TomT Stock Market Model 2013-05-31

Six-Month Stock Market Indicators
Over 50 timing indicators focused on market behavior a few months ahead
May 31, 2013
Overview
Surprisingly Good Forecast
According to my forecasting models, prospects for the stock market are better than average for the coming half year to 10/31/2013. Probable market gain: 12% Probability of at least breaking even: 83% Probability of an 8% dip along the way: 50%. Statistically the stock market tends to be weak over the second half of the year, but my model says that probably will not be true this year. Why? 1: The economy is still under-performing that leaves room for improvement. 2: Leading economic indicators are very slowly rising. 3: Recession probabilities are low and still falling, mainly because the Federal Reserve is still pushing down interest rates. My econometric models of the stock market are based on just a few basic measures tied to the U.S. economy and stock markets. They are sophisticated guesses, at best. Market Valuation Measures Most measures consider the market to be near fair value. However, the indicator Warren Buffet likes best says it is somewhat overvalued. . Economic Indicators Only about 15% of U.S. economists expect any sort of recession in the U.S. in the coming year. Most Composite Leading Economic Indicators anticipate slow growth for the U.S. Business profits should continue to be high as debt costs are at the lowest relative levels in several hundred years and businesses already are lean. Though profits should stay high, there isnt much room for quick expansion. Too bad, thats what the market likes. Trader Signals - Fast I have finally found a couple of indicators that appear to lead the market by a month or so. No guarantees. By the time you read this, these short term signals may give an entirely different picture. Trader Signals Slow The long running Second Great Contraction will likely continue to play out as a decade long grind much like the 1930s. Sell in May is statistically valid and it deprecates the second half of the year. International View Growth estimates generally are below normal. Emerging economies will probably have faster growth than major developed nations. Government austerity in Europe is a negative facote.. Econometric Models Most number crunchers conclude that the economy is still bad enough that it will likely keep getting somewhat better sooner or later. Reversion to the mean is working in our favor times are tough so eventually they are likely to improve. The pull back toward the mean, however, is not as strong as it has been for the past 3 years.
How did my forecasts work out in the past half year? The model kicked my butt!
Last October the model forecast a terrific 19% gain from Halloween to the end of May. Seeing the looming fiscal cliff I personally discounted that to a 10% expected gain. The final outcome was an amazing 24% gain for the Value Line Arithmetic Index, my primary market gauge.
How have my forecasts performed during the past 6 years?

I have been testing my forecasting models in real time since May, 2007. That has been a tough test since it included a major market collapse during the worst recession since the Great Depression. At the back of this report I have updated graphs comparing the models predictions with reality. The models are far from perfect. However, they are more accurate than my personal guesses and hunches. So far, I think the forecasts are worth following. .
Copyright 2013 Tom Tiedeman, Washington, D.C. All rights reserved. This private letter tries to provide somewhat objective research, not investment advice.

Still more than fully invested. (Margined) Select to view: Overview Market Valuation Measures Economic Indicators Trader Signals - Fast Trader Signals Slow International View Econometric Models About This Forecast
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Market Valuation Measures
If there was any real agreement on how to accurately value stocks, prices wouldnt go up and down as much as they do. The never ending stream of world news, economic, business and company developments with largely unknowable consequences, however, make business valuation an approximate art rather than a clear science. The measures here gauge only roughly -- whether the stock market as a whole is priced reasonably. My favorite is the Morningstar Market Valuation Graph below. Morningstar.Com Market Valuation Graph (Click to the Max. time period view of the chart.) Status: Valuation at 1.01 is right at fair value. Getting above 1.0 has eluded the market for the past several years so a pullback would not be surprising. About the indicator: This graph is a fundamental financial analysis / accounting calculation based on net present value calculations of long-term projected profits for the thousands of stocks Morningstar tracks. It is a basic check to see if the stock market pricing makes sense. S&P 500 to Book Value (Barrons) VectorGrader Status: The current market price-to-book value of about 2.47 is below the median level of 2.77 and well below the typical historical market peak valuation ratio of approximately 3. At the pit of the 2008-2009 crash the ratio sank to 1.5. About the indicator: Book Value is the money you would get if you closed a business and sold off all of its physical plant and inventory. Its one of the most basic valuation tools for stocks. On its own it doesnt mean too much since valuations can be quite debatable. However, reasonable book value levels confirm that stocks are not wildly overpriced today and that room remains on the upside. Total Market Valuation vs. GNP (GuruFocus.com Free registration required. The linked page is a good primer on valuation.) VectorGrader chart Status: My two data sources do not agree. GuruFocus scored the ratio at 110% and VectorGrader says 117%. Either way the market is modestly overvalued.
About the Indicator: In a mildly famous 2001 Fortune magazine article Warren Buffet wrote that despite some limitations, the ratio of total stock market valuation to Gross National Product is probably the best single measure of where valuations stand at any given moment. At 55% stocks would a fantastic buy. At 110% it would be time to be worried. . S&P-500 Price Earnings Ratio VectorGrader Barrons Table and S&P 500 Earnings (The link above is to www.multpl.com, courtesy of Josh Staiger). Source data available online courtesy of Robert Shiller and S&P) Status: Depends how you look at it. If you judge by current earnings, the SP 500 at 19 is fine. Alternatively, a rolling 10-year average tags the S&P 500 as pricey. I side with the short-term view because the past decade has contained two very nasty recessions skewing the average. About the indicator: Intuitively, the ratio of a stock's price to the company's earnings should be the key objective tool for judging if a stock is properly valued and for comparing multiple stocks. High Price-to-Earnings ratios should make investors worry that a stock is overpriced. Likewise, low P/E ratios should help to flag bargains. Unfortunately, as indicated in this Mark Hulbert article, P/E ratios have negligible value in predicting either one-year or even 10-year stock price moves. As discussed in the Fed Model (below) my own statistical analysis does not find any validity in using P/E ratios for 6-month stock market analysis. The Fed Model (Wikipedia.org explanation) Source data for S&P Earnings and long interest rates made available courtesy of Robert Shiller. Status: Today you can read this measure as saying either that the market is overpriced or that it is underpriced. The interpretation mainly depends on how long an historical average of earnings you want to consider. (Given the current long T-Bond rate of 2.7%, and based on experience since 1960, a regression model predicts that the S&P 500 P/E should be approximately: P/E = 1/ (0.808 T +0.010) P/E = 1/ ( 0.808 (0.03) + 0.010) = 39!!!!!. 2
Copyright 2013 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.
The current S&P-500 P/E based on 10-year trailing earnings is roughly 21. About the indicator: This popular classic stock market valuation model starts from the simple premise that the earnings to price ratio (E/P) of basket of quality stocks like the S&P 500 index and the yield from long term quality bonds should be just about the same, with the stocks having a little higher return to reflect their higher inherent risk. This Mark Hulbert (MarketWatch.com) article says there is not much predictive value to the indicator. My own analysis finds no statistical link in the 6-month time frame between P/E ratios and the S&P-500 average.
Value Line 3-5 Year Appreciation Potential Status: At the end of December VLMAP is at about 50%, right where it was last October. This is a sell signal for this long term indicator. About the Indicator: As it has for many years, each week the Value Line Investment Survey announces an estimate of the three to five year median appreciation potential for the 1700 stocks they track. The lowest recent appreciation estimate was 35% at the previous market high on 7/13/2007. The highest appreciation potential recorded was 185% at the panic market low of 3/9/2009. In general, a reading of 55% points to a sell and 100% signals buy according to this Mark Hulbert MarketWatch.com article
Tobins Q (VectorGrader.com). Status: Neutral to mildly. About the Indicator: (From VectorGrader.com linked page) The Tobin's Q is the ratio of price to replacement cost, which is in many ways similar to book value. It was developed by Economic Nobel laureate James Tobin in the 1960s as a metric for valuing the stock market. The Q ratio can be calculated from the most recent Federal Reserve Flow of Funds release. The ratio is calculated by dividing line 35 of table B.102 by line 32. The historical data is also available on the St. Louis FRED website. However, because the Flow of Funds report is released long after the quarter end, we update the Q ratio for the change in stock prices since the most recent flow of funds report.

Select to view: Overview Market Valuation Measures Economic Indicators Trader Signals - Fast Trader Signals Slow International View Econometric Models About This Forecast
Economic Indicators
Despite all of its semi-random craziness, eventually the stock market reflects corporate profits which in turn reflect the economy and especially interest rates. Usually the stock market nervously anticipates ( and over-reacts to) economic conditions by several months. (An old adage says that since 1948, the stock market has predicted 20 of the last 10 recessions.) The indicators here are my favorites for looking ahead for the economy 6 months to a year. Economic Cycles Research Institute U.S. Leading Indicator (Scroll down on the linked page) U.S. Leading Economic Indicator (e-forecasting.com See bottom of linked page.) Philly Fed 6 Month Leading Indicator (St. Louis Federal Reserve) Conference Board Leading Economic Index Organization for Economic Cooperation and Development. Status: Most composite leading economic indicators are slightly positive, but muted, signaling slow economic growth ahead. Highly regarded ECRI remains convinced that the U.S. is already in recession despite the fact that their own leading indicator has been rising since last July. About the indicators: These are just a few of the groups that compile and aggregate statistics of several economic factors that tend to lead the economy both up and down. Changes and directions of the leading economic indicators are worth paying attention to. As pictured below, there is a strong long term linkage between composite leading indicators and periods of recession. Anxious Index for Recession Probability (Philadelphia Fed. xls file) Status: The jury is split. ECRI and Gary Shilling are convinced that the U.S. is already in recession. But, on average, the gurus of economics have eased off their fears of a near-term recession. As of 2/15/2013 A panel of 54 economists polled by the Philadelphia Federal Reserve sees about a 15% chance of another recession in the coming half year. (Next Anxious Index release on May 10, 2013.) About the indicator: This article by David Leonhardt in the NY Times in February, 2008 coined the popular name for this index. This Survey of Professional Forecasters maintained by the Philadelphia Federal Reserve hasn't missed calling a recession or called a false positive in all the years since 1968 when it was started. This Anxious Index is the successor to the earlier Livingston Index a personal project of a Philadelphia journalist. Effective Federal Funds Rate (from St. Louis Federal Reserve) Status:. In essence the Fed is paying banks to borrow! Eventually rate cuts will stimulate the economy. But, because of lag times, for now it remains a contrary reminder of just how worried they are at the Fed About the indicator: The Federal Reserve largely controls interest rates. Interest rates largely determine business profitability. And profitability controls the stock market. Enough said. MarketWatch.com forecast of interest rates Probability of Recession Predicted by Interest Rate Spread (NY Federal Reserve Go to linked page or use your browser zoom on the chart below.) St. Louis Fed Recession Model (data can be downloaded)l
standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets. Long Treasury Bond vs Discount Rate (InvestmentTools.com) Status: As the subprime mortgage financial panic and subsequent recession hit, the Fed dramatically lowered short term lending rates to near-zero, creating a major stimulus to try to pump up the economy. The difference between the short and long rates is seldom greater than it is now. About the indicator: Interest rates are a prime determinant of profitability and of economic activity. This is a major long term telltale of where the market will go next. Long-term interest rates have been falling almost steadily since 1980, corresponding with overall stock market growth over the same period. Federal Reserve actions moving the discount rate, however, are a primary factor in short-term business profits and therefore stock market prices. For now the big question is when will the Federal Reserve raise rates? Unfortunately, the flip side of this is that low rates like we now have are a direct statement that the Fed remains deeply worried about the economy. TED Spread (StockCharts.com) Status: The TED spread has been heading down since the start of 2012. Good. Recent ups and downs of the TED spread have all been mild in comparison to the world-wide financial panic that ran from late 2007 to early 2009. The interest rate for banks lending to one another, LIBOR has remained essentially flat since 2010. Major banks do not seem to be seriously worried about other banks failing in the near future. About the indicator: Credit markets only become interesting when they fall apart. Lack of credit then brings the economy to an abrupt stop. This indicator tracks the difference between the 3-month Treasury rate and the 3-month LIBOR -- the interest rate at which banks loan to one another. (At least that is what it is supposed to be it the banks arent trying to rig the numbers.) Normally these two banking insider rates should be close.
Status: With short term interest rates near zero, the NY Fed model sees a negligible 4.8% probability of being in recession next year. St Louis sees about a 1.2% chance of recession. About the indicators: When the Federal Reserve raises short term interest rates high enough the economy quiets down -- and possibly goes into recession. When the Fed lowers interest rates it supplies a major economic stimulus. This well documented indicator from the New York Federal Reserve is an econometric model of the probability of economic recession based on the difference between short term interest rates and the rate on the 10-year Treasury Note. Raw data The St. Louis Federal Reserve has another recession indicator that is based on more factors than just interest rates: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales Citigroup Economic Surprise Index (BusinessInsider.com 4/13//2013) Status: (Bloomberg has stopped no-cost coverage of this indicator. Since I can only get occasional snapshots of the Indicator, I dont put much store in it.) In late April the indicator may have finished a several month plunge.. About the Indicator: The stock market reacts strongly to unexpected news good or bad. This indicator is new to me, but there might just be a chance that this leads the market. The Bloomberg.com description of the chart says: The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs. Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1
Money Supply (M1 y/y Federal Reserve) (MZM y/y Federal Reserve) Status: We are receiving an open-ended expansion of the money supply via QE4. About the Indicator: The economic theory is that increasing the money supply should raise asset prices and lower interest rates. Im not an economist so Ill avoid this debate. Building Permits and Housing Starts (St. Louis Federal Reserve) Status: Construction is definitely up from the pits, but home building is still at depression levels. Over the next few years this could be the most significant sector of improvement in the economy. About the indicator: Housing and construction are important economic indicators, usually leading the stock market by about a year. Housing construction itself is just about 2% of the economy, but when all related factors such as new appliance purchases housing constitutes a larger slice. These linked charts from the St. Louis Federal Reserve show clearly that if you have several years of over-building then payback in the form of a dead market for new construction must eventually follow. Another housing bubble is not likely to start soon according to this article by Robert Shiller (NY Times, free subscription required), Housing Bubbles Are Few and Far Between. Dollar Index (MarketWatch.com) Dollar Index (StockCharts.com) Status: The race to the bottom in currency valuations continues. The Buck has been roughly constant for the past two years compared to other currencies. It is in an uptick. Nothing serious yet. About the indicator: The primary difficulty in reducing the value of the Dollar is that other countries will also inflate their currencies in order to maintain their relative trading advantage. Household Net Worth (Federal Reserve, see Line 42) Status: The overal wralth total is nearly back to prerecession levels. Improving overall, but still down $1.5 trillion from 2007! Thanks mainly to the rebounding stock market, total net worth has come back from being down $18 trillion an incredible amount. The problem, however, is that home prices, where the net worth of the middle class is centered, have not risen much. The middle class setback is also a setback for the economy and the stock market. About the indicator: Net worth is the score that counts. Personal wealth fell by an incredible 18 trillion dollars during the Great Recession, equivalent to a full year of GDP, and it could have been much worse. All that would have been needed for a complete collapse would have
been for cascading bank, business and personal wealth failures to get rolling in a domino sequence as they did in the Great Depression. The couple of trillion dollars that the Government threw down as part of the TARP and stimulus efforts looks like a smart investment if it saved us from what could have been another ten or twenty trillion dollars of damage. U.S. Federal Deficit (St. Louis Federal Reserve) Status: Has the knife stopped falling? This 5/1/2011 article by Lori Montgomery (Washington Post, free subscription required) remains the best summary of the deficit problem that I have read. About the indicator: A lot of investors make a lot of noise about the deficit, but the deficit does not correlate very well with changes in the stock market. Still, fear of the rising deficit has stopped any chance of further stimulus from Congress. So a very slow and faltering recovery is almost certain. U.S. Balance of Payments (Federal Reserve link) Status: The balance of payments has stabilized but at a high negative level. About the indicator: The worsening Balance of Payments probably means little in the short term, but is a major negative long term problem for the U.S. The persistent balance of payments deficit is the central issue in the current round of competitive currency devaluations underway around the world. (WashingtonPost.com, free subscription required) Shipping & Transportation Sector Strength Baltic Dry Index BDI (StockCharts.com) HARPEX (Harper Peterson Container shipping index) Transportation Stocks USDOT Transportation Services Index Status: Taking a long term view, the USDOT Transportation Services Index (a fairly good leading economic indicator) is flat, pointing to very weak growth. Shipping rates may have bottomed, but their continuing weakness signals a slow recover.. Container shipping rates covered by the HARPEX more closely related to expectations of retailers remain below historicallyaverage levels. The Dow Jones Transportation Index (StockCharts.com) had been roughly flat for the whole year, but has surged since November. About the indicator: Shipping rates and pricing of transportation industry stocks are much followed and basically believable long-lead economic indicators. The reasoning is simple; if a lot of goods are being shipped then the economy must be improving. The Dow Theory (Wikipedia), for example, one of the oldest and most followed technical indicators is based on the relative strength of the Dow Jones Industrial Average versus the Dow Jones Transportation Index. How much it actually counts is debatable (Mark Hulbert column) . The Baltic Dry Index (Wikipedia), The Best Economic Indicator You've Never Heard of tracks the cost of 6
moving materials by sea. A higher value indicates rising shipping levels and therefore points to economic expansion. This Wall Street Journal article and this Bloomberg article (1/10/2011) say that the Baltic Dry Index and most other shipping indexes may give a fuzzy indication of world economic activity this year because of an unusually large number of new ships this year. Inflation Rate (Consumer Price Index, Rate of change, Federal Reserve has set an inflation goal of roughly 2% and at the current 2.3% inflation we are still near the goal. Excellent! It is pretty hard to get scared about the inflation boogeyman after you see this graph. This is about as low as inflation has been in our lifetimes. In the U.S. and other developed economies inflation is very low deflation still remains the greater worry. If U.S. inflation resumes, dont worry until it reaches 4% annually (see below). The inflation situation is quite different in developing economies (MSN Jim Jubak 1/21/2011) where inflation is already at worrisome levels. How is it that developing nations can have high inflation while the Dollar is crashing? The falling Dollar should be causing U.S. inflation to skyrocket. The answer is that developing nations are trying to maintain their favorable trade balances by inflating their currencies faster than we sink ours. About the indicator: High interest rates whether caused by inflation or central bank policy tend to precipitate stock market declines and recessions. As discussed in this Mark Hulbert MarketWatch.com article, (1/18/2011) rates of inflation greater than 4% tend to coincide with poor market performance. (Chart below is from Mark Hulbert article.)
S&P 500s average When trailing 12-month monthly return since inflation is... 1871 is... Below 0 0.61% Between 0% and 1% 0.50% Between 1% and 2% 0.40% Between 2% and 3% 0.96% Between 3% and 4% 0.53% Between 4% and 5% -0.23% Above 5% -0.05% % of months falling into this category 28% 5% 13% 15% 10% 6% 22%
GDP: Potential GDP vs. Real GDP (Data link at Federal Reserve )
(Use your viewers magnification/zoom setting to be able to read the graph. No, you really should do it the gap shown in the graph is amazing.) Status: Four years later, inflation-adjusted GDP is just getting back to where it was in 2007- 2008. It is still far below potential providing room for significant growth. Potential GDP has recently been recalculated and scaled down a bit, but the gap between actual and potential remains at about 6% -- much higher than any other historical point. About the indicator: The nonpartisan Congressional Budget Office maintains a database and econometric model of Potential GDP which is the GDP that could result if the workforce was fully employed. The graph above shows both Real GDP and Potential GDP, all in constant chained 2005 dollars. If you really zoom-in on the graph you will see that since the late 1940s periods where the economy is booming and Real GDP is higher than Potential GDP tend to end badly the Federal Reserve takes away the punch bowl and the party ends with a crashing stock market followed by a recession. Currently the opposite situation exists and the Fed will continue to do all that is possible to get the economy performing better. Professional Economists Survey of Forecasts for Inflation, GDP, Unemployment, and Long Term S&P 500 Gains and Cong. Budget Office Economic Outlook Status: The 1st quarter 2013 forecasts by a survey of professional economists are slightly stronger than last quarter: weak GDP gains (1.9% annual rate for 2013); modest inflation (2.1% headline for 2013); continuing high unemployment (8.4%, an improvement, and only going down to 7.4% by 2014) and normal 10-year average expected gains for the S&P 500 (6.1%), but for the second time, down from the previous survey. All of which point to continuing modest economic growth. The high lingering unemployment is tough for people, but has 7
Current National Financial Activity Index (CFNAI) (Source: Chicago Federal Reserve) Status: This index is weak. It has hovered around zero for nearly 2 years now, more evidence of the Second Great Contraction. This expects economic growth to stagnate for the next couple of months which, at least, is a lot better than being truly rotten. About the Indicator: The Current National Financial Activity Index is a weighted measure of total national business activity compiled monthly and based on 85 economic indicators. Though developed primarily as a tool for forecasting inflation, some believe that it is a better indicator than GDP of short term actual economic performance.
little relation to near term stock market moves. The CBO forecast has similar conclusions. About the indicator: Next release May 10, 2013. The Survey of Professional Forecasters is the oldest quarterly survey of macroeconomic forecasts in the United States. The survey began in 1968 and was conducted by the American Statistical Association and the National Bureau of Economic Research. The Federal Reserve Bank of Philadelphia took over the survey in 1990. The Survey of Professional Forecasters' web page offers the actual releases, documentation, mean and median forecasts of all the respondents as well as the individual responses from each economist. The individual responses are kept confidential by using identification numbers. Commodity Research Bureau Index (InvestmentTools.com) (CRB site chart) Status The CRB Index has been weak indicating relatively limp demand in the economy. Not so good. The mildly good news is that it isnt falling badly. About the Indicator: If the stuff we use to make things costs more, thats probably a good sign that at least people are trying to make things. When it is flat like now it is a sign of stagnation. The Commodities Research Bureau (CRB) Index (Wikipedia description) represents a market basket of futures prices for major world commodities. According to CRB: The
commodities used are in most cases either raw materials or products close to the initial production stage which, as a result of daily trading in fairly large volume of standardization qualities, are particularly sensitive to factors affecting current and future economic forces and conditions. Highly fabricated commodities are not included for two reasons: (1) they embody relatively large fixed costs which fact causes them to react less quickly to changes in market conditions; and (2) they are less important as price determinants than the more basic commodities which are used throughout the producing economy . The CRB Index measure is further influenced by the fact that it is measured in U.S. Dollars so a fall in the Dollar will automatically make it appear that world commodity prices have shot up.
quarterly results of U.S. economic performance. Here is a primer on the BEA National Income and Product Account data.
Corporate Profits (St. Louis Federal Reserve) Domestic Income) S&P 500 Earnings (data courtesy Robert Shiller, site hosted by Josh Staigner) Philadelphia Federal Reserve Survey of Professional Forecasters Status: Corporate profits are well above pre-recession levels, though still down a bit from late 2011. Liquid assets available for new investment are extremely high. Now that profits have returned, the forecasted annual rates of profit growth are down to normal levels. About the Indicator: Rising corporate profits is what stock market investing is all about. The U.S. Department of Commerce, Bureau of Economic Analysis posts Copyright 2013 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice. 8
Six-Month Stock Market Indicators C

Select to view: Overview Market Valuation Measures Economic Indicators Trader Signals - Fast Trader Signals - Slow International View Econometric Models About This Forecast
Trader Signals Fast (well, relatively fast)
None of these short-term tell tales are part of my 6month forecasting model. At best they may help to fine tune a buying or selling opportunity. (i.e. Buy the dip.) Any of my trend guesses here will probably be out of date by the time you read this. For the part-time investor trend following is dangerous you enter the trend too late and miss most of the gains. Then the inevitable crash happens before you can react in time. Using short term trading indicators is a lot like playing a carnival game it looks so simple, but somehow you always lose. But, if you want to look at what is likely for the next couple of months, I like the first two of these indicators best.
Stocks versus Bonds Status: Both Daily and Weekly charts are positive. About this Indicator: In theory, over the long haul holding bonds should give about the same yield as holding stocks. This chart shows how a bond fund is faring against a stock fund. % Stocks Trading Above 50-Day Average
(StockCharts.com) Broader Market (Barchart.com covers
NYSE New Highs minus New Lows (StockCharts.com) Status: Clear sailing again..
About the indicator: I like this short term indicator of the broad stock market as it is really easy to read, changes infrequently, and tends to lead the market averages. A bullish signal occurs when the ratio is in an uptrend. Longer term investors will mainly pay attention to the Weekly view lower on the page Consumer versus Cyclical Stocks (StockCharts.com) Status: Bounced back up again in the strong May rally. About this indicator: In this MSN MoneyCentral article (11/18/2011) Anthony Mirhaydari makes a case that cyclical stocks beating consumer staples is a sign of a bull market and vice versa Emerging Markets versus Consumer Staples Status: This chart has been negative for years, a sign of risk averseness. Often foreign stocks lead the U.S. market. About this indicator: Are investors turning to riskier emerging market stocks, or just hunkering down with old reliable blue chips?
approximately 5,000 stocks) Status: Going down is a pullback underway? About the indicator: This is a very short term indicator for whether the market is overbought or oversold. The worry point is above 80%. The turn-around point is at around 20% to 30%. MACD S&P 500: Moving Index Average Convergence / Divergence Status: The fast moving average is above the slow average good. About this Indicator: Fidelity Investments has a good article on back- testing various MACD strategies here. After all is said and done, Im afraid that all of it s ounds like both mumbo and jumbo. Moving averages are plots of the arithmetic or exponential mean of prices for some period of time in the past. The one shown in the link is the S&P 500, the most commonly followed average for MACD charts. The Moving Average Convergence Divergence is a plot of two moving averages; a slow moving average that includes more days than the second fast average. A positive divergence occurs when the fast average has risen above the level of the slow average. I am not really a big fan of these moving averages. If you use very long time periods for your MACD then it generates buy and sell signals too late to be of real value. Using shorter periods for your MACD graph generates many more false buy and sell signals.
NYSE Daily - Weekly Advance Decline Line (StockCharts.com) Status: Slammed down to an unusually low level normally a contrarian positive indicator. About the indicator: Often market breadth (A simple ratio of how many stocks go up vs. down.) leads actual swings of index prices. These charts are only for traders or for picking an auspicious moment to buy or sell. The initial view of this short term indicator is daily Advances-Declines -- Do a good few days follow a bad few days or what? Reset the chart to see a weekly view, again using the line view Type rather than the "candlestick: view. Every few weeks the market tends to get overextended creating a relatively good time to trade. Buy when the weekly line has plummeted and starts to rise; sell when it hits a dangerous peak and turns down. VIX - Implied Market Volatility (StockCharts.com.) Status: The fear gage has turned up from an incredibly low level. The market is way overdue for some bad news. About the indicator: The CBOE (Chicago Board Options Exchange) Volatility Index (VIX) measures market expectations of near-term volatility conveyed by stock index option prices. According to the CBOE "since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility". When the VIX shoots up you are in the midst of a crisis - if you didn't know that already from the rapidly crashing stock market. In this August, 2011 MarketWatch.com article Mark Hulbert describes a very simple VIX strategy: avoid the stock market for the coming month if the VIX reading is above, say, 20 which he notes is approximately the median VIX level for the last two decades. Hopefully the VIX signal will come early enough to help avoid developing market crashes. The negative side is that it will also lead to missing sharp market rebounds. For example, following it would have led to missing nearly the entire market rebound from the crash of the winter of 2008-2009. Historically, this VIX strategy performs slightly better than a buy-and-hold strategy. Viewing Multiple Stock Markets (Click to the maximum time frame view) Status: Is the current downturn just a blip? Emerging markets have been the weakest. About the indicator: The Dow-30 and the S&P-500 are what most people usually thing of as 'The Stock Market.' Take a look at some of these other long term graphs. I prefer: Value Line Arithmetic Index (VAY) (My preferred stock market index. Status: Going strong. About the indicator: Taking a many-year view, this remarkably consistent index appears to have nearly caught up with its long term trend -- making the slingshot
rebound from the crash of 2008-2009 weaker The Value Line Arithmetic Average includes the top 1700 companies in the U.S. -- all weighted equally. (Similar equal weight ETFs are EWRI and RSP) Historically, the arithmetic index it has had an amazingly consistent growth pattern, much steadier than the Dow 30, S&P 500, or NASDAQ Composite indices. Because of the equal weighting, portfolio rebalancing is built-in. As a result, besides being more predictable, the equal weight index will regularly outperform a conventional index of the same stocks. Until recently it was not possible to buy an equal weight EFT, but now a number of equal-weight index fund ETFs such as EWRI and RSP have been introduced. They have only been around a few months, but so far they appear to have very similar tracks to the Value Line Arithmetic Index. Good news! EEM The MSCI Emerging Markets Fund represents valuations of the developing markets that have the greatest potential for growth. Emerging markets have been at a plateau since early 2010. Profits need to grow, but this average still is well below trend. A new equal weight emerging market ETF is EWEM.
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Trader Signals Slow Moving
Several of these slow moving trading indicators may seem far-fetched, irrational or bizarre. None the less, a few are probably the most helpful market timing tools for a part-time investor. The old adage of Sell in May leads the pack with a documented track record going back several hundred years. The Second Great Contraction (link to This Time is Different: Eight Centuries of Financial Folly at Amazon.com) Status: The world still teeters at the edge of an economic abyss that threatens to come from credit disruption. The U.S. and the rest of the world are only mid-way through the world-wide economic debt collapse that began in 2007. Typically, economic pains from credit destruction last much longer than ordinary recessions (Ezra Klein, Washington Post 10/9/2011) . Slow growth is the best that can be expected for years to come. (IMF) Risk remains that cascading debt defaults, especially from sovereign debt collapse in Europe, can cascade into a world-wide economic collapse. Unfortunately, mistakes by any number of fairly independent players still can bring on the nightmare at most any time. About the indicator: Reinhart and Rogoff powerfully demonstrate in This Time is Different the current economic trauma is more like the Great Depression than any of the comparatively short-lived recessions that occurred since then. The resolution of our Second Great Contraction, as Rogoff calls it, will most probably take several more years. Because of government-created incredibly low interest rates, the worst may already be over for stocks. Since borrowing costs will remain abnormally low for years, corporate profits may remain strong despite continuing economic pain. This is not a market for the faint of heart, but it may also be seen as the early stages of a tremendous long term growth market.
Sell in May Indicator Status: For the past two years people seem to have jumped the gun and started to sell in April rather than May. In April that appeared to be the case again but them the market sailed up in May. About the indicator: Here is an update from Mark Hulbert on the Halloween Indicator still going strong. If you had to pick just a single stock market timing signal, this old and crazy-seeming one might well be the best. Statistically, performance of stock markets worldwide during the summer months is not as good as during the winter. When the market crashes it usually is during September and October. The summer - winter trading pattern has been shown to occur in many markets world wide for the past several hundred years. This Mark Hulbert article from MarketWatch.com cites a definitive study showing that the pattern has been valid for at least 317 years in the U.K. This MarketWatch column by Sy Harding summarizes his variant on the approach which includes also being invested on holidays. My own analyses show that the Sell in May or Halloween effect is greatest when the economy is heading into a recession. On the other hand, when coming out of a recession the effects of a rising economy overpower the semiannual pattern. According to a Charles Schwab report (5/14/2012) there appears to be a distinct split among sectors in seasonality as shown in the table below.
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Investor Sentiment (AAII Investor Sentiment Guide) (Barrons.com Investor Sentiment page) Status: Some people pay serious attention to these indicators. I dont. About the Indicator: Investor sentiment tends to be a contrarian indicator. When there are vastly more Bulls than Bears, it is time to worry! When you have a bad sinking feeling in your gut, you probably should be a buyer of stocks. Retail investors follow trends, but they dont lead them. As a result, they are usually late to the party. When too many people get to any party, the police usually come to bust it up. Peaks in investor sentiment usually lead the market by a few months. As Brett Arends, a writer for the Wall Street Journal notes in this MSN article on Why Market Timing Works our feelings are terrible guides. The American Association of Individual Investors publishes a weekly survey of member sentiment (bullish / bearish / neutral. According to AAII, the current historical averages are bullish 39% (standard deviation of 10.7 percentage points), neutral 31% (standard deviation of 9 percentage points) and bearish 30% (standard deviation of 10 percentage points). This article at the AAII website covers a statistical analysis that verifies the sentiment survey as a solid contrarian indicator: danger lies ahead if investors get too bullish. First Year of the Preidential Election Cycle (Mark Hulbert, MarketWatch.com) Status: It depends which stock market average is reviewed and for what historical period, but overall, the first year of the presidential cycle tends to be weak The fact that we are in a major long term financial crisis, however, probably trumps this cyclic indicator as the Federal Reserve still is pushing the economy up with historically low interest rates. About the Indicator: According to Mark Hulbert's statistical calculations of the Dow Jones Industrials since 1896 there is statistical validity at the 95% confidence level that year 3 of the presidential election cycle yields outsize gains. Year 4 should also produce some gains. Year 2 typically yields nearly zero.
were 9% in the next six months versus only 6% gains when Index value was ABOVE the moving average. At those times when the Index was below its 200-day moving average it was right 2 out of 7 times not very good. My conclusion: Most of the time (80%) this indicator gives a positive reading which has little predictive value, but in the few instances when the Index is significantly below the moving average, a market panic is probably in full swing and you should be starting to think about buying again! Mark Hulbert seems to agree that this indicator now fails to work. % Stocks Trading Above 200-Day Moving Average (stockcharts.com covers S&P-500 stock) Status: The S&P 500 is 93%, high enough to worry about. About the indicator: As a general rule, when a stock's price is above its 200-day moving average, the stock has been in a long-term price rise. So, an increasing percentage of stocks priced above their 200-day moving average is generally a good sign. However, when 80% to 90% of stocks are trading above their averages it is usually a signal that euphoria has gotten out of hand and a market correction is due. Similarly, when only 20% to 30% of stocks are trading above average, a sharp bullish upswing becomes very likely. NYSE Advance-Decline Line (cumulative) (InvestmentTools.com)) Status: Still points up. Good. About the indicator: The indicator is a cumulative count of advances on the NYSE minus declines since 1996. Click to the 5-year view. This good MID-TERM indicator tends to form a rounded top before falling as part of a broad Bear Market TomTs Post - 2000 Anomaly Status: Since December smaller stocks have been stronger than the large caps. Since the crash of 2000, the bigger and better known U.S. stocks in the Dow 30 and the S&P 500 have fared worse than the run of the mill stocks that dominate the NASDAQ composite, or especially, the Value Line Arithmetic Index. That is different than previous decades when the averages followed more similar tracks. About the indicator: As shown in this Yahoo.com chart reproduced below, something strange has happened in the U.S. stock market since the crash of 2000. From 1984 through the S&P 500 (red), the NASDAQ (green) and the Value Line Arithmetic Index followed very similar paths. In the DotCom bubble, NASDAQ shot up, and the S&P500 rose appreciably, but the Value Line was remarkably untouched. Since the crash the popular stocks of the S&P500 and the NASDAQ have floundered while the Value Line has gone on almost undeterred. Does this signify a massive shift in markets? Or, is this actually a massive negative stock market bubble that will soon send the popular market averages soaring as retail investors flock back to stocks? 12
Stock Market Slow Moving Average (StockCharts.com 12 month SP-500 moving average) Status: In mid-November the index dropped down to touch the moving average, then bounced up. That is generally considered to be a sign of strength. About the indicator: In my analysis, the moving average indicator had a poor track record for my favorite market average, the Value Line Arithmetic Average Index, in the years between 1985 and 2010 it was usually better to bet against the long term moving average indicator! Since 1985 at my 6-month decision points (October and May) where the Index price was BELOW the 200-day moving average the average gains
Rolling 10-year S&P 500 Total Return (Article by Anthony Mirhaydari, MSN Money Central) Status: This chart practically guarantees a multi-year significant increase in stock investor enthusiasm,. Read below for the reason.
About the Indicator: Most financial advisors tell their clients to take a long term view of owning stocks. Thats what the chart above shows 10-year rolling returns of the S&P 500. Right now the picture implies that we have gone through a terrible decade of stock performance, so now things most likely will get better. Thats clearly what typically happens. But, this simpleseeming chart is largely an illusion. Ten years to most people is what long-term investing means. (The lazy Law of Round Numbers leads people to choose 10 years as opposed to something irregular like 17 years.) Because we already know what happened 10 years ago (an historic boom followed by a terrible crash), we already know that in a couple of years this chart will show a much rosier picture. (Comparing the current market to the peak of the Dot Com bubble looks a lot worse that comparing it to the low point of the ensuing crash.) As a result there is an incredibly high probability that for several years to come, thousands of financial advisors will be showing their clients that the stock market actually gives excellent long-term rewards! A gradual, but long-running increase of investor enthusiasm is almost certain. For the simple reason that long-term means 10 years to most people!
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International View
I.M.F. World Economic Outlook Status: IMF sees a slowing of growth for the next couple of years: just 1.1% for the U.S., next to nothing for Europe and an uninspiring 4.7% for the globe as a whole. This is a disappointment. About the indicator: All you have ever read about World growth trends becomes clear in this customizable chart from the International Monetary Fund. Going back to 1980 you can see the development of major regions of the world and projections for the future -- all in constant currency units. (The zoom feature is super! Also, at the very bottom of the chart the button "Play Time" runs an animated history of world growth patterns.) The 'take home' from this chart is that for the past several decades the rest of the world has been playing catch up with the developed economies. As a result, other economies have consistently been growing at faster rates than ours. For an investor growth RATE is what counts. Sovereign Public Debt Ratio (Wikipedia) Status: U.S. debt equals 107% of GDP and is climbing fast. This if well above the world average. About the indicator: This chart ranks nations by their Debt-to-GDP ratios. The worst off states serve as bell weathers for the others. CIA raw data U.S. Versus International Focus (Click to the 5 year view.) Status: For the past year emerging markets have significantly lagged the U.S. Emerging market long term GDP growth rates are again far ahead of the U.S. and other developed countries. About the indicator: The link is to a plot of U.S. stocks (the SP-500 index) versus a few emerging market favorite ETFs.
The world keeps getting smaller. For the next several decades most of the best market investment opportunities probably lie outside the U.S. The reason is simple: it is easier to increase wealth in percentage terms if you are poor rather than wealthy. And percentage growth is what investing for profit is all about. U.S. growth will probably average 2% to 4% for the next decade while China will probably have growth in the 8% to 10% range 3 to 4 times higher! Case in point: U.S. housing construction is struggling to get back to the 1 million units per year level. China, on the other hand, has just announced plans for a crash program to build an additional 10 million housing units for each of the next several years. Commodity prices may well skyrocket. Multinationals based in the U.S. may well perform much better than the overall U.S. economy. The long overdue growth of emerging nations creates a double sided situation. On side provides immense growth opportunities for business, and the low cost of overseas labor means U.S. inflation probably will be contained for many years. The other side of the situation constrains U.S. worker incomes it is hard for many working people to seek higher incomes when they are directly competing against overseas workers making 1/10th as much money. It is easy to sit back and be philosophical about all of this until your particular field is hit with devastating competition that destroys your business and your life. Believe me, I know. Organization for Economic Cooperation and Development. Status: OECD predicts spotty world-wide economic growth with mild recessions for most of Europe. The index for the U.S. is flat. About the indicator: There are many reasons to take international comparisons with a heaping tablespoon of salt I can speak from personal experience having prepared some international statistical publications. A number of countries consider economic data to be state secrets and the data they provide to international organizations may have little to do with reality. None the less, it is worthwhile checking these estimates now and then. The rates of change are what count.
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Six-Month Stock Market Indicators Tom Ts Stock Market Forecast

Select to view: Overview Market Valuation Measures Economic Indicators Trader Signals - Fast Trader Signals Slow International View Econometric Models
Econometric Models
. Anyone forecasting stock prices deserves your skepticism. That includes my forecasts. Monkeys (trained or not) often beat both forecasters and investment managers. Unfortunately for this October update, most of the published forecasts I could find were New Years predictions and so are out of date. (I find it bizarre that people tend to make forecasts at the turn of the year rather than any other time. It must be just another herd-based round number phenomena.) Countless stock market forecasts are posted by groups and individuals, but there is seldom much performance evidence given to prove their credibility. Some forecasts may be wacky like those based on astrology. Other forecasts actually may be brilliant, but no track record is provided. A few forecasts, however, do have enough of an experience basis so that they can be tested and have some credibility. I have my own econometric forecasting models and have been evaluating them since 2007 so far, with good results. (See next page) I WILL UPDATE THIS AS THE END OF MAY I have also included links to a few other models that appear to me to have some merit. Models can be very helpful, but, do not stake your fortune on any of these models including mine. Sam Eisenstadt Current Model Status: A 5/1/2013 Mark Hulbert update says this model forecasts a 6.4% rise in the S&P 500 between May and the end of October. About the Indicator: Eisenstadt created the Value Line model (above) but has maintained this personal model since leaving Value Line. The model has an R-squared value of .36 it predicts about half of the 6-month variation in the S&P 500 Index.
Philadelphia Federal Reserve Survey of Professional Economists 10-Year S&P 500 Forecast Status: For 2013 Q1 the median estimate in the survey of economists is for a 6.1% annual appreciation rate for the S&P 500 for the coming decade. That is down from 6.8% last year. About the indicator: I am not sure that this long range forecast has any real value. This question was added in 1992 to the Survey of Professional Forecasters provided by the Federal Reserve Bank of Philadelphia. The measure here STOCK10 includes percentage point forecasts for the annual average rate of return to equities (S&P 500) over the next 10 years. While this indicator is a survey rather than an econometric model, it is reasonable to expect that numerous survey responses by professional economists are based on independent econometric models..
My statistical models forecast a 7% gain in the Value Line Arithmetic Index between May and the end of October, 2013. There is a 76% probability of the market at least breaking even and a 53% chance of a temporary drop of 8% or more at some point. Compared to my other forecasts for the past few years this is a weak expectation. I hope to be able to buy any significant correction by mid-summer. My econometric models of the stock market are based on forecasting the Value Line Arithmetic Average which tracks the 1700 largest U.S. companies and accounts for 95% of U.S. industry.. . Here are longer term performance numbers. In real world testing, my models appear to point to the basic direction of U.S. stock markets most of the time -- which is their purpose
VectorGrader.com Primary Market Model Status: This is a new indicator to me and I think I like it. Currently it points to being 80% invested (declining) with the overall rating being positive, but near to neutral. Momentum seems to be the greatest positive factor and valuation is a strong negative. About the Indicator: VectorGrader.com has a rather complete description of their model at this page.
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Six-Month Stock Market Indicators ecot

Select to view: Overview Market Valuation Measures Economic Indicators Trader Signals - Fast Trader Signals Slow International View Econometric Models
My Econometric Models Past Performance Probability of Breaking Even

This model estimates the likelihood that the stock market will at least break even in the coming half year. A low probability (say, below 0.60) of break-even means there is a very good chance the market will lose money, while a high probability (between .80 and 1.0) implies that it is highly likely the market will rise in price over the next half year.
Next page predicted versus actual gains
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Predicted vs. Actual Gain

This chart presents the half-year gains predicted by the model compared with the gains that actually followed
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About Forecast m Ts This Stock Market Forecast

Since 2007 I have been testing in real time -- basic econometric models of the stock market that I have developed. The models give a simplified view of how stocks behave based on a few key economic statistics. This document is my way of tracking the performance of my models hopefully while keeping my eyes open to other factors related to the market. So far, results have been encouraging, but it would be dangerous to put too much trust in any single stock market tool. This document is not intended as investment advice. I have no idea whatsoever of what is best for your particular circumstances. I want to thank the authors of all of the resources that I have linked to. Id appreciate any comments you may have. Please send them to: tomtiedeman@gmail.com
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TomT Stock Market Model 2013-05-31

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Six-Month Stock Market Indicators

Over 50 timing indicators focused on market behavior a few months ahead

May 31, 2013

How have my forecasts performed during the past 6 years?

Six-Month Stock Market Indicators

Market Valuation Measures

Six-Month Stock Market Indicators

Six-Month Stock Market Indicators C

Trader Signals Fast (well, relatively fast)

Six-Month Stock Market Indicators

Trader Signals Slow Moving

Six-Month Stock Market Indicators

Six-Month Stock Market Indicators Tom Ts Stock Market Forecast

Six-Month Stock Market Indicators ecot

My Econometric Models Past Performance Probability of Breaking Even

Next page predicted versus actual gains

Predicted vs. Actual Gain

Six-Month Stock Market Indicators

About Forecast m Ts This Stock Market Forecast

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