Cyclicality is a defining feature of the global economy and of every financial market worldwide. This phenomenon can be attributed to the cyclical nature of human behavior, which influences consumption, production, and investment. Historically, the economy follows secular cycles lasting approximately 35 to 45 years, alongside shorter business cycles averaging 6.2 years. Equity markets mirror this rhythm, displaying long-term secular cycles that align closely with macroeconomic trends and span roughly 35 to 43 years, while also exhibiting mid-term cycles lasting about 3.2 to 4.5 years (on average). The following analysis, part of my latest book ‘The Capital Cycle’, examines these historical trends and patterns.
In late 2023, the famous Breadth Thrust indicator flashed a bullish signal for the stock market. Since the Second World War, it has only happened a few times. But why is this important?
What is the Breadth Thrust Indicator?
Developed by Marty Zweig, the Breadth Thrust is an indicator that analyzes the general momentum of the stock market to reveal the times when buyers begin to dominate the market. The indicator calculates the proportion of advancing/declining stocks and is widely known for its signal at the beginning of a new bull market.
Calculating the Zweig Breadth Thrust
Mr. Zweig created the indicator by tracking the proportion of advancing/declining stocks (AID ratio) over ten days. The indicator is based on the NYSEand tracks moments when oversold market conditions quickly shift to extremely overbought.
The signal for the new bull market
When the Breadth Thrust indicator moves from below 40% to above 61.5% within 10 days, it indicates the beginning of a potential new bull market.
■ From below 40% to above 61.5% (within 10 days)
Formula
The Breadth Thrust is simply the 10-day moving average of the following formula:
“Money, the denominator of every economic value, rapidly loses purchasing power due to inflation, driving equity prices higher and higher".
The stock market is widely seen as fundamentally overvalued by most analysts. This analysis examines how expensive stocks are today using several tools and indicators, and more specifically:
• Stock Market Capitalization to GDP (Buffett Indicator)
• Historical P/E ratios for S&P 500, Nasdaq 100, DAX 40, and NIFTY 50
Benner’s Cycle is a simple model that predicts the ups and downs of the stock market based on a repetitive market cycle of 18/16/20 years. As briefly shown below using historical data, the model is reliable at the beginning of each market cycle, and completely unreliable at the end of the cycle. As concerns market tops and mid-cycle tops, the model is sometimes accurate, and sometimes not.
Decoding the Cyclicality of Financial Markets
Financial markets tend to follow specific cycles. Over time, these cycles create recognizable patterns. Spotting these patterns can help improve investment decisions. Knowing when a market cycle may begin and end can be very useful for investors.
✅ Market cycles follow economic cycles, which are shaped by liquidity, inflation, and interest rates.
✅ A market cycle has two or four distinct phases. Each phase reflects specific trends that emerge during different economic conditions.
✅ Generally, a market cycle can range from six months to many years, or even decades.
Mature vs. Emerging Markets: What Sets Them Apart
Before moving forward, it is useful to examine the main differences between mature and emerging markets.
Volatility and the length of market cycles are the two main elements that set each financial market apart. As shown in the following chart, mature markets follow longer cycles, are less volatile, and offer lower risk/return ratios than emerging markets.
The Economic Confidence Model & Global Financial Interconnectivity
Historically, economic growth moves in cycles, with phases of steady expansion followed by contraction. Financial markets follow this pattern as the wider economy shapes interest rates and, in turn, liquidity conditions across global markets. In earlier articles, we looked at models of business cycles, such as:
The MOVE Index as a Predictor of Market Volatility and Financial Distress
The MOVE Index tracks U.S. interest rate volatility and can provide an early signal of shifting risk sentiment in the bond market and the wider financial markets, before it shows up in equities.
Key Takeaways
MOVE is like the VIX for bonds, with a strong track record of reflecting bond market sentiment (🔗 Treasury Bills)
MOVE can be used alongside the VIX (explained later) to gauge overall market risk and investor sentiment.
The bond market often signals major changes before the equity market.
Introduction to the MOVE Index
Created in 1988, MOVE stands for ‘Merrill Lynch Option Volatility Estimate’ and is designed to track U.S. Treasury yield volatility implied by current prices of 1-month OTC options.
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Cyclicality is a defining feature of the global economy and of every financial market worldwide. This phenomenon can be attributed to the cyclical nature of human behavior, which influences consumption, production, and investment. Historically, the economy follows secular cycles lasting approximately 35 to 45 years, alongside shorter business cycles averaging 6.2 years. Equity markets mirror this rhythm, displaying long-term secular cycles that align closely with macroeconomic trends and span roughly 35 to 43 years, while also exhibiting mid-term cycles lasting about 3.2 to 4.5 years (on average). The following analysis, part of my latest book ‘The Capital Cycle’, examines these historical trends and patterns.In late 2023, the famous Breadth Thrust indicator flashed a bullish signal for the stock market. Since the Second World War, it has only happened a few times. But why is this important?
The Economic Confidence Model & Global Financial InterconnectivityThe MOVE Index as a Predictor of Market Volatility and Financial Distress