Portfolio Design

Advanced concepts in stock investment portfolio design.  Fundamentals, technical analysis and many other related topics are discussed.

Business Cycle Recovery Indicator

My plan to conquer the business cycle hit its first snag today. As it turns out, directly monitoring company fundamentals provides a nice way to determine where we are in the business cycle. The problem is that the stock market anticipates the cycle by six to 12 months. This means that my strategy will have to change. The trigger for the ensuing bull market recovery will have to come while in the contraction part of the business cycle, not the recovery part.  Dah ;-(

Stock market quantitative analysis tools by Portfolio123.


Today I evaluated three custom series, aggregates for year-over-year sales, operating income, and inventory.  Below are the details.

I first set up a custom universe of what I believe are manufacturers within the S&P 1500 (shown below).  I put in a couple of filters in order to eliminate some glitches by eliminating wide swing in TTM / PTM operating income and inventory custom series. I also found that I had to use the S&P 1500 instead of the Russell 3000 stock universe to eliminate additional glitches in the custom series output for Sales YoY.

Custom universe for manufacturers listed on the S&P 1500

Shown below are the rules for the three custom series.


Screenshot of the rules for aggregate custom series for Sales Year-over-Year

Screenshot of the aggregate Sales Year-over-Year custom series


Screenshot of the rules for aggregate custom series for Inventory Year-over-Year

Screenshot of the rules for aggregate custom series for Inventory Year-over-Year

Screenshot of the aggregate Inventory Year-over-Year custom series

Screenshot of the aggregate Inventory Year-over-Year custom series


Screenshot of the rules for custom series for aggregate Operating Income Year-over-Year

Screenshot of the rules for custom series for aggregate Operating Income Year-over-Year

Screenshot of the aggregate Operating Income Year-over-Year custom series


Below is the average of the three custom series.  The combined series was called Recovery YoY.

Screenshot of the rules for Recovery YoY custom series

Screenshot of the aggregate Recovery YoY custom series

As can be seen from the above chart, the three phases of the (simplified) business cycle are easily identified. Some smoothing will be required and probably additional fundamental factors will be added to make the business cycle phase easy to extract mathematically.

It is hard to see from the above chart, but the recovery phase begins at the start of 2010, almost one year later than the stock market recovery which commenced in February 2009. So the new plan will be to find ways to anticipate the start of the stock market advance while in the contraction phase.

It also appears to be the case that the speed bumps in 2011, 2015, and 2016 were not business cycle related, or at least they were very minor cycles at best.

All for today

Take care