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4Featured IndexDow Jones Pring U.S. Business Cycle IndexSMDow Jones Indexes recently teamed up with Pring Research LLC to create and launch a new index called the Dow Jones Pring U.S. Business Cycle Index. The index is designed to dynamically allocate among stock, bond, commodity and cash segments according to a model that identifies the current stage of the economic business cycle. Pring Research's founder and president, Martin Pring, is also chairman of Pring Turner Capital Group, a California-based money management firm. Among his many books is Technical Analysis Explained, which has been translated into 10 languages and is required reading for the Chartered Market Technician's exam. Since 1984, he has published the Intermarket Review, a monthly market report offering long-term synopses of the world's major financial markets.For this issue of Insights, we talked to Martin about the investment process he developed that serves as the foundation for the Dow Jones Pring U.S. Business Cycle Index. Insights: Hi, Martin, can you start by telling us a little bit about the firms you founded? Martin: Pring Research started in the early 1980s as a financial newsletter publisher. Our Intermarket Review is a monthly publication that covers the world's principal financial markets from a long-term perspective. It uses economic and technical analysis to figure out where we are in the business cycle as well as determining the implications for the various asset classes. I've also written close to 20 financial books. My most important project right now is my partnership interest in Pring Turner Capital, our money management arm. The firm was originally founded by my partner, Joe Turner, in 1981. We joined forces in 1988 because we both had a love and appreciation for the business cycle and its asset allocation opportunities. Joe and our other partner, Tom Kopas, have done a tremendous job managing portfolios.Insights: The new Dow Jones Pring U.S. Business Cycle Index is based on your research and investment process. Can you explain the core philosophy behind your approach? Martin: The business cycle has been with us since the start of recorded economic history. For the United States, that would be at the beginning of the 19th century. We believe that the cycle is likely to continue its repetitive process because of the constancy of human nature. What makes the concept so interesting is that the cycle goes through a set series of chronological events. It begins with financial indicators, such as money supply expanding and interest rates falling. Then it goes through the pickup in consumer demand and then eventually capital spending. Just as the calendar year goes through seasons, so does the business cycle. It's like farming: there are optimal times of the year to plant certain types of seeds and a time to harvest their produce. Same thing with the business cycle. There are certain phases in a business cycle when you want to own bonds and other times when they should be avoided, and so forth. So with our investment process, we're trying to determine the best allocations between stocks, bonds, commodities and cash, based on the phase of the business cycle.Insights: You argue that a business cycle has six stages-what are the characteristics of each stage? Martin: The fact is that business cycles go through numerous events that keep repeating, hundreds in fact. The peaks and Martin PringPresident, Pring Research

5troughs of bonds, stocks and commodities are also part of that sequence. Each of these three markets has two turning points, giving us the six stages. Stage I begins during the early part of the recession when rates peak and bonds bottom. That's when the demand for credit plummets because of declining business activity and the supply of credit, through Fed actions, is expanding. Whenever demand shrinks and supply expands, the price of anything declines. In this case, the price of credit is interest rates. Even though stocks are falling in Stage I, some interest-sensitive early leaders, such as utilities or even homebuilders, start to edge their way higher. Eventually, the players in the equity market sense that the declining rates will soon lead to a recovery. So instead of waiting for a recovery, they anticipate it. They say the news is blackest at the bottom. In the case of the stock market, the final low is often associated with the lowest point in the momentum of coincident indicators, such as industrial production. Insights: Is this what triggers a rally?Martin: Exactly. Our research has shown that Stage II actually offers the best and broadest stock market gains. Eventually business picks up to the extent that commodity prices bottom out. So now all three markets are in a rising phase, and that's Stage III.But, all good parties must come to a close. At some point, Stage IV hits. This is when the demand/supply balance for credit tips in favor of the demand side. That means bonds peak and start their bear market.In Stage IV, rates might be rising but stock market participants are still positive because profits are moving up at a faster clip than interest rates. Insights: So what slows it down?Martin: Eventually the rate rise takes its toll on equities, which now peak. This often takes place when momentum in the coincident part of the economy is topping out.BONDSSTOCKSCOMMODITIES4 to 5 YearsPring's Six Business Cycle StagesSTAGE 1STAGE 2STAGE 3STAGE 4STAGE 5STAGE 6SELL BONDSDEFLATIONARY PERIODRECESSIONSELL STOCKSSELL COMMODITIESBUY BONDSBUY STOCKSBUY COMMODITIESEXPANSIONINFLATIONARY PERIOD