Application #2 - Chapter 2: Financial Markets and the Business Cycle

This chapter won't be application as such but more of a summary of the points I find useful in the chapter. Why? It's such a broad topic and to apply it correctly in a world in the midst of high inflation, war and an emerging new asset class i.e. crypto I recognise as being beyond my capabilities at this time.

The financial markets defined in the book (Technical Analysis Explained by Martin J. Pring [Fifth Edition]) are bonds, stocks and commodities. The order of which is useful to remember based on the typical order of bull markets - a handy acronym for people using Binance would therefore be BSC.

Pring describes the primary trend of the financial markets is determined by investors' expectations of movements in the economy, the effect of these movements on price of the asset, and psychological attitude of investors to these fundamental factors. These expectations result in asset rotation i.e. selling one asset to move into another with the intended effect of profiting from the move (or reducing risk).

Quick references:

• Anticipation of a weak economy bullish for bond prices (rise in bonds = fall in interest rates)

• Expanding economy usually bullish for stock prices

• Capacity constraints bullish for industrial commodities (e.g. metals, not seasonally driven products such as grains)

The idea is each runs into the other but not always at the same time, so has little forecasting value. The whole cycle usually takes 3-5 years. It does however, provide a framework for identifying the position of a market in the business cycle. It will be interesting to see how crypto begins to fit into this cycle as inflows starts to increase.