Tom T‘s Six Month Stock Market Outlook
Make an informed guess where the stock market is headed
Select to view:
Overview
My Best Guess for the Stock Market
Market Valuation Measures
Economic Indicators
Lost in the Holiday rush - hopefully
Overview
Over 50 free resources here may help you
decide where the stock market is headed.
My best guess for the stock market for the
next 6 months is a bumpy summer followed
by a strong 12% gain by November 1. This
forecast is based on econometric
statistical models that are predicting 17%
gains, but I think that may be too optimistic
given economic and seasonal headwinds.
.
In October and May I post my best guess for the
stock market for the next half year based mainly on my
own econometric models. I‘m not expecting exactness or
accuracy; I am just trying to usually get big market
moves right. Here are the models‘ forecasts since 2007
as well as back-test results from 1984. Racking up
actual results year after year is the only real way to
validate if my models are worth anything. Four years of
good results are encouraging, but not enough to justify
betting the farm or even the backyard shed on my
forecasts.
For any half-year, my models still have a reasonable
chance of being dead wrong. So, along with my market
forecast, I post dozens of links to what I consider to be
the best freely available stock market indicators and
econometric forecasts by others. While the majority of
these indicators are positive for the coming half year, a
significant number have started to wave cautionary flags,
especially for the next few months.
All market indicators often don‘t necessarily tell the same
story, and forecasts are only right until they are wrong.
Think for yourself!
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This private letter tries to provide somewhat objective research, not investment advice.
May 22, 2011
Trader Signals - Fast
Trader Signals – Slow
International View
Econometric Models
About This Letter
Market Valuation Measures
These tools try to evaluate if the stock market is
reasonably priced. Included is one comparison that
Warren Buffet called: ―probably the best single measure
of where valuations stand at any given moment.‖
Economic Indicators
Ultimately, the stock market reflects performance of the
overall economy. The data here track the economy. The
stock market is always fixated on what economic
conditions are going to be.
Trader Signals - Fast (These indicators can change
from day to day -- too fast to summarize here. The links
here all go to the most current data.)
Winning traders tend to pay relatively little attention to
fundamentals. Good traders, I am told, have cast iron
guts and tend to be contrarian -- they worry when the
market performs too well and drool for the crashing
moment when everyone else is jumping out of windows.
Even with longer term investing, it pays to pick the best
time to act.
Trader Signals – Slow
History shows that the stock market tends to follow some
seasonal patterns and longer term trends. Combined
with other indicators, some of these signals are worth
paying attention.
International View
Many of the best long term economic growth
opportunities are in rapidly developing countries. The
sources and indicators here look world-wide.
Econometric Models
Econometric models use the anticipated interactions of
several major economic factors to estimate the future.
Models differ in the factors they consider most important.
There are plenty of econometric models of the stock
market. Few of them, however, show their track records.
Ones that don‘t should be suspect. Current forecasts
from several established models are covered here
including my own. One of the other models here is the
Value Line Investment Survey econometric model -- with
a track record since 1980.
1
Tom T‘s Six Month Stock Market Outlook
Make an informed guess where the stock market is headed
Select to view:
Overview
My Best Guess for the Stock Market
Market Valuation Measures
Economic Indicators
My Best Guess for the Stock Market
Six month forecast:
May 22, 2011 to November 1, 2011
Historically the summer months tend to yield poor stock
market performance. So, I am somewhat surprised that
my econometric models expect excellent gains for the
stock market between June 1 and November 1, 2011:
 12% gain for the Value Line Arithmetic Index
(VAY) -- my main measure of the broad stock
market. Probably the Dow 30 and S&P 500 will
have gains that are a few percent lower. (My
models actually are predicting 17% gains for
VAY, but I think that the slowness of the current
economic rebound will make that unlikely.)
 Near certainty (greater than 95% chance) of not
losing money by the end of the period. (At least,
that‘s what the models say :o)
 50-50 odds of a temporary decline of 8% or
more at some point during the period (That is
normal, but my personal hunch is that the actual
odds of a pothole this summer are higher.).
The reason for my models positive forecast is simple:
the world economy is slowly getting better.
To most people, the U.S. and world economic pictures
remain gloomy and foreboding. For an investor that is
good news – there is still plenty of room for
improvement. The slow economic recovery is frustrating
for many, but it means that there may be several more
years of growth before we slide into the next recession.
Many big negatives are priced into the market: lingering
high unemployment and stagnant wages; Gross
Domestic Product way below potential; a steeply sliding
U.S. Dollar; a devastated U.S. housing market; $10
trillion in lost wealth in the U.S. since 2007; still bankrupt
financial sector; a corporate sector that is cash-rich, but
afraid to invest; stumbling Leading Economic Indicators;
sovereign debt worries; upheaval in the Mideast; crazies
running Congress; and still-fresh memories of the
financial Armageddon that led off the Great Recession.
Together these dark clouds have a glorious silver lining:
Since things are still very bad, they can still get very
much better.
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
Trader Signals - Fast
Trader Signals – Slow
International View
Econometric Models
About This Letter
As long as only 1 in 7 Americans believe that a long term
economic recovery is underway (Bloomberg), and public
optimism is as low as during the winter of 2009 (NY
Times), the stock market will have room to rise –
hopefully, slowly and somewhat steadily.
While there is potential for the current bull market to
continue for years, red flags are waving for the next few
months.
 Record smashing stock market gains since last
September make the market overdue for some
sort of correction.
 Prices for several commodities (silver, gold, oil,
wheat) have ―gone vertical‖, evidence of a
speculative bubble that may have started to pop.
 The Federal Reserve‘s Quantitative Easing
program (QE2) will stop at the end of June,
closing down a major stimulant for stock prices.
 Summer months typically are poor for stock
market performance. Whether for good reasons
or not, many investors routinely cut their stock
holdings starting in May.
 Several Leading Economic Indicators have
dropped a bit, suggesting a disappointing
economic scene for the summer.
I was amazed last October when my econometric
models forecasted mind boggling 30% gains in the Value
Line Arithmetic Average (VAY) by this coming June. The
projection seemed incredibly rosy to me, so in my written
forecast I discounted to ―just‖ 20% gains. My tiny bit of
caution proved correct; from the time of my forecast to
now the market index has indeed risen 20% -- incredibly
good!
Further along the path of economic recovery, we should
continue to expect the stock market to grow, but
probably at about half the pace of the past year. I‘m
hoping to buy into a summer market dip.
Good luck. Happy summer! I‘ll next report in late
October.
2
TomT‘s
m still more Six Month
than fully Stock
invested. Market Outlook
(margined)
Make an informed guess where the stock market is headed
Select to view:
Overview
My Best Guess
Market Valuation Measures
Economic Indicators
=====
Market Valuation Measures
If there was any real agreement on how to accurately
value stocks, prices wouldn‘t 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: Morningstar judges the market to be slightly
(2%) overvalued this week. This indicator has read
slightly overvalued since last. A mildly optimistic market
could stay slightly overvalued for years as it did from
2003 to 2007. No worry here.
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 basic check to see if the stock
market pricing makes sense. Take this measure with a
grain of salt – its calculations are highly dependent on
future interest rates – which are notoriously hard to
predict :o) None the less, it accurately reflects what
smarty-pants analysts THINK the real situation is. And
that is probably more useful than knowing what the
actual truth is. The Market always cares more about
opinions than the truth.
S&P-500 to Book Value (Bloomberg.com, Click on
the chart option that gives the 5-year view)
Status: The current market price-to-book value of
roughly 2.3 is still well below the typical historical market
peak valuation ratio of approximately 3. Since late
summer 2009 the Book Value-to-Price ratio has shown
just a slight rise. There is no reason for concern here.
About the indicator: Book Value is what you would get
if you closed a business and sold off all of its physical
plant and inventory. It‘s one of the most basic valuation
tools for stocks. On its own it doesn‘t mean too much
since valuations can be quite debatable. However,
reasonable book value levels confirm that stocks are not
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
Trader Signals - Fast
Trader Signals – Slow
International View
Econometric Models
About This Forecast
wildly overpriced today and that room remains on the
upside.
.
S&P-500 Price Earnings Ratio 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: By eyeball, P/E ratios are roughly at normal-to-
slightly-high levels. (But, as the long term chart shows,
P/E ratios don't really have a 'normal' level.) The
earnings chart shows what an incredible V-shaped
recession we 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! Part of the reason for the
somewhat high current level is that the earnings
measured here are averaged over several years –
several really rotten years -- and thus not really
representative. Also in the current recovery corporate
profits have risen at the fastest pace since 1900.
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. If you want
to play around with alternative versions of P/E
valuations, read this web link from financialwebring.org .
Here is an example why Price / Earnings ratios are not a
very good market indicator: On April 12, 2011
MarketWatch.com ran two reasonably argued articles
which drew completely opposite conclusions. This one
said that P/E ratios (based on averaged 10 year
3
earnings) were dangerously high (―History Bodes Ill for
the Stock Market‖); and this one (―Investors Should SP500 E/P vs 10yr Treasury
Choose Stocks Now‖) opined that that P/E ratios were 1960 - 2010
historically low (based on forward looking earnings
estimates). 0.18
0.16
0.14
As discussed in the Fed Model (below) my own 0.12
statistical analysis does not find any validity in using P/E 0.1
ratios for 6-month stock market analysis. 0.08
0.06
0.04
The Fed Model (Wikipedia.org explanation) Source 0.02
data for S&P Earnings and long interest rates made 0
available courtesy of Robert Shiller.

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
1960.01

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 valuation 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 S&P 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&P 500 since 1881 is roughly 13.5, much lower than
the current P/E, so you should worry.)
Be happy or worry 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 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.
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 amazing! No
wonder that market commentators dote on every twitch
made by any of the directors of the Federal Reserve
related to interest rates.
Total Market Valuation vs. GNP (GuruFocus.com
The linked page is a good primer on valuation.) See
also Discounted Cash Flow Valuator for individual stocks
Status: According to this ratio, at 97% the market is
modestly overvalued. Using this factor and interest rates,
GuruFocus.com calculates that the market is likely to
produce an uninspiring annual return of 3.7% going
forward.
About the Indicator: In a famous 2001 Fortune
Magazine article (Well, it is famous to ‗stockies‘.)
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 think
seriously about selling.

Value Line Dow Jones Annual Forecast

Status: At today‘s 12,810 level, the DJ-30 is already
10% above Value Line‘s average price target of 11,600
for 2011. Back at the start of the year Value Line wrote:
―We remain cautious on prospects for the year to come.‖
About the Indicator: At the close of every year since
1980, the Value Line Investment Survey has published a
forecast for the Dow Jones Industrial Average for the

Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved. 4

This is research, not investment advice.
coming year. The model, created by Samuel Eisenstadt,
is a straight-forward statistical model with just 4 variables
for the combined 30 Dow stocks: current DJ-30 price,
earnings per share, dividends per share, and Treasury
bond yields. In each case the values used are Value
Line‘s staff forecasts of changes for the coming year.
The forecasting results of this model have been
impressive as discussed in this 2006 research paper. VL
notes that considerable deviation from their forecast over
the course of a year is to be expected.

Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved. 5

This is research, not investment advice.
TomT‘s Six Month Stock Market Outlook
Make an informed guess where the stock market is headed

Select to view: Trader Signals - Fast

Overview Trader Signals – Slow
My Best Guess International View
Market Valuation Measures Econometric Models
Economic Indicators 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 economic
conditions by several months. (An old adage says 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 Leading

Economic Indicators (See graph at bottom of the linked
page)
U.S. Leading Economic Indicator ( e-forecasting.com
Anxious Index for Recession Probability
See bottom of linked page.)
(Philadelphia Fed. xls file)
Conference Board Leading Economic Index
Status: A panel of 54 economists polled by the
Organization for Economic Cooperation and
Philadelphia Federal Reserve sees about an 8.5%
Development.
chance of another recession in the coming half year
Status: The leading economic indicators are not
down from a 13% expectation in the autumn survey. This
showing robust growth, but they could be worse. The
is nearly as low as this indicator ever goes. Next
closely-watched ECRI leading indicator is faltering a bit,
update: August 12, 2011. Interestingly, at Intrade.com
having been slowly rising, indicative of a gentle
on 5/13/2011 betting put a 12% probability of a U.S.
expansion. The e-forecasting.com LEI rose in April.
recession in the next year and 20% in 2012.
Conference Board was down in April after 9 months of
About the indicator: This article by David Leonhardt in
gains. OECD saw a slightly positive world situation in
the NY Times in February, 2008 said the Index pointed
February. Like last year, the world economy seems to be
toward an economic recession. Clearly it was right. He
entering a ―soft patch.‖
noted this Survey of Professional Forecasters
About the indicators: These are just a few of the
maintained by the Philadelphia Federal Reserve hasn't
groups that compile and aggregate statistics of several
missed calling a recession or called a false positive in all
economic factors that tend to lead the economy both up
the years since 1968 when it was started. This Anxious
and down. Stock market performance is typically part of
Index is the successor to the earlier Livingston Index a
the group of measures that makes up a leading
personal project of a Philadelphia journalist. Here is an
economic indicator, so by definition, that part of the
interesting article on it from the Philly Fed web site. (OK,
leading indicator cannot lead the stock market. Other
you may think it is terribly boring, but I think that it is
parts of an LEI, however, can lead the stock market.
impressive that an individual journalist could create one
Changes and directions of the leading economic
of the best economic forecasting tools around.)
indicators are worth paying attention to. As pictured
below, there is a strong long term linkage between
composite leading indicators and periods of recession. Effective Federal Funds 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

Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved. 6

This is research, not investment advice.
business profitability. And profitability controls the stock
market. Enough said. MarketWatch.com forecast of
interest rates
Anthony Mirhaydari in this article at msn.com makes an
argument that, incredibly, interest rates are at their
lowest levels in over 500 years as indicated in the graph
below. He argues, not surprisingly, that interest rates
cannot stay this way forever. After all, how long can
lenders make money at zero 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. (In fact, current interest rates are
so unusual; the econometric model actually yields an
impossible negative probability for a 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
Citigroup Economic Surprise Index
(Bloomberg.com chart) Change to the 5 year view in
order to gain necessary perspective.)
Status: The index hit an historical top at the start of
March and it has been sharply downhill since then – just
like last summer. If true to typical form, this indicator
should turn up in a month or two.
About the Indicator: The stock market reacts strongly
to unexpected news. 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
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
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 standard deviation data surprises. The
indices also employ a time decay function to replicate
the limited memory of markets.‖
If an economic forecast is actually objective then any
deviations from the forecast should, theoretically, be
random This indicator tracks the actual positive and
negative deviations that occur in the Bloomberg surveys
of economists and clearly shows that ―economic
surprises‖ are not random and follow definite trends. The
bottom line is that this indicator tracks the sentiments of
economic forecasters. To my eyes, it appears that the
chart is actually rather cyclic, with a distinct drop-off at
roughly October to November of each year.
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 (Bloomberg, Free registration required,
Click to the 5 or 10 year chart to get a longer
perspective.)
Status: Recent increases in the TED spread have all
been mild in comparison to the world-wide financial
panic that ran from late 2007 to early 2009. (Click to the
5-year view to see this.) LIBOR (click to the 5 year
chart) is also low again. No worry here.
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. Normally these two banking
insider rates should be close.
7
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.
Money Supply (M1 y/y Federal Reserve) (MZM
y/y Federal Reserve)
Status: The current $600 billion quantitative easing
(QE2) liquidity increase by the Federal Reserve shows
up in the amazing spurt in the money supply. QE2 is
scheduled to end in June, but no announcements have
been made about scaling back the money supply any
time soon. An increasing money supply bodes well for all
assets including stocks. It also screams that the Federal
Reserve remains extremely concerned about the
strength of the U.S. economic recovery. (The 800 pound
gorilla hiding in the closet is that the finance industry still
has massive losses from the subprime mortgage
collapse that the industry would rather not talk about. All
the damage from the popping of the housing bubble will
take several more years to work out – and inflating asset
prices is the only way out. Inflation is also the only option
for improving the U.S. trade balance.
About the Indicator: The economic theory is that
increasing the money supply should raise asset prices
and lower interest rates. I‘m not an economist so I‘ll
avoid this debate.
Building Permits and Housing Starts (St. Louis
Federal Reserve)
Status: Recovery, or rather the non-recovery of the
housing industry has been abysmal, much slower than is
typical following a recession. The great overhang of
properties now on the market or in the ―shadow
inventory‖ of homes that would be on the market if the
market was any better – now a 23 month supply
inventory -- prevents any growth and shows no sign of
going away. In most areas it just keeps getting worse.
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.
How likely is another housing bubble to start up soon?
According to this article by Robert Shiller (NY Times,
free subscription required), ―Housing Bubbles Are Few
and Far Between.‖
U.S. Dollar (ClearStation.com) or Dollar Index
(Google) Click to the longest view) Dollar Index
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
(MarketWatch.com)
Status: In April the U.S. dollar slipped to a 16-month
low. A significant portion of the decline has been
attributed to the Federal Reserve‘s $600 billion
quantitative easing program that ends in June. This
4/10/2011 Anthony Mirhaydari, MSN Money column
talks about a further Dollar slide until 2014. But, just to
pretend to be fair, this NY Times piece (5/18/2011)
speculates that the Buck may be due for a bounce
because other currencies are winning the race to the
bottom. The U.S. MUST reduce its balance of payment
deficit, and the way that is being done is with a weaker
dollar. (For the personal investor – it makes sense to
have a good share of non-dollar resources.)
About the indicator: Watch the dollar slide – as Steven
Pearlstein wrote in the Washington Post (4/24/2011) the
long decline of the Dollar is both ―inevitable‖ and
―economically desirable.‖ The gradual slide is good for
the stock market and rebalancing the U.S. economy, but
it can be bad for your personal wealth if all your wealth is
held in dollars. 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, as it must. 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 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. The
race to the bottom for 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: Thanks mainly to the rebounding stock market,
Americans have gained back more than half of the
wealth lost during the Great Recession, but Net Worth
is remainsdown $8 trillion (roughly 20% of total
assets) from 2007. The real estate portion of total
wealth is still down $10 trillion, with nearly a third of
home owners now underwater. It‘s still no time to
celebrate a successful economic recovery; and it‘s no
surprise that Treasury and the Fed are doing everything
possible – including market interventions that have never
been tried before -- to block further drops in house prices
and to increase business profitability by reducing
borrowing costs. Economists are concluding that all the
intervention has helped to avert deflation (Bloomberg)
and total economic destruction. But, the economy is still
far from normal.
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
8
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: 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! This 5/1/2011
article by Lori Montgomery (Washington Post, free
subscription required) is the best summary of the deficit
problem that I have read recently.
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: It is going to be interesting over the next year to
see if a falling Dollar leads to an improved balance of
payments. It hasn‘t happened yet.
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 (Bloomberg -- Click to the 5 year
view.) HARPEX (Harper Peterson Container shipping
index) Transportation Stocks
Status: Most of the transportation industry has been
slowly and grudgingly improving since the 2009
crash bottom -- much like the rest or the world
economy. (Investopia.com 4/7/2011 update article.) The
land-based cargo industry shows continuing strength –
especially railroads. Ocean shipping rates for bulk
materials are still at recessionary levels but that is
primarily because of an oversupply of bulk carrying
ships. Container shipping rates were rising slowly, but
have paused in the past month or so. Hopefully the
decline is just a seasonal slump. Read article about
overproduction of cargo ships (Bloomberg.com
1/10/2011) Container shipping rates covered by the
HARPEX – more closely related to expectations of
retailers -- is still below historically-average levels. The
Dow Jones Transportation Index (click to the longest
period) has risen steadily from recession levels.
About the indicator: Shipping rates and pricing of
transportation industry stocks are much followed and
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
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. 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 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)
Status: It is pretty hard to get scared about the inflation
boogeyman when 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, don‘t 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.
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 500‘s average
When trailing 12-month % of months falling into
inflation is...
monthly return since
this category
1871 is...
Below 0 0.61% 28%
Between 0% and 1% 0.50% 5%
Between 1% and 2% 0.40% 13%
Between 2% and 3% 0.96% 15%
Between 3% and 4% 0.53% 10%
Between 4% and 5% -0.23% 6%
Above 5% -0.05% 22%
9

GDP: Potential GDP vs. Real GDP
(Data link at Federal Reserve )
(Use your viewer’s 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: As no surprise to anyone, Federal Reserve data
show that U.S. economy is not performing as well as it
could if everyone was employed. The gap between
Potential GDP and the U.S. actual performance remains
below trend, much more so than in most previous
recessions. That‘s why it‘s called the Great Recession!
The positive take on this situation is that there is plenty
of room to increase economic output without causing
undue inflation. That‘s good for stocks.
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 1940‘s 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 2nd quarter 2011 forecasts by a survey of
professional economists are weaker than last quarter:
weak GDP gains (3.2% annual rate this quarter,);
modest inflation (3.1% annually, up slightly); continuing
high unemployment (8.7% and only going down to 7.5%
by 2013) and normal 10-year average expected gains for
the S&P 500 (7.25%). All of which point to continuing
modest economic growth. The high lingering
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
unemployment is tough for people, but has little relation
to near term stock market moves. Next release August
12, 2011. The CBO forecast is similar.
About the indicator: 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: Recent major price swings for sliver and oil
clearly point to speculation. Commentators (Chuck Jaffe
MarketWatch.com 5/15/2011) are split whether a
collapse of commodity prices is imminent. But, despite
the developing bubble, commodities remain the truly big
news story for the next few years. As billions of people in
China, India, Indonesia, and Brazil increase their
standard of living an unprecedented commodity resource
crunch is developing. This is an incredible new event.
Commodity prices have shot back up from the pits of the
world-wide recession. It‘s an open question of if or when
high commodity prices will stifle the rebounding world
economy. The U.S. Dollar (ClearStation.com) has
headed back down making the CRB Index appear to rise
unusually fast. This is probably a good chart to watch to
spot the eventual end of the current Bull Market.
About the Indicator: 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.
10
 Corporate Profits (line 17) Undistributed
Corporate Profits (line 21) (Bureau of Economic
Analysis Quarterly Gross Domestic Income) S&P 500
Earnings (courtesy Robert Shiller)
Status: Corporate profits are nearly back to pre-
recession levels. Undistributed profits are back up as
well – there is corporate money still on the sidelines.
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
quarterly results of U.S. economic performance. Here is
a primer on the BEA National Income and Product
Account data.

Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved. 11

This is research, not investment advice.
TomT‘s Six Month Stock Market Outlook
Make an informed guess where the stock market is headed
Select to view:
Overview
My Best Guess
Market Valuation Measures
Economic Indicators
Trader Signals – Fast (well, relatively fast)
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 May the
market appears overbought 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: This indicator has fallen back from 80% to 64%:
no longer overbought.
About the indicator: This is a very short term indicator
for whether the market is overbought or oversold. The
worry point is above 80% -- sadly, things can‘t stay that
good for too long.
NYSE New Highs minus New Lows
(StockCharts.com)
Status: This has to be the most comforting of all the
charts I follow --- up, up, up! Both the daily (top of page)
and weekly (bottom of page) charts on this page show a
solid Bull Market underway.
About the indicator: I like this short term indicator as it
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
Trader Signals - Fast
Trader Signals - Slow
International View
Econometric Models
About This Forecast
is really easy to read! A bullish signal occurs when the
ratio is in an uptrend Scroll down on the link and pay
attention mainly to the weekly view lower on the page.
An alternative view of the data is contained in NYSE
New Highs & New Lows (www.InvestmentTools.com) In
this chart the number of highs has dropped dramatically.
NYSE Daily - Weekly Advance Decline Line
(StockCharts.com)
Status: Both daily and weekly charts have turned down:
breadth has started to decline for the moment.
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 few weeks the market tends to get overextended
creating a relatively good time to trade. Buy when the
weekly line plummets; sell when it hits a dangerous
peak.
A Completely Opposite Opinion (Bill Fleckenstein,
MSN 3/12/2011) Anthony Mirhaydari MSN Money
3/27/2022 wrote ―Investors it is time to run and hide‖;
Paul Farrell MarketWatch.com ―2008 crash déjà vu; we‘ll
relive it and soon‖ (4/29/2011), and ―10 Doomsday
trends America can‘t survive‖; Brett Arends, WSJ
3/10/2011 Ten Reasons to be Worried. Bob Prechner
(Yahoo 2/26/2011) We‘re still in a massive Bear Market
and stocks will crash to new lows. Paul Farrell
(2/22/2011) wrote ―Market Crash 2011: It will hit by
Christmas‖. William Pesek (1/5/2011) outlined 8 Bubbles
Galore to Make 2011 a Year to Remember. Gary
Shilling sees ―significant‖ stock selloff within year‖
(Bloomberg.com 11/12/2010) ―Why Americans‘ Love
Affair with the Market is Over‖ (11/20/2010 Yahoo
Finance) Crash is Dead Ahead Sell Get Liquid
Now!.(5/25/2010 Paul Farrell MarketWatch.com) Is
Another Market Crash Coming? Brett Arends, WSJ.
More Brett Arends WSJ 9/10/2010 "Stocks Still Aren't
Cheap -- Ignore the Bullish Talk".
Status: The Wall of Worry has been well reinforced;
12
there are plenty of naysayers out there now. The
professional fear stokers keep doing their job. In May
more conservative journalists like Anthony Mirhaydari
see a summer turn down as likely.
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!
VIX and NYSE ARMS Index Implied Market
Volatility (StockCharts.com. Shift to the weekly view with
the line setting -- I can't understand their default view.)
Status: Volatility is very low right now --- like the quiet
just before a storm. That is cause for concern. A low VIX
says that the market is ripe for bad news and a
correction.
About the indicator: Most catastrophes don't last very
long. So if you survive the disaster, it is probably time for
rebuilding. The CBOE (Chicago Board Options
Exchange) Volatility Index ® (VIX®) is a key measure of
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.
The $TRIN is the NYSE Short Term Trading ARMS
Index which multiplies how many stocks moved in a
direction by the trading volume of the stocks. (OK, this is
pretty abstruse.) But, when it gets high (at or above 3.0),
it is another sign of a buying or selling panic.
MACD S&P 500: Moving Index Average
Convergence / Divergence
Status: The ―fast‖ moving average is above the ―slow‖
moving average, so this is interpreted as a positive sign.
(Of course, you could just as easily look at any stock
market price chart and conclude that the stock market
has been going up, and that can also be interpreted as a
positive sign. :o)
About this Indicator: Fidelity Investments has a good
article on back- testing various MACD strategies here.
After all is said and done, I‘m afraid that all of it sounds
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
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
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.
Viewing Multiple Stock Markets (Click to the max
view)
Status: Plenty of people did already ―sell in May.‖ The
current pull-back is even welcome following the terrific
run-up since September. Emerging markets remain
weak.
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.) Appears to have nearly caught up
with its long term trend making the slingshot rebound
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 markets that have the greatest potential
for growth. Profits need to grow, but this average still is
well below trend. A new equal weight emerging market
ETF is EWEM.
13
TomT‘s Six Month Stock Market Outlook
Make an informed guess where the stock market is headed
Select to view:
Overview and My Best Guess
Market Valuation Measures
Economic Indicators
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.
“Sell in May…” Indicator
Status: We have just started the risky half of the year, a
time when zero gains are the long term average.
Compounding normal seasonal worry is the fact that the
Fed is stopping the simulative QE2 at the end of June.
There most likely WILL be a negative jolt in May/June as
many investors follow the ―Sell in May‖ dictum. The
question is how bad it will be. So far my model is
oblivious and positive.
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 ‖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.
That Sinking Feeling in your gut (AAII Investor
Sentiment Guide) (Barrons.com Investor Sentiment
page) Investor Confidence (StateStreet.com)
Status: There appears to be a reasonably normal spit of
Bulls v. Bears, so these indicators don‘t say too much to
me now. Others (Mark Hulbert, MarketWatch 5/20/2011),
however, are concerned that there is too much market
enthusiasm. Up through January investor sentiment had
been giddy. AAII bullishness has now fallen to just
average – and is still declining. A Charles Schwab
Survey, however, found active trader sentiment was
back to levels last seen in 2009. The StateStreet.com
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
Trader Signals - Fast
Trader Signals – Slow
International View
Econometric Models
About This Forecast
value is also high.
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
don‘t 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.
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% to 24%. So far, it has
followed true to form. We enter the 4th year of the cycle
this fall, normally a somewhat better than average year.
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.
Is Congressional Gridlock Good for Stocks?
Status: The Republicans regained control of the House
of Representatives in the midterm elections—and stocks
kept going up. Will this pattern hold for the next few
14
months? 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.)
Stock Market Slow Moving Average (12 month SP-
500 moving average). To view the graph you may need
to follow the free upgrade procedure at the MSN Money
site.)
Status: Wake me up when the market again falls below
its 12-month moving average – hopefully in a couple of
years. This indicator has been doing cruising along
nicely for a very long time, but nothing lasts forever.
Sooner or later it will be cruisin‘ for a bruisin‘.
Unfortunately, this indicator can‘t give us a clue when
that sudden change will be. In the voodoo world of
Technical Analysts, however, the market being above its
moving average is a big positive omen; Greater Fools
will continue to swarm back to the stock market as long
as the market keeps climbing.
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
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!
If all of your stocks are priced above their 200-day
moving average conventional wisdom is that 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
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
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 accepted rule is to run from the market
when the price line crosses below the moving average,
and jump back in when the price is again 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 may
sorts out major Bull and Bear trends. This MarketWatch
article by Mark Hulbert comes to the same favorable
conclusion. As said above, I now disagree.
% Stocks Trading Above 200-Day Moving Average
(number) (Barchart.com covers approx. 5000 stocks)
chart (stockcharts.com covers just S&P-500 stocks--
change to the weekly view)
Status: A few weeks ago 92% of the stocks in the S&P
were over their 200 day moving average. That‘s too
much of a good thing. It remains to be seen how bad
the current retreat will become. The current value is
89%. In the broader market just 72% of the 5000 stocks
are above their 200 day average.
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)
(Bloomberg.com)
Status: To me, it looks to be on a fairly steady rise.
That‘s good. How long can this last?
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
Mutual Fund Flows (Investment Company Institute
data. I like the Weekly Flow of Long Term Funds best.)
Status: Money had been flowing out of domestic stock
15
mutual funds and into foreign equity and bond funds
ever since the DotCom bubble burst in 2000. In just the
first 7 months of 2010 retail investors cashed in over $30
B of stock mutual funds. (NY Times 8.21.2010) 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 Brett Arends
Wall Street Journal opinion on going against the herd
and moving in the OPPOSITE direction of the ICI funds
flow.

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 dominate
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?

Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved. 16

This is research, not investment advice.
TomT‘s Six Month Stock Market Outlook
Make an informed guess where the stock market is headed
Select to view:
Overview and My Best Guess
Market Valuation Measures
Economic Indicators
International View
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 your wealth in
percentage terms if you are poor rather than wealthy.
And percentage growth is what investing for dollars is all
about. Multinationals based in the U.S. may well perform
better than the U.S. economy.
Organization for Economic Cooperation and
Development.
Status: OECD predicts world-wide economic growth, but
it is going to be slow. . In April the estimates were
upgraded saying recovery was becoming ―self-
sustained.‖ For a long term investor, slow and steady
growth is the best of all possible worlds.
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 Update for Europe
5/12/2011
Status: The World economy is slowly returning to
normal, but financial conditions remain ―unusually
fragile.‖ 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
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
Trader Signals - Fast
Trader Signals – Slow
International View
Econometric Models
About This Forecast
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 142%. Italy is at
119%. And look at Japan – 225% of GDP! In the later
stages of a 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: For the last half year, emerging market stocks
have not performed as well as the U.S. market.
Emerging market long term GDP growth rates are again
far ahead of the U.S. and other developed countries. ,
Here is a Jim Jubak (12/1/2010) article saying that U.S.
stocks look better than most alternatives. Here is
Jubak‘s 2011 follow-up – again negative on emerging
markets.
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!
17
TomT‘s Six Month Stock Market Outlook
Tom T‘s Stock Market Forecast
Make an informed guess where the stock market is headed
Select to view:
Overview and My Best Guess
Market Valuation Measures
Economic Indicators
Econometric Models
Countless stock market forecasts are posted by groups
and individuals, but there is seldom much performance
evidence given to prove their credibility, so you don‘t
have much reason to believe them. Some forecasts may
be wacky like those forecasts 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 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.
My statistical models see a bright half-year ahead for
the stock market: 12% gains for the Value Line
Arithmetic Average (VAY) between June 1 and
October 31, 2011. (Actually, the raw prediction is for a
17% 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 forecasting the Value Line Arithmetic Average which
tracks the 1700 largest U.S. companies and accounts for
95% of U.S. 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 to November 2010 was right on target
(13% gain forecasted and 12% actual gain), and the
most recent November to May forecast was for 20%
gain, matched by an actual 20% gain in the Value Line
Arithmetic Index. . 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.
Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved.
This is research, not investment advice.
Trader Signals - Fast
Trader Signals – Slow
International View
Econometric Models
Value Line 3-5 Year Appreciation Potential
Status: The current VL 3-5 year appreciation
potential is 55%. That is definitely on the low side
historically.
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.
Value Line Dow Jones Annual Forecast
Status: See discussion as part of Market Valuation
Measures.
Other Econometric Stock Market Models
Norman Fosback‘s forecast for 2011 (12/24/2010 Mark
Hulbert in Warketwatch.com) is for 22% gains over 2011
and an 11% annualized return over the next 5 years.
Economists polled by Bloomberg (12/13/2010)
forecasted an increase of 11% in the S&P 500 over the
course of 2011. According to the article: ―Goldman
Sachs Group Inc.‘s David Kostin, the most accurate U.S.
strategist this year, said sales growth will spur a 17
percent rally in the S&P 500 through the end of 2011. ―
Mark Hulbert reported 4/5/2011 at MarketWatch.com
that Sam Eisenstadt‘s current economic model is
forecasting a gain by September 30, 2011 of 9.1%. The
article noted that Eisenstadt‘s model has an excellent R-
squared value of 36%.
CNN 2011 Survey
Status: The consensus forecast of investment
strategists for 2011 was for a 9% gain, taking the S&P
500 average to 1391 by the close of the year.2011. (As
of late May the S&P 500 is at 1,337). None of the
respondents forecasted a negative year for the S&P 500.
About the Indicator: In January 2011 CNN Money
surveyed 32 investment strategists and money
managers. Here is the report. Most of these forecasts
appear to be based on some sort of model.
18
TomT‘s Six Month Stock Market Outlook
Tools to make a better guess where the stock market is headed

Select to view: Trader Signals - Fast

Overview and My Best Guess Trader Signals – Slow
Market Valuation Measures International View
Economic Indicators 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.

Predicted vs. Actual Gain

This chart presents the half-year gains predicted by the model compared with the gains that actually followed

Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved. 19

This is research, not investment advice.
TomT‘s Six Month Stock Market Outlook

Select to view: Trader Signals - Fast

Overview Trader Signals – Slow
My Best Guess
Market Valuation Measures
Tom T‘s Stock Market
International View
Econometric Models
Forecast
Economic Indicators About This Forecast

About This 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.

I‘d appreciate any comments you may have. Please

send them to: tomtiedeman@gmail.com

Copyright © 2011 Tom Tiedeman, Washington, D.C. All rights reserved. 20

This is research, not investment advice.