Tuesday, 29 May 2012

Welcome to the Big Macro Picture

Welcome to Big Macro Picture.

Through these articles, we look forward to providing analysis, commentary and insight relevant to investment and trading in the short, medium and long term.

Our focus is purposely broad, ranging from technical (momentum, trend and price action), economic (leading indicators for market direction) and fundamental (valuation, sector and industry analysis for individual securities).

By taking such a broad view, we build up an overview of analysis of global financial markets on multiple timeframes, to help us make the best informed investment decisions relevant to that time horizon.

To provide an example - it is May 30th 2012, roughly ten minutes past midnight (GMT). On our longest-term, most broad time horizon, we are bullish. Why are we bullish? On a time horizon that begins in 1885 with the Dow Jones Industrial Average at 25 (presently valued at 12580), one thing is difficult to ignore. In the long run, owning productive assets (machines, productive farmland, businesses, equities) makes sense. This is our longest timeframe possible and is unchanging for as long as we live in a market economy.

How about another timeframe? Let's zoom right in to 2012. On the Daily chart of the Dow Jones Industrial Average, we might be bearish. Unlike the above timeframe, which has been bullish for hundreds of years, the Daily chart switches between bullish and bearish every week or so, for reasons completely separate from the other time horizons. 

Another timeframe? March 2009 to present. We are in a bull market. Again, the indicators we use for this analysis are very different from the ones we use for either the week-to-week analysis or a variety of other timeframes. All too often we see investors and traders make the common mistake of using the wrong type of analysis for the time horizon they're looking at.

What do we mean by this? You have probably seen it for yourself. "Long term investors" scrambling to buy shares at the top of a bull market and being scared out of the market near the bottom, because of price action in the short term. "Short term momentum traders" ignoring the price action because they have a view on the economy. We see it during every cycle - market participants looking at the wrong things for their given time horizons. We think this is partly down to psychology and discipline, but too often it is because participants don't know what to look for and what to ignore.

Given that our longest, longest run time horizon probably won't switch from being "bullish" during our lifetimes, we don't need to spend any time talking about analysis for it. Our analysis will be split between "long term", "medium term" and "short term".


By long term, we mean 2000-2003. 2003-2007. 2007-2009. 2009-present. In other words, are we in a bull market or a bear market? It is 2007, are we at risk if being near the end of a bull market? It is 2009, are we near the bottom? What is the real economy telling us? In 2002, the signals were there to indicate a bottom was close. In 2007, the warning signals were there. In early 2009, we gradually saw that the rallies were the real deal and could buy with a degree of conviction by April.

This kind of indicator switches between "bull market" and "bear market", the headline at the top of our Big Macro Picture, usually every few years. But when it does change, or it might change, the broad moves can provide the buying or selling opportunities that come along only a handful of times each decade.

How do we calculate this indicator and what sort of analysis do we use? By the most part, forward-looking leading economic indicators - we look at around 100 every month to gain insight into what economies across the world are doing. When used in the correct way, these indicators can help identify the beginning and end of bull/bear markets, to help give us perspective of the market we're dealing with.

We use this to our advantage for our long-term investment accounts - to know when to scale into or hold off from buying new long term (several years holding period) equities. This will be explained further in later articles.


By medium term, we mean within a given year, to help guide our medium term (week to week, month to month) trades. Would it have been possible to avoid the brunt of the latest market correction by taking profits from late February onwards? How about avoiding catastrophe last August, or being confident to add market exposure in October-December?

This type of analysis is probably our greatest focus at Big Macro Picture - our long term view may change only once every few years, but in the medium term we adjust our mentality every couple of months, and almost every day there is new data to affect these opinions. We analyse this in real-time and will provide objective commentary via new articles as the data arrives, while evaluating each new piece of information.

On this timeframe we take more consideration of market breadth signals, the trends and cycles of leading economic indicators and broad market trend/momentum analysis.

What is the purpose of analysis on this timeframe? For one, it helps explain in simple terms how economic data really affects equity markets from week to week, month to month. It also helps us make informed decisions on how to manage our market risk, time our investment decisions, and potentially make profitable trades. We think readers will find this analysis the most interesting and useful.


By short term, we mean day-to-day, evaluating the Daily chart and other shorter timeframes for market direction over the course of the week.

This type of analysis includes understanding and recognising key market levels, mostly using technical analysis of price action, price momentum, oversold/overbought conditions and bullish percentage charts.

We generally only use this analysis for perspective in the Big Macro Picture - a final bottom layer to explain how we're getting from A-to-B. There are many good technical analysts online who provide similar commentaries, and others who are very effective trading on the low minute-to-minute timeframes. While we enjoy this type of trading, for the time being we'll focus on using short term TA for perspective rather than basing trading decisions.

For an example of why we use this sort of analysis for perspective, there are often key levels in major indices which can be identified using technical analysis. We knew our February-onwards caution was warranted when it began being reflected in the Daily chart. As we broke through key levels, we took it as confirmation and a trigger for certain medium term decisions.

This rough introduction explains how we use different analysis to get as broad a Big Macro Picture as possible, on a very wide variety of different timeframes. Whether we're looking at the ultimate long term view, or simply what the market is doing this week, we're dedicated to using objective, unbiased analysis to help us make good trading and investment decisions.

We look forward to sharing our insights and commentary here at Big Macro Picture and welcome any questions via the comments section or e-mail.

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