Tom T‘s Stock Market Forecast
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Still on track for a long Bull Market
My statistical models see an exceptionally bright
half-year ahead for the stock market: 20% gains for
the Value Line Arithmetic Average (VAY) between
November 1 and May 31, 2011. (Actually, the raw
prediction is for a 30% gain, but I am discounting that as
probably unrealistic.) There is a greater than 95%
probability of at least breaking even. The odds are
roughly 50-50 that a temporary correction of at least 8%
will occur at some point before June – so, the recession
recovery road ahead will probably be bouncy.
My econometric models of the stock market are based
on the Value Line Arithmetic Average which tracks the
1800 largest U.S. companies and accounts for 95% of
industry. The models focus on a few fundamental
economic statistics that tend to foretell stock market
moves. How good are they? My forecast from last May
was right on target (13% gain forecasted and 12% actual
gain). Here are some longer term performance charts.
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.
But, what if my new forecast is all wrong? That‘s
what the rest of this paper is about. For what they are
worth, here are my thoughts on what I feel are the major
factors likely to affect the market over the next half year.
I have also included a wide variety of stock market and
economic indicators – my favorites and the favorites of
others for looking ahead several months.
Bad is good. Retail investors remain firmly convinced
that prospects for the U.S. and European economies are
somewhere between dismal and frightening. Corporate
profits have shot back up to near-normal levels, but no
one seems to notice. People have focused more on the
pain of high unemployment that refuses to drop. Factory
utilization is low. Housing activity has not been this bad
since World War II, and there is no prospect for
improvement in sight. National deficits in most
developed economies have people quaking in their
boots. Millions and millions of people are effectively
broke.
Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
October 31, 2010
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Personal wealth in the U.S. dropped $18 trillion – a full
year‘s worth of GDP -- in the worst recession since the
Great Depression, but losses could have been twice that
bad.
The Federal Reserve is throwing everything it can at the
problem, including a giant money printing press. But the
Fed is essentially acting alone. Politicians have now
been intimidated by deficit fear mongers so there does
not seem to be even a remote chance of further
congressional stimulus action. Getting out of this Great
Recession is going to be a long slow slog.
Because so many retail investors remain frightened,
from a long-term investor’s view nothing could be
better! When interest rates eventually go up, over
several years all those bond investors will herd back
to stocks! There is plenty of room on the upside for
stocks and relatively little room on the downside! If
everything was wonderful in the economy then there
would be nowhere for the market to go but straight
down. But, with economic prospects murky, there really
isn‘t anywhere to go but up – slowly and haltingly – for
years!
(My forecast does not include any intervening huge
calamity like war, plague, or a giant meteor strike.
Besides, if something like that occurs, no one will
remember my prognostications anyway.)
I am not the only stock market Pollyanna. My models
have been strongly bullish since October, 2008 – a time
when the world seemed near financial calamity. Foreign
markets started to rebound then, but U.S. markets
continued to crash until March, 2009. Now, nearly two
years later, and after a tremendous stock market
rebound, some of the most influential voices in the
popular investing world have finally come out with
optimistic views.
Warren Buffet, the ―Oracle of Omaha‖, said (10/5/2010)
―It‘s quite clear that stocks are cheaper than bonds. I
can‘t imagine anyone having bonds in their portfolio
when they can own equities.‖ Here is a column by
Steven Pearlstein from the Washington Post (9/23/2010)
saying: "Yes it may finally be time to get back into
stocks." (Free subscription required)
1
 Similarly, at MSN MoneyCentral, Anthony Mirhaydari
wrote ―Get Ready for an Epic Bull Market.‖ On
10/13/2010 Mirhaydari follows up writing ―… investors
can look forward to what's shaping up to be the best
market environment in a generation.‖ In the same vein,
Jurrien Timmer at Fidelity Investments at the start of
October wrote about ―A case for taking some risk
again.‖ At MarketWatch.com Peter Brimelow opines
(10/14/2010): ―Is there a bond bubble? Short answer:
yes… stocks seem to be a better bet than bonds‖.
Shelly Schwartz for CNBC.com says that ―the best of
times for stocks may be ahead.‖ Finally, Liz Ann
Sonders at Charles Schwab writes: ―US stocks are not
expensive and they're most certainly under-owned. Most
individual investors are either pessimistic or indifferent
about the stock market, suggesting the "wall of worry"—
the contrarian nature of the market to perform best when
pessimism is highest—is alive and well.‖
Considered together it appears that the deep seated
fears of a double dip recession have faded for
economists and some fairly prominent conservative
investors. A long term bull market is coming into their
view. Corporate insiders have also become strongly
bullish – they are buying their companies‘ stocks.
Average retail investors, on the other hand, remain
petrified of stocks as evidenced by the continuing flow of
mutual fund investments out of stocks and into bonds.
The ‗smart money‘ and the trendsetters have accepted
the reality of the bull market and small time investors will
eventually follow.
Why have the gurus turned bold? First and foremost,
the economy did not tumble into a second round of
recession as had been feared by many. GDP growth did
slow over the summer, hurting stock performance.
Plenty of investors were scared and ran for cover from
May to August. But, in the end, the sky did not fall; GDP
did not actually decline; profits kept rising; leading
Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
economic indicators leveled off; and the market gave a
great sigh of relief.
Another factor that helped to avoid a big sell off this
autumn was that the market has not racked up major
losses over the past year or so. Therefore, major
institutional investors did not need to sell a massive
volume of losers in order to book tax losses and pretty
up their portfolio holdings. On the contrary, most
investors have a strong tax incentive to keep holding
their stocks at least into the New Year.
Finally, there just might be something to the validity of
the trend pattern of the ―Presidential Cycle.‖ I‘m not sure
that I really trust this pattern, but historically the end of
the second year of the Presidential election cycle is very
good for stocks.
Unless something earth shaking occurs, I’ll report
next at the close of May, 2011.
Competing Econometric Stock Market Models
Mark Hulbert at MarketWatch.com reported in May, 2010
on two econometric models with half-year to one year
perspectives that are even more optimistic than mine.
One, from Sam Eisenstadt, forecasts a 20% gain in the
SP-500 over the next 6 months. The other from Norman
Fosback foresees a 26% gain in the next year and a
75% gain over the next 5 years.
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Tom T‘s Stock Market Forecast
Select to view:
Current Forecast
Market Valuation Measures
Economic Indicators
Market Valuation Measures
If there was any real agreement on stock valuation
prices wouldn‘t go up and down as much as they do.
The measures here are tied to company earnings. They
gauge 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: Following market gains of the past several
weeks, Morningstar sees the market as fairly priced; up
from the 10% undervalued level hit two months ago. As
far as this Morningstar estimate goes, the market is
certainly not in any bubble.
About the indicator: This graph is a fundamental
financial analysis / accounting calculation based on long-
term projected profits for the thousands of stocks
Morningstar tracks. It is a good basic check to see if the
stock market pricing makes sense. If the Morningstar net
present value pricing model is to be believed (a good
bet) then the significant price rise in the stock market
over the past year must reflect recovering earnings and
real business improvement, not any sort of undue
speculation. From this point any further market gains
need to be justified by advancing real earnings.
S&P-500 to Book Value (Bloomberg, Click on the
chart option that gives the 5-year view)
Status: The market had a great rise from the depths of
March 2009, but seems to have leveled off with the
market price-to-book value well below the typical
historical valuation ratio.
About the indicator: This is a basic valuation tool for
stocks -- how does the price of a stock compare to the
money that could be gained from selling off all the
physical plant and inventory of the company. I don't feel
it means too much on its own since valuations can be
quite debatable. However, it confirms that stocks are not
wildly overpriced today and that plenty of room remains
on the upside.
. current P/E, so you should worry.) Be happy or worry
S&P-500 Price Earnings Ratio also S&P-500
Earnings (Note that the S&P-500 Earnings chart is
somewhat out of date. The link above is to
www.multpl.com, courtesy of Josh Staiger) Source data
available online courtesy of Robert Shiller and S&P)
Status: By eyeball, P/E ratios are roughly at normal
Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
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levels. (But, as the chart shows, P/E ratios don't really
have a 'normal' level.) The earnings chart shows what an
incredible V-shaped recession we have had. (You really
should look at it!) To my mind, there is nothing scary
about current P/E ratios -- at least as compared to the
incredible spike of P/E ratios during the tech bubble of
2000!
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 over-
priced. 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. P/E
ratios today are high compared to 40 years ago or more.
Part of this sea change in ratios, however, was probably
due to the shift to investors preferring appreciating stock
prices instead of dividends -- all caused by the fact that
the tax code sets low rates for capital gains and taxes
are deferred until the stock is actually sold.
The Fed Model (Wikipedia.org explanation) Source
data for S&P Earnings and long interest rates made
available courtesy of Robert Shiller.
Status: According to the long term pattern of interest
rates versus stock prices, the stock market is either
significantly undervalued or overvalued depending on
the length of the historical average you want to consider.
(Given the current very low long T-Bond rate of 3.55%,
and based on experience since 1960, a regression
model predicts that the SP&500 P/E should be
approximately:
P/E = 1/(0.808 T +0.010)
P/E = 1/( 0.808 (0.0355) + 0.010) = 25.8.
The current S&P-500 P/E based on 10-year trailing
earnings is roughly 21. So, smile; the market must be
undervalued. But, the long term average P/E for the
S&P500 since 1881 is roughly 13.5, much lower than the
as you wish. But, don’t go crazy – My analysis finds
no statistical link in the 6-month time frame between
any gap between the calculated and actual P/E and a
corresponding rise or fall in the S&P-500 average.
About the indicator: (This indicator is a quantitative
look at the P/E ratio and comes to the same conclusion
as the qualitative look of the pervious indicator. I find its
3
results to be nearly worthless in the 6-month time
frame.) 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.

SP500 E/P vs 10yr Treasury

1960 - 2010
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
1960.01
1962.11
1965.09
1968.07
1971.05
1974.03
1977.01
1979.11
1982.09
1985.07
1988.05
1991.03
1994.01
1996.11
1999.09
2002.07
2005.05
2008.03

eps INT10

As shown in the chart above, earnings per share (E/P or

eps) and the 10-year Treasury bond interest rate are
fairly closely linked. Statistically, more than half of the
long term variation of the E/P or P/E ratio of the S&P-
500 can be explained directly from the level of long term
interest rates. The link is even closer between interest
rates and fairly long term averaged earnings rather than
just current earnings. The upshot is that interest rates
and a moving average of the market‘s P/E can be used
to forecast stock market values. That‘s really quite
amazing! No wonder that market commentators dote on
every twitch made by any of the directors of the Federal
Reserve related to interest rates.

Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved. 4

This is research, not investment advice.
Tom T‘s Stock Market Forecast
Select to view:
Current Forecast
Market Valuation Measures
Economic Indicators
Economic Indicators
Despite all of its semi-random craziness, eventually the
stock market needs to reflect corporate profits which in
turn reflect the economy and especially interest rates.
Usually the stock market anticipates economic
conditions by several months. (The old adage is that
since 1948 the stock market has predicted 20 of the last
10 recessions.) The indicators here are my favorites for
looking ahead 6 months to a year.
Economic Cycles Research Institute (Bottom of
the page)
U.S. Leading Economic Indicator (See bottom of link
page.)
Conference Board Leading Economic Index
Organization for Economic Cooperation and
Development.
Status: The ECRI leading indicator turned down over
the summer convincing many commentators that the
economy was falling back into recession. Now it has
leveled off, creating a bit more confidence that the
economy hit a "soft patch" rather than a serious pot hole.
About the indicators: These are just a few of the
groups that compile statistics of economic factors that
tend to lead the economy both up and down. Stock
market performance is typically part of the group of
measures that makes up a leading economic indicator,
so by definition, that part of the leading indicator cannot
lead the stock market. Other parts of an LEI, however,
can lead the stock market. Changes and directions of
the leading economic indicators are worth paying
attention to.
Anxious Index (Philadelphia Fed. xls file)
Status: Economists are starting to hedge their bets a bit
on avoiding another round of recession. The August
update of this indicator shows that a few more
economists are afraid of a double-dip recession. The
number is still small, but the key point is that the concern
is rising rather than falling. (Next update in mid-
November)
About the indicator: This article by David Leonhardt in
the NY Times in February, 2008 said the Index pointed
toward an economic recession. Clearly it was right. He
noted this Survey of Professional Forecasters
maintained by the Philadelphia Federal Reserve hasn't
Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
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missed calling a recession or called a false positive in
the years since 1968 when it was started. The Anxious
Index is the successor to the earlier Livingston Index a
personal project of a Philadelphia journalist. Here is an
interesting article on it from the Philly Fed web site. (OK,
you may think it is terribly boring, but I think that it is
pretty neat that a small-time single individual could
create one of the most important economic tools
around.) I find that the Anxious Index is a much better
leading indicator than is actual GDP.
Effective Federal Funds Rate and Target Interest
Rate (from St. Louis Federal Reserve)
Status: The Fed is effectively paying banks to borrow!
Eventually rate cuts will stimulate the economy. But,
because of lag times, for now it is still 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. See the chart lower
on the link page.)
Status: With short term interest rates near zero, this
indicator says that there is practically no chance of a
double dip recession..
About the indicator: 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
5
 Long Treasury Bond vs Discount
Rate (InvestmentTools.com)
Status: The Fed has dramatically lowered short term
lending rates 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. In the past couple
of months the gap between long and short rates has
started to close, primarily because long-term rates have
continued to fall. Liz Ann Sonders at Schwab writes
(10/7/2010) that this is a positive rather than negative
development. (MarketWatch.com forecast, bottom of
linked page) (Sometimes MW posts it there and
sometimes not :o)
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. 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 really worried about the economy.
TED Spread (Bloomberg)
Status: The Greek bond default fear spike of the past
few months -- appears to be fading. The spike was also
fairly small -- TED remains significantly BELOW normal
showing a major return of credit confidence. (Click to the
5-year view to see this.) LIBOR is also low again.
About the indicator: Credit only counts when you don't
have it! This indicator tracks the difference between the
3-month Treasury rate and the 3-month LIBOR (click to
the 5 year chart) -- the interest rate at which banks loan
to one another. As the credit crisis started to hit in mid
October, 2008 the banking panic froze the credit markets
and caused the LIBOR to skyrocket despite falling
Treasury rates. The TED spread had never been higher.
Now, the situation has calmed tremendously. Bond
spreads also continue to improve with continuing
declines in perceived risk.
Building Permits and Housing Starts (St. Louis
Federal Reserve)
Status: Construction remains as low as it has been at
any point since WWII. Housing probably has bottomed
out and a multi-year rebound is just starting --- with
recovery much slower than is typical following a
recession.
About the indicator: Housing and construction are
important leading indicators, usually leading the stock
market by about a year. Housing related activity -- not
just construction, but including all factors such as new
appliances -- constitutes roughly 15% to 20% of the U.S.
economy. It is much too big a sector to ignore. 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.
Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
U.S. Dollar (ClearStation.com) or Dollar Index
(Bloomberg. Click to the longest view) Dollar Index
(MarketWatch.com)
Status: Since June, the Dollar has fallen considerably --
a good sign of returning financial confidence following
the bond default fears last spring for Portugal, Greece,
Spain, Ireland and Italy, The falling Buck is also an
expectation that further quantitative easing (creating
massive amounts of dollars out of thin air) is highly likely.
About the indicator: Watch the dollar slide – it‘s good
for the stock market and rebalancing the U.S. economy,
but it is bad for your personal wealth. The flow of dollars
from the U.S. is at flood stage. To try to bring the U.S.
balance of payments at least a little bit under control the
Bush administration set the value of the U.S. Dollar on a
big long slide while pretending in public ("Strong Dollar" )
that it had nothing to do with the slide. The Obama
administration continues that policy. The only alternative
means to restore some semblance of a trade balance
would have been to cut use of foreign oil or resurrect the
old strong array of trade barriers and tariffs. The race to
the bottom of world currencies is now at high pitch as
illustrated by this Bloomberg.com story on the October,
2010 G20 meeting.
Household Net Worth (Federal Reserve, see Line
42)
Status: As a Nation we are a lot less wealthy than we
were a few years ago. After falling off a cliff with the
collapse of housing prices and the stock market crash,
personal net worth appears to have bottomed out, but it
is not yet seriously rising. It is not yet time to celebrate. It
is no surprise at all that Treasury and the Fed are doing
everything possible to block further drops in house
prices and to increase business profitability by reducing
borrowing costs.
About the indicator: Net worth is the score that counts.
Personal wealth fell by 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 was for cascading bank, business and personal
wealth failures to get rolling 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 another ten or twenty trillion dollars of damage.
U.S. Federal Deficit (St. Louis Federal Reserve)
Status: Watch the knife fall! They are going to have to
shift the axis on the graph because the deficit will never
have been as bad as it is going to be!
About the indicator: A lot of investors make a lot of
noise about the deficit, but it does not correlate very well
with changes in the stock market because changes
move so slowly. Still, fear of the rising deficit has
stopped any chance of further stimulus from Congress.
6
 U.S. Balance of Payments (Federal Reserve link.)
Status: The balance of payments has turned worse in
the past few months which is probably a positive sign of
improving international confidence and a recovering U.S.
consumer.
About the indicator: This probably means little in the
short term, but is a major negative long term problem for
the U.S. over the years. 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)

Baltic Dry Index (InvestmentTools.com Scroll down

a bit to see the graphs.) BDI (Bloomberg. Click to the 5
year view.) HARPEX (Harper Peterson Container
shipping index)
Status: Bulk material shipping rates reflected in the
Baltic Dry Index started to pick up again during July.
Container shipping rates covered by the HARPEX –
more closely related to expectations of retailers -- are
climbing fast. Some in the field are even saying that a
crisis is developing. A hopeful sign was a Bloomberg
report in mid-July that there is a severe shortage in
China of shipping containers.
About the indicator: OK, now you can feel truly erudite
:o) This important long-lead indicator accurately
foreshadowed the big market turn around last year. Now
shipping rates are somewhere near normal levels, but
still far below the boom levels of 2006. The Baltic Dry
Index (Wikipedia) , The Best Economic Indicator You've
Never Heard of tracks the cost of moving materials by
sea. A higher value indicates rising shipping levels and
therefore points to economic expansion. This Wall Street
Journal article says that the Baltic Dry Index may give a
fuzzy indication of world economic activity this year
because of an unusually large number of new ships this
year. The Dow Jones Transportation Index (click to the
5-year view) seems to lag the BDI a bit. It returned
nearer to normal levels since the late winter and seems
solidly in a strong and continuing price upswing. It still
has far to rise to get to 2006 to 2008 normal levels.

Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved. 7

This is research, not investment advice.
Tom T‘s Stock Market Forecast
Select to view:
Current Forecast
Market Valuation Measures
Economic Indicators
Trader Signals – Fast (well, relatively)
None of these short-term tell tales are part of my 6-
month 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. At the end of October the
market appears over bought on a short term basis.
Technical Analysts, like palm readers, astrologers, and
other pseudo-scientists, believe that they have special
tools that ‗really‘ show what is happening in the market.
Most of these market timing tools are based on graphing
prices in various ways to highlight or identify trends.
Usually these graphs involve some sort of moving
average in order to smooth out any undue influence (a
‗head fake‘) from a few days of erratic trading.
Unfortunately, using moving averages means that the
indicators always react with a time delay; the longer the
averaging period of the moving average, the slower the
reaction time.
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.
% Stocks Trading Above 50-Day Average
(StockCharts.com)
Status: The level of this very short term indicator
collapsed in June to less than 6% of stocks above their
50-day average. That was a definite buy point for this
short-term trading indicator. Today at 81%, it implies
that the market is significantly somewhat overbought for
the short term.
About the indicator: This is a very short term indicator
for prices being over bought or over sold. Only traders
should pay much attention to it.
Importantly, this indicator can say completely opposite
things for the short term as opposed to the long term.
According to this 4/21/2010 MarketWatch article by Mark
Hulbert, moments when more than 90% of stocks trading
above their 50-day moving averages are very rare (12
times in the past 43 years). It is also and strongly bullish
market signal for the long term. On average, returns over
the next year are 19.7%. Hulbert cites research
Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
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performed by Ned Davis Research indicating that stocks
are rising with great breadth. On the other hand for the
short term, however, too high a reading or too low a level
is a strong contrarian indicator.
Ratio of NYSE Highs to Lows (StockCharts.com)
Status: The ratio remains in an uptrend.
About the indicator: I like this short term indicator. A
bullish signal occurs when the ratio is in an uptrend
Scroll down on the link and pay attention mainly to the
lower of the two charts. An alternative view of the data
is contained in NYSE New Highs & New Lows
(www.InvestmentTools.com) In this chart the number of
highs makes the market appear somewhat overbought
at the moment.
NYSE Daily - Weekly Advance Decline Line
(StockCharts.com)
Status: Talk about a bouncing ball! Buy when the
weekly line bounces off a temporary bottom.
About the indicator: 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 couple of weeks there is a relatively good time to
sell and one to buy.
A Completely Opposite Opinion ( Simon Maierhofer,
Thursday May 13, 2010 Yahoo Finance) Crash is Dead
Ahead Sell Get Liquid Now!... Paul Farrell
MarketWatch.com) Is Another Market Crash Coming?
Brent Arends, WSJ. More Brent Arends WSJ 9/10/2010
"Stocks Still Aren't Cheap -- Ignore the Bullish Talk".
Status: Over most of the summer it was easy to find
negative opinions, but there seem to be fewer negatives
in October. The first linked piece that talks of "5 Bull
Market Game Changers" says that "investors have been
asleep at the wheel" and indicates the market may be
"setup for a waterfall decline." The Paul Farrell column is
Chicken Little to a "T".
About the indicator: At the market for every buyer
there is a seller with the exact opposite opinion. So, it
only makes sense to see what the other side is thinking -
- roughly half of the time they are right!
8
 sell out and thereby lose most of their money. Likewise,
VIX and NYSE ARMS Index Implied Volatility when the market is rising wonderfully and you feel great
(StockCharts.com. Shift to the weekly view with the line joy, it is merely a trick. Ask yourself: "What part of Buy
setting -- I can't understand their default view.) Low and Sell High don't I understand?"
Status: September has been unusually good which
means that some sort of retrace is highly likely. Multiple Stock Market Views (Click to the max view):
About the indicator: Most catastrophes don't last very Status: Since the start of September all market
long. So if you survive the disaster, it is probably time for averages have been on a roll!
rebuilding. The CBOE (Chicago Board Options About the indicator: The Dow-30 and the S&P-500 are
® ®
Exchange) Volatility Index (VIX ) is a key measure of what most people usually thing of as 'The Stock Market.'
market expectations of near-term volatility conveyed by Take a look at some of these other long term graphs. I
stock index option prices. According to the CBOE "since prefer:
its introduction in 1993, VIX has been considered by
many to be the world's premier barometer of investor VAY Appears to have nearly caught up with its long
sentiment and market volatility". When the VIX shoots up term trend making the slingshot rebound weaker The
you are in the midst of a crisis - if you didn't know that Value Line Arithmetic Average includes the top 1800
already. companies in the U.S. -- all weighted equally.
The $TRIN is the NYSE Short Term Trading ARMS Historically. It has had an amazingly consistent growth
Index which multiplies how many stocks moved in a pattern. Until this year, that is. To me it looks like it had a
direction by the trading volume of the stocks. (OK, this is double bottom and is likely to regress to the historic
pretty abstruse.) But, when it gets high (at or above 3.0), mean.
it is another sign of a buying or selling panic.
EEM The MSCI Emerging Markets Fund represents
MACD Moving Average Convergence / valuations of the markets that have the greatest potential
Divergence for growth. Profits need to grow, but this average still is
Status: The ―fast‖ moving average is above the ―slow‖ well below trend.
moving average, so this is interpreted as a positive sign.
About this Indicator: 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.

That Sinking Feeling in your gut

Status: Through May and June some panic and
desperation were in the air. My instincts said to flee!
Instead, I fought my churning gut and bought some stuff.
The edge of fear seems to be receding from the market,
but there is still plenty of investor worry. For this
contrarian indicator, that‘s a great sign!
About the Indicator: As Brent Arends, a writer for the
Wall Street Journal notes in this MSN article on Why
Market Timing Works ―our feelings are terrible guides.‖.

It often pays off to think of market gyrations as a big

game set up with the sole purpose of tricking you and
stealing all of your money. It works by enticing you to
buy with hints of untold wealth when the market is rising.
Then shortly after you buy the market falls off a cliff. That
nasty feeling in the pit of the stomach gets innocents to

Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved. 9

This is research, not investment advice.
Tom T‘s Stock Market Forecast
Select to view:
Current Forecast
Market Valuation Measures
Economic Indicators
Trader Signals - Slow
Several of these slow moving trading indicators may
seem far-fetched, irrational or bizarre. Maybe they are.
None the less, a few are probably the most helpful
market timing tools for a part-time investor.
Halloween Indicator:
Status: We have entered the half of the year that
statistically is responsible for all of the gains in the stock
market over time. Plenty of people believe in this
indicator and sell out for the summer. They will be
buying back -- or judging from September's price rise
some investors jumped back early.
About the indicator: If you had to pick just a single
stock market timing signal, this 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 Halloween
Effect is greatest when the economy is heading into a
recession. On the other hand, when coming out of a
recession like last year the effects of a rising economy
overpower the semiannual pattern.
3rd Year of the Presidential Cycle (Mark Hulbert,
MarketWatch.com) Second article by Hulbert.
Status: Starting in September, 2010 (see the linked
article) the stock market should be benefiting from this
strange, but statistically valid cycle. Typically, year 3 of a
president's term yields 15% gains versus squat for year
2 which we are now leaving.
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 be better than
average. Year 2 typically yields nearly zero. Since 1945,
Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
Trader Signals - Fast
Trader Signals – Slow
International View
Testing my forecast models
About This Forecast
rd
Hulbert calculates that the 3 year returns have
averaged an outstanding 24%. Here is Liz Ann Sonders'
slightly different take on the cycle which starts to define
the pattern over the course of each year. From this
perspective the first half of the mid-term year is typically
rotten (It was.) and the fourth quarter that we are now
entering is typically fantastic. I have not analyzed the
presidential cycle, but my hunch is that the presidential
election cycle has a big impact on Federal Reserve
policy -- the Fed takes the punch bowl away from the
party when the president is clearly a lame duck. (True for
Carter, Reagan, Clinton, Bush 1 and Bush 2) The Fed
action, in turn, damps down a frothy economy leading to
a tough new year for the new president. Well, at least he
gets to blame his predecessor.
Congressional Gridlock is Good?
Status: Coming up on the mid-term election it looks like
the solid Democratic control of Congress may be over
or, at the least, may be weaker. Will this affect stock
prices? There are plenty of conflicting analyses out
there. I don‘t have an answer. :o)
About the indicator: The question of congressional
gridlock and the stock market is hot right now, before the
mid-term election. So far I have found four quantitative
answers and they don‘t agree. Liz Ann Sonders of
Charles Schwab in this post writes that data from Ned
Davis Research appears to prove that the effect is real,
with the best situation being a Democrat as President
and Republicans controlling Congress. The second view
is from Fidelity Investments, their post finds no real
difference based on control of Congress. Mark Hulbert
rd
found no significant difference in 3 year gridlock or non-
gridlock gains. Finally, Robert Powell writes that ―political
gridock is bad for your stock portfolio.‖ So, decide for
yourself. (My econometric model does not consider this
factor.)
Miscellaneous Seasonality Factors
Status: Per the norm -- since Congress is going out of
session for the elections that should be good news.
About the indicator: I mainly pay attention to the "Sell
in May" seasonal trading strategy since my goal is to
minimize trading -- Studies repeatedly have shown that
the more frequently retail investors trade, the lower their
returns are likely to be. That said, IF you are trading in
10
the time frame of weeks and months it might be worth
paying attention to several statistically valid market
timing patterns. According to Mark Hulbert, of all the
strategies he tracks, the best has been the Seasonality
Trading System: buy before holidays and prior to the end
of any month; sell four days later. Another Hulbert
column focuses on recesses of the U.S. Congress --
when Congress is unpopular and it goes out of session
(schedule) the stock market breathes a sigh of relief and
goes up. The study he cites found that "about 90% of the
capital gains over the life of the Dow Jones Industrial
Average have come on days when Congress is out of
session." (Click here to read the study.) Here is another
column on seasonality. Another effect worth paying
attention is selling in the fall of the year in order to book
tax losses (link) .
Stock Market Slow Moving Average (12 month SP-
500 moving average)
Status: The 50-day price moving average of the S&P
500 has just crossed above the 200-day moving
average. In the voodoo world of Technical Analysts that
is very big and positive news. Many technical traders will
pounce once they feel clear which way the market has
turned. In the meantime, all of this trader uncertainty
leads to big short lived price swings. Mark Hulbert had
this interesting column on the subject.
About the indicator: If all of your stocks are priced
above their 200-day moving average you should sleep
easy at night. A moving average helps a trader to see
longer trends rather than day to day seemingly random
price moved. Moving averages have been popular with
Technical Analysts since the 1920's to identify market
trends and serve as a market timing signal. A long
period moving average, such as 200 day or 12 month is
a simple way to call major market shifts for a trader who
only wants to sell or buy once or twice a year. The basic
rule is to run from the market when the price line crosses
below the moving average, and jump back in when the
price is above the slow moving average. In a strong bull
market price could stay above the slow moving average
for years. The two problems with this indicator are: (1) It
is prone to false calls -- fairly often prices will touch or
cross over the moving average only to stage a sudden
reverse. The shorter the averaging period, the more
false calls occur; (2) The long averaging period means
that the indicator will be slow in calling the end of a bull
run and slow in calling the end of a bear decline. This
MSN MoneyCentral article by Anthony Mirhaydari
describes the approach. It is no panacea, but it sorts out
major Bull and Bear trends. This MarketWatch article by
Mark Hulbert comes to the same favorable conclusion.
% Stocks Trading Above 200-Day Moving
Average (number) (Barchart.com) chart
(stockcharts.com --change to the weekly view)
Status: At 72% the indicator doesn't say much of
anything. Worry when it hits 85% or more.
Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
About the indicator: As a general rule, when a stock's
price is above its 200-day moving average, the stock is
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)
(Bloomberg.com)
Status: To me, it looks to be on a fairly steady rise.
That‘s 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. Interpreting it, however, is a lot like
taking an ink blot test and tends to pull out your current
hopes and fears.
Mutual Fund Flows (Investment Company Institute
data)
Status: Money has been flowing out of stock mutual
funds and into bond funds ever since the DotCom
bubble burst in 2000. Maybe it has slowed somewhat?
The outflows from stock mutual funds over the summer
been terrible. In just the first 7 months of 2010 retail
investors cashed in over $30 B of stock mutual funds.
(NY Times 8.21.2010) Mutual fund money is still solidly
on the sidelines of this bull market. The end of the bull
market won't come until the retail investors have joined
in -- in time to go to slaughter some years from now after
interest rates eventually go up.
About the indicator: The Investment Company Institute
tracks sales and redemptions of equity and bond mutual
funds offered by ICI's member companies. Their data
show a decade-long flow of money to bond funds from
stock funds. When this situation eventually reverses –
when interest rates finally start going up – the stage will
be set for a return of private investors that could make
the boom of the 1990‘w seem tame. Here is Brent
Arends Wall Street Journal opinion on going against the
herd and moving in the OPPOSITE direction of the ICI
funds flow.
Investor Confidence (StateStreet.com)
Status: Investor confidence tanked in August, getting
nearly as low as during the crash of 2008-2009. I take
this as a very strong positive and contrary indicator.
Retail investors are usually wrong. (except when they
are right :o)
About the indicator: Most investor sentiment surveys
have a track record as lagging market behavior or even
being contrary indicators -- i.e. retail investors always get
it wrong. This investor confidence indicator may be
11
special. The State Street Advisors indicator claims to be
based on actual investor risk taking. This is a new
indicator to me so I do not have a strong opinion yet.
Consumer Sentiment versus CEO Sentiment (MSN
Money Central -- Anthony Mirhaydari )
Status: VERY bullish for the next few years.
About the indicator: In a July, 2010 MSN
MoneyCentral.com article Anthony Mirhaydari presented
a very slow moving indicator the follows the difference
between the Consumer sentiment and CEO sentiment
indicators compiled by the Conference Board. As shown
in the graph below a very striking multiyear pattern
emerges. The moments -- like now -- when consumer
confidence has been devastated, but CEO's see a bright
future usually mark the start of multiyear bull markets. As
of July 2010, the difference was historically high.
TomT’s Post - 2000 Anomaly
Status: 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 comprise
the Value Line Arithmetic Index. That is a turn-around
from previous decades. All three indexes, however,
show a statistically significant lower performance in the
post-2000 period. Is that changing now?
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?

Insider Trading (MarketGauge.com The

statistic of interest here, Vickers Insider Trading
appears near the bottom of the page)
Status: Short term bullish, but the cast is not all
that clear. Here is a different track of insider
buying that indicates that on a very short term
basis insiders have been selling off to harvest
some profits. But, the picture is not really that
clear – this article points to a sharp increase in
insider selling over the past month that may
point to a turn-around coming soon.
About the indicator: Corporate officers and
directors must report any time they buy or sell
shares of their company. Vickers Weekly Insider
Reports sums this activity and provides a
measure of whether supposedly knowledgeable
insiders are buying or selling

Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved. 12

This is research, not investment advice.
Tom T‘s Stock Market Forecast
Select to view:
Current Forecast
Market Valuation Measures
Economic Indicators
International View
The world keeps getting smaller. For the next decade
most of the best market investment opportunities
probably lie outside the U.S.. The reason is simple: it is
easier to increase your wealth in percentage terms if
you are poor rather than wealthy. And percentage
growth is what investing for dollars is all about.
Organization for Economic Cooperation and
Development.
Status: OECD is predicting slow economic growth, but
at least that‘s better than more recession.
About the indicators: 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.
I.M.F. World Economic Outlook
Status: The World economy is slowly returning to
normal. The International Monetary Fund projects steady
growth at historically typical rates: 2.4% for advanced
countries; 6.7% for developing economies, and 4.6% as
a World average.
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 (CIA World
Factbook)
Status :The U.S. with debt equal to 60% of GDP is in
the middle of the pack. Greece is at 90%. Italy is at
103%. And look at Japan! In the later stages of a
Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
Trader Signals - Fast
Trader Signals – Slow
International View
Testing my forecast models
About This Forecast
recession sovereign debt defaults become a growing
concern, especially when interest rates begin to rise
making debt levels more burdensome.
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: Emerging market stocks are back in the lead.
Emerging market growth rates are again far ahead of the
U.S. and other developed countries. That's true of GDP
growth rates and now again stock market rises. It was
only during the panics that money flowed to the relative
stability of U.S. stocks.
About the indicator: The link is to a plot of U.S. stocks
(the SP-500 index) versus a few emerging market
favorite ETFs. Clearly, industries outside the U.S. are
showing faster growth. The immediate question is
whether emerging markets have rebounded too far and
too fast from March, 2009. Several commentators have
voiced concern. My guess remains that all markets still
have room to rise.
Big Mac Index (Economist.com, subscription required)
Status: This indicator doesn't say anything about the
stock market. I just think it is fun! The Economist says
the chart shows that the Chinese Yuan and several other
Asian currencies are drastically undervalued -- great
bargains on Big Macs in Asia! On the other side of the
chart, if you are in Switzerland it sure looks like you
should learn to enjoy small portions of local cheese --
$6.78 for a Big Mac! Gimme a break!
13
Tom
Tom T‘s
T‘s Stock
Stock Market
Market Forecast
Forecast
Select to view: Trader Signals - Fast
Current Forecast Trader Signals – Slow
Market Valuation Measures International View
Economic Indicators Testing my forecast models
About This Forecast

Testing my forecasting models

What happened when I banked on my models in real time?

In 2007 I began using my current set of predictive statistical models. They are built around the few numerical indicators I
could identify that actually tell their stories before the stock market can react. My basic approach has been to go very light
on stocks if the predicted gain is below 10%.

Predicted Probability
Forecast Gain Actual Gain Break Even Broke of 8% Correction
Date (Proportion) (Proportion) Probability Even? Correction Occurred?
5/31/2007 0.09 -0.02 0.94 No 0.55 Yes
10/31/2007 0.02 -0.08 0.83 No 0.58 Yes
6/2/2008 -0.16 -0.32 0.62 No 0.67 Yes
10/31/2008 0.13 0.18 0.99 Yes 0.71 Yes
6/1/2009 -0.02 0.15 0.99 Yes 0.52 No
10/31/2009 0.33 0.15 0.99 Yes 0.59 No
5/31/2010 0.13 0.12 0.78 Yes 0.48 Yes
10/31/2010 0.31 0.99 0.46

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.

The current forecast for winter 2010-2011 gives greater than 95% chance of market gains -- outstanding prospects!

Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved. 14

This is research, not investment advice.
Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved. 15
This is research, not investment advice.
Tom
Tom T‘s
T‘s Stock
Stock Market
Market Forecast
Forecast
Select to view: Trader Signals - Fast
Current Forecast Trader Signals – Slow
Market Valuation Measures International View
Economic Indicators Testing my forecast models
About This Forecast

About This Forecast

For the past few years I have been testing 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 welcome any comments. Please send them to:

tomtiedeman@gmail.com

Copyright 2010 Tom Tiedeman, Washington, D.C. All rights reserved. 16

This is research, not investment advice.