A Certified Financial Technician (CFTe) personal view on Singapore Stock Market - SGX

Dick A. Stoken analyzed over sixty years of investment history to come up with the prediction system in his book Strategic Investment Timing (Probus Publishing, 1990). According to Stoken, four fundamental indicators combine into a model that has accurately pinpointed every important turn in investment markets. Not only does Stoken’s theory purport to call the turns, it also signals when to switch from stocks to alternative investments such as gold, real estate or commodities, etc. (See Figure 1, Stock Market and Gold Chart.) Over the 63-year period under study, the indicators sent out the correct signal at the start of each and every bull and bear market within an average 6 percent of the exact high or low.

The single most important factor impacting the economy and investment markets is the investment climate. Key to the investment climate, the level and direction of interest rates signals whether or not a turn in the economy and stock market is in the cards.

Interest rate warning signs include a drop in the 90-Day T-Bill rate to its lowest level in fifteen months and when AAA corporate bond rates hit a fifteen-month low. The occurrence of either of those two events triggers a powerful expansionary force that promises to send both the economy and stock market soaring.

On the other extreme, the appearance of seven-year highs for both the 90-Day T-Bill rate and the AAA corporate rate represents a shot across the bow for a plunging economy and stock market in the days and months ahead.

Another important influence on the investment climate comes from the political arena. The presidential election cycle translates into a 15-month favourable phase beginning in early October, two years prior to the presidential election, and lasting through early January of the election year.

According to Stoken’s research, this 15-month period has generated an average gain of 25 percent for the Dow Jones Industrial Average since 1932 versus an average gain of only 1 percent for the remaining 33-months of the political cycle. Even more interesting not one single recession originated during this 15-month favorable time frame.

Under the presidential election scenario, the level of interest rates can be ignored since the investment climate turns favorable regardless of their level during this phase of the political cycle.

The third factor, inflation, can cause an otherwise favorable investment climate to prove disastrous for stock investments and a fertile ground for real assets such as gold, commodities, real estate, and collectibles.

For keeping tabs on this valuable indicator, Stoken suggests monitoring the Producers Price Index compiled by the Bureau of Labor Statistics. An inflationary spiral starts when a price increase reaches 5 percent or more and is at its highest reading in a year. However, Stoken cautions that the rate of inflation must also be gathering momentum and that people start believing in the inflationary spiral and begin to change their spending and saving habits.

On the deflation side of the coin, a one-year low in the Producer’s Price Index sends a clear signal of deflation taking place. Typically, another inflationary bout doesn’t occur until two years after a deflationary period has terminated.

An inflationary spiral will stop stock market progress while it makes real assets more attractive. In the three periods of runaway inflation in the U.S. since end of World War II, purchasing power loss averaged 25 percent. On the other hand, had investors followed the inflation signals and converted to gold investments, they would have earned a return of 145 percent during 1972 through 1974 and 405 percent between 1977 and 1980.

According to Stoken, investors following the inflation indicators would have participated and profited in every hyper-inflationary period, plus they would have been fully invested during the bulk of the post World War II bull markets.

Finally, the psychology of investors impacts the stock markets, creating periods of pessimism when stock prices are cheap in relation to value and periods of optimism when stock prices become expensive in relation to value. Stoken’s research shows that no sustained bull market has begun until the Dow had fallen into a two-year low. Accordingly, the best time to purchase stocks is one week after the market hits its two-year low point.

This ‘buy zone’ continues until nine months have passed since the Dow made a two-year high. The stock market is then in a ‘caution zone’ which lasts until the Dow once again drops to a two-year low, restarting the cycle. When the Dow hits a five-year low, extreme pessimism has taken over the market, creating a stock buying opportunity five months after experiencing that low point.

Stoken contends that using the above indicators, an investor can design a flexible investment timing strategy that deftly moves him or her out of stocks or real assets in tune with the investment climate and inflationary and deflationary signals.

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