Professional Documents
Culture Documents
and
Asset Allocation
Table of Contents
Introduction .......................................................... 5
Chapter 1: The KST System ................................. 7
THE MARKET CYCLE MODEL ............................. 11
Chapter 2: Business Cycle Analysis .................... 15
THE B OND BAROMETER ..................................... 19
THE STOCK BAROMETER .................................... 20
THE RULE OF 12 .............................................. 21
THE I NFLATION BAROMETER .............................. 23
INFLATION VS. DEFLATION .................................. 23
Introduction
Martin J. Pring
Chart 1-1
Chart 1-2
the 1980s (shown in Chart 12) and the U.S. market in the
late 1980s to mid-1990s, offer fine examples. During
linear trends where there are
very few cyclic rhythms, a momentum indicator such as the
KST may give premature sell
signals, while buy signals will
be unduly late.
For this reason, its prudent
to remember that KST buy and
sell signals are just that - they
are buy and sell signals for momentum, not price. Under
normal circumstances, the
price will go with the momentum, but there are many
Chart 1-3
10
Chart 1-4
Figure 1-1
12
Chart 1-5
13
Chart 1-6
Idealized Business Cycle for the Six Stages of the Business Cycle
Stage I
Stage II
Stage III
Stage IV
Stage V
Stage VI
Stocks
Bonds
Commodities
Recovery
Recession
Bonds
Commodities
Stocks
Figure 2-1
15
18
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5
Stage 6
Bonds Bullish
Stocks/Inflation
Bearish
Bonds/Stocks
Bullish
Inflation Bearish
All Bullish
Bonds Bearish
Stocks/Inflation
Bullish
Stocks/Bonds
Bearish
Inflation Bullish
All Bearish
86
Table 2-1
87
88
89
90
91
92
93
94
95
96
97
98
Bonds
28.6
15.3
9.6
-7.3
-4.8
0.7
Stocks
-0.7
24.8
20.1
16.6
4.3
-12.4
8.6
6.8
5.2
8.2
7.7
Cash
4.91
19
Government
Bond
Shaded areas show when the Barometer is below 50%; i.e. bearish for bonds.
Chart 2-1
The Rule of 12
The Rule of 12 is a very
profitable, yet simple, technique for identifying positive
periods for equity prices. It
takes advantage of the fact that
declining short-term interest
rates are positive for equity
prices once they start to respond. Remember, in most
cycles short-term interest rates
lead stock prices, but the lead
varies from cycle to cycle. The
Stock
Barometer
Shaded areas show when the Barometer is below 50; i.e. bearish for stocks.
Chart 2-2
21
Chart 2-3
22
25
* POSITIVE ENVIRONMENT
REWARD
20
15
10
ENTIRE PERIOD
5
NEGATIVE ENVIRONMENT
0
10
RISK
12
14
*
16
Figure 2-3
Chart 2-4
Chart 2-5
25
Chart 2-6
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27
Notes
28