are secular commodities peaks, every third solar maximum, equities buy point (note the equities buy point follows the secular commodities and solar peak by 1-4 years). Yellow circles are secular stocks interim peaks, every third solar maximum. Red circles are secular stock final peaks, every third solar maximum. It’s a very neat chart from a solar cycles perspective, and it may offer more evidence of the 33-year lunisolar cycle (3 solar cycles) creating sine waves in the markets.

However, the long term Nikkei chart that I presented in the last post did not conform. The secular peaks and troughs aligned with solar maxima but the 33-year cycle was not in evidence in the same way. What is consistent across the long term charts for FTSE, Nikkei and Dow was that secular turns aligned with solar maxima, and demographics dictated whether the market was in a secular bull or bear for any specific solar cycle, between maxima.

The reason the Nikkei made a secular bull in the 1970s solar cycle whilst the Dow made a secular bear was demographics, and the same applied in reverse in the 1990s solar cycle. It appears that a secular bull or bear is dependent on the demographic trend, whilst cyclical bulls or bears within the overall trend are not. During the 1990s, the Nikkei made cyclical bulls and bears that aligned with cyclical bulls and bears in the Dow. However, the Nikkei cyclical bulls were more sideways and the bears more downwards than the Dow’s respectively. In other words, stock indices around the world largely move together in cyclical bull and bear trends, but the gradient of the moves (and p/e progression) differs to create an overall secular bull or bear.

So looking ahead to the next solar cycle, from maximum to maximum, circa 2013 to circa 2025, out of the top 10 largest economies in the world, those with demographic trends in that period to support secular bulls are USA, Japan, Brazil and India (with Mexico and Indonesia just outside the top 10 potentially offering additional support); whilst those with negative demographic trends that would argue for secular bears in this period are China, Germany, France, UK, Italy and Russia (or we might simplify to China and Europe).

Compare this to the last solar cycle which was primarily a secular stocks bull, namely the one from the 1989 solar max to the 2000 solar max. The top 10 largest economies in the world were pretty much as now, just with slight differences in order. USA, Europe, China and Brazil made secular bulls, whilst Japan, Russia and India made secular bears. So not all countries made secular bulls, but out of the most important economies in the world, the total GDP of those in secular bulls exceeded those in secular bears. The same should occur in the next solar cycle, but by a lesser margin (having made a comparative calculation). The bottom line is, there are enough of the big guns in a demographic position to generate a K-spring, and if China were to draw down on its massive currency reserves to stimulate the economy in this period then it could potentially escape a bear too. The UK and the Eurozone don’t have such a fallback, and I think it therefore likely that they will endure another secular bear 2013-2025 (circa), if the demographic correlations hold true.

In summary, I think we see an overall up-cycle for equities for the next solar cycle looking out to 2025 or so (whenever the solar maximum falls), a K-spring. But I think buy-and-hold will do best targeted at USA, Japan, Brazil and India, with Mexico and Indonesia also likely outperformers.

My new chapter is moving home to Austria next week. The big trip inspired a big move (and maybe the solar maximum inspired both?!). Certain further-afield countries on the trip were highly attractive, but with two kids the option we have long had under consideration won out. My wife is Austrian, we have a network of family and friends there already, and the kids will become truly bilingual in both the language and culture of their second nationality. We get the better climate that the trip made me crave.

So Eurozone issues are going to have more resonance from now on. We will be living in Vorarlberg, in the very West of Austria on the Swiss/German border. If you live anywhere near there, e.g. Zurich, Liechtenstein, Bodensee, and would like to meet up, please get in touch with me at john(at)solarcycles(dot)net.