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Six-Month Stock Market Indicators

Over 50 mid-term market timing guides that might be helpful

October 30, 2011

Overview
The Next 6 months: Should be good -unless panic returns.
My econometric models, based on just a few simple macroeconomic measures, forecast a continuing stock market rebound of about 20% over the next 6 months. The prospect of financial system drama like we saw this summer and probable missteps by European governments and/or Congress make me think that 12% to 15% is a more realistic target for gains. A sharp immediate cutback in Government spending, however, could really throw a wrench in the works. I make no promises for the next half year, but I am optimistic. The models forecast a very high probability of at least breaking even. Volatility will be high with a 50/50 chance of having a temporary market price drop of 8% or more along the way. In a long slow slog, with a gigantic Wall of Worry, economic recovery here and abroad continues to creep forward. Business profits, almost unnoticed to many pundits, stay much stronger than the economy thanks to historically-low interest rates, now guaranteed for years ahead. Truth is, its hard for a business not to make money when borrowing is almost free. The split between world-wide economic fear and strong business profits led to stocks being priced well below fair market value over the summer. Despite the October recovery, according to the Morningstar.Com Market Valuation Graph stocks are still underpriced by 8%. There is plenty of room for valuations to rise. Market Valuation Measures Several measures see the stock market as significantly undervalued. Other indicators with very long-term perspectives say market is fairly valued or somewhat over-priced. I favor the undervalued argument for the next six months. Economic Indicators About 20% of economists expect a second round of recession and a good number fear at least pockets of economic collapse. The Economic Cycles Research Institute, not a view to ignore, is convinced that we are hitting another recession. But, not all Composite Leading Economic Indicators are glum. Business profits should continue to be high as debt costs are at the lowest relative levels in several hundred years and businesses already are lean. Trader Signals - Fast The tremendous stock market rebound during October makes the market look a bit overbought on a short term basis, but stocks have not yet reached previous highs. By the time you read this, these short term signals may give an entirely different picture. Trader Signals Slow Winter and spring tend to be kinder to the market than summer and fall. It looks like the famous Halloween Indicator kicked in early at the start of October. The long running Second Great Contraction will likely continue to play out as a decade long disappointment much like the 1930s. International View Tough economic times and below-normal growth span most of the world. Growth estimates generally are below normal. Emerging economies will probably have faster growth than major developed nations. The greatest fears are for sovereign defaults, cascading financial collapse in Europe, and a hard landing in China. Econometric Models Most number crunchers, of which I am one, conclude that things are bad enough that they will likely get somewhat better over the next six months. Reversion to the mean is working in our favor times are tough so eventually they are likely to improve.

The Past 6 Months: Whoops.


Last May I forecasted a bumpy summer for the stock market followed by a strong 12% gain by November. Wrong. Thanks in large measure to the why-do-you-shootyourselves-in-the-head antics of Republicans in Congress and the like-trying-to-herd-cats Europeans; the broad stock market was slammed by fear of complete economic collapse, just like 2008 2009. Even with a spectacular market rebound in October, the broad market (VAY) fell 7% rather than gaining 12% for the half-year as the models expected. Sorry about that.

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This private letter tries to provide somewhat objective research, not investment advice.

Six-Month Stock Market Indicators


still more than fully invested. (margined) Select to view: Overview Market Valuation Measures Economic Indicators Trader Signals - Fast Trader Signals Slow International View Econometric Models About This Forecast

Market Valuation Measures


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If there was any real agreement on how to accurately value stocks, prices wouldnt go up and down as much as they do. The never ending stream of world news, economic, business and company developments with largely unknowable consequences, however, make business valuation an approximate art rather than a clear science. The measures here gauge only roughly -- whether the stock market as a whole is priced reasonably. My favorite is the Morningstar Market Valuation Graph below. Morningstar.Com Market Valuation Graph (Click to the Max. time period view of the chart.) Status: Valuation is now 8% below fair value and has been rapidly improving. About the indicator: This graph is a fundamental financial analysis / accounting calculation based on net present value calculations of long-term projected profits for the thousands of stocks Morningstar tracks. It is a basic check to see if the stock market pricing makes sense. S&P-500 to Book Value (Bloomberg.com, Click on the chart option that gives the 5-year view) Status: The current market price-to-book value of about 2.1 is well below the typical historical market peak valuation ratio of approximately 3. At the pit of the 20082009 crash the ratio sank to 1.5. It looks like it is breaking out of the jagged pit it had been in over the summer. About the indicator: Book Value is the money you would get if you closed a business and sold off all of its physical plant and inventory. Its one of the most basic valuation tools for stocks. On its own it doesnt mean too much since valuations can be quite debatable. However, reasonable book value levels confirm that stocks are not wildly overpriced today and that room remains on the upside. .

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: If you judge by forward looking earnings, the SP 500 is now a bargain by historical standards. But, going by an average of10-year past earnings the S&P is still pricey despite the current correction. I side with the forward-looking view because the past decade has contained two very nasty recessions skewing the average. About the indicator: Intuitively, the ratio of a stock's price to the company's earnings should be the key objective tool for judging if a stock is properly valued and for comparing multiple stocks. High Price-to-Earnings ratios should make investors worry that a stock is overpriced. Likewise, low P/E ratios should help to flag bargains. Unfortunately, as indicated in this Mark Hulbert article, P/E ratios have negligible value in predicting either one-year or even 10-year stock price moves. As discussed in the Fed Model (below) my own statistical analysis does not find any validity in using P/E ratios for 6-month stock market analysis. The Fed Model (Wikipedia.org explanation) Source data for S&P Earnings and long interest rates made available courtesy of Robert Shiller. Status: Today you can read this measure as saying either that the market is overpriced or that it is underpriced. The interpretation mainly depends on how long an historical average of earnings you want to consider. (Given the current long T-Bond rate of 3.0%, and based on experience since 1960, a regression model predicts that the S&P 500 P/E should be approximately: P/E = 1/(0.808 T +0.010) P/E = 1/( 0.808 (0.03) + 0.010) = 39!!!!!. The current S&P-500 P/E based on 10-year trailing earnings is roughly 21. About the indicator: This popular classic stock market valuation model starts from the simple premise that the earnings to price ratio (E/P) of basket of quality stocks like the S&P 500 index and the yield from long term quality bonds should be just about the same, with the 2

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

stocks having a little higher return to reflect their higher inherent risk. This Mark Hulbert (MarketWatch.com) article says there is not much predictive value to the indicator. My own analysis finds no statistical link in the 6-month time frame between P/E ratios and the S&P-500 average. Total Market Valuation vs. GNP (GuruFocus.com Free registration required. The linked page is a good primer on valuation.) See also Discounted Cash Flow Valuator for individual stocks Status: According to this ratio, at 90% the market is fairly valued) Using this factor and interest rates, GuruFocus.com calculates that the market is likely to produce a below normal annual return of 4.8% 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 todays 12,207 level, the DJ-30 is slightly above Value Lines average price target of 11,600 for 2011. A new forecast will be published by Value Line at the end of December. 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 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 Lines 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. This is research, not investment advice.

Six-Month Stock Market Indicators


Select to view: Overview Market Valuation Measures Economic Indicators Trader Signals - Fast Trader Signals Slow International View Econometric Models About This Forecast

Economic Indicators
Despite all of its semi-random craziness, eventually the stock market reflects corporate profits which in turn reflect the economy and especially interest rates. Usually the stock market nervously anticipates 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 right top of the linked page) U.S. Leading Economic Indicator ( e-forecasting.com See bottom of linked page.) Conference Board Leading Economic Index Organization for Economic Cooperation and Development. Status: The leading indicator composites are split. ECRI has already forecast that a recession is certain. The call may be early, but ECRI has a good track record (Jon Markman, MarketWatch.com 10/20/2011). The Conference Board and e-forecasting were both positive for September.. About the indicators: These are just a few of the groups that compile and aggregate statistics of several economic factors that tend to lead the economy both up and down. 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 a LEI, however, can lead the stock market. Changes and directions of the leading economic indicators are worth paying attention to. As pictured below, there is a strong long term linkage between composite leading indicators and periods of recession.

Anxious Index for Recession Probability (Philadelphia Fed. xls file) Status: The betting gurus have gotten scared! A panel of 54 economists polled by the Philadelphia Federal Reserve sees about a 20% chance of another recession in the coming half year a huge jump up from the previous 8.5% level. Next update should be in midNovember. Interestingly, at the bet-on-anything-site Intrade.com on 10/30/2011 betting put a 36% probability of a U.S. recession in 2012 a significant worry! 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 missed calling a recession or called a false positive in all the years since 1968 when it was started. This Anxious Index is the successor to the earlier Livingston Index a personal project of a Philadelphia journalist. 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 impressive that an individual journalist could create one of the best economic forecasting tools around.) Effective Federal Funds Rate (from St. Louis Federal Reserve) Status: The Fed is charging banks less to borrow than the inflation rate. In essence the Fed is paying banks to borrow! Eventually rate cuts will stimulate the economy. But, because of lag times, for now it remainsl a contrary reminder of just how worried they are at the Fed About the indicator: The Federal Reserve largely

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

controls interest rates. Interest rates largely determine business profitability. And profitability controls the stock market. Enough said. MarketWatch.com forecast of interest rates Probability of Recession Predicted by Interest Rate Spread (NY Federal Reserve Go to linked page or use your browser zoom on the chart below.)

defined as weighted historical standard deviations of data surprises (actual releases vs. Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 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: The TED spread has doubled in the past month or so reflecting fears of bank weakness due to sovereign debt and foreclosure concerns. Despite this, 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. Major banks do not seem to be seriously worried about other banks failing in the near future. About the indicator: Credit markets only become interesting when they fall apart. Lack of credit then brings the economy to an abrupt stop. This indicator tracks the difference between the 3-month Treasury rate 5

Status: With short term interest rates near zero, this indicator says that there is a negligible 2% 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 Citigroup Economic Surprise Index (Bloomberg.com chart) Change to the 5 year view in order to gain a longer term perspective.) Status: A sharp drop of this index, from historic highs, started in March and ended in May leading by a few months the market tumble that got underway in May. The Index has finally turned positive, climbing since June. This indicator gets more and more attractive to me it was among the first to flag the approach of this summers correction. 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

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

and the 3-month LIBOR -- the interest rate at which banks loan to one another. Normally these two banking insider rates should be close. 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: QE2 ended in June, but no announcements have been made about scaling back the money supply any time soon. So far, this chart has not shown any cutback that could have come from the ending of QE2. 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. Im not an economist so Ill 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 33% total decline in property values is now worse than during the Great Depression, and a major deterrent to an economic rebound. The great overhang of properties on the market, in foreclosure, 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 for the housing industry 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 (MarketWatch.com) Status: In April the U.S. dollar slipped to a 16-month low but has had a series of partial rebounds in response to more world debt risk fears The U.S. MUST reduce its balance of payment deficit, (Paul Krugman, NYTimes, 10/3/2011) 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. Or, as Cristina Romer dared to write the truth that must not be spoken in this (5/22/2011) NY Times piece: in a depressed economy, it isnt so clear that a strong dollar is desirable. The gradual slide of the dollar 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 remains down $5 trillion (roughly 20% of total assets) from 2007. (MarketWatch.com commentary by Rex Nutting) Its still no time to celebrate a successful economic recovery; and its 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. 6

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

About the indicator: Net worth is the score that counts. Personal wealth fell by an incredible 18 trillion dollars during the Great Recession, equivalent to a full year of GDP, and it could have been much worse. All that would have been needed for a complete collapse would have been for cascading bank, business and personal wealth failures to get rolling in a domino sequence as they did in the Great Depression. The couple of trillion dollars that the Government threw down as part of the TARP and stimulus efforts looks like a smart investment if it saved us from what could have been another ten or twenty trillion dollars of damage. U.S. Federal Deficit (St. Louis Federal Reserve) Status: 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: The Dollar has been falling in relative value for over a year, but so far the balance of payments just keeps getting worse. 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: Shipping rates are still depressed overall. If Santa Claus doesnt start shipping lots of toys from China soon there wont be much of a Christmas for little kids this year. Read article about overproduction of cargo ships (Bloomberg.com 1/10/2011) Another one 9/26/2011) Container shipping rates covered by the HARPEX more closely related to expectations of retailers currently seems to be going through a bad summer slump like last year and is still below historically-average levels. The Dow Jones Transportation Index (click to the longest period) took a bad hit this summer like most everything else. About the indicator: Shipping rates and pricing of transportation industry stocks are much followed and basically believable long-lead economic indicators. The

reasoning is simple; if a lot of goods are being shipped then the economy must be improving. The Dow Theory (Wikipedia), for example, one of the oldest and most followed technical indicators is based on the relative strength of the Dow Jones Industrial Average versus the Dow Jones Transportation Index. 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 after you see this graph. This is about as low as inflation has been in our lifetimes. In the U.S. and other developed economies inflation is very low deflation still remains the greater worry. If U.S. inflation resumes, dont worry until it reaches 4% annually (see below). The inflation situation is quite different in developing economies (MSN Jim Jubak 1/21/2011) where inflation is already at worrisome levels. How is it that developing nations can have high inflation while the Dollar is crashing? The falling Dollar should be causing U.S. inflation to skyrocket. The answer is that developing nations are trying to maintain their favorable trade balances by inflating their currencies faster than we sink ours. About the indicator: High interest rates whether caused by inflation or central bank policy tend to precipitate stock market declines and recessions. As discussed in this Mark Hulbert MarketWatch.com article, (1/18/2011) rates of inflation greater than 4% tend to coincide with poor market performance. (Chart below is from Mark Hulbert article.)
S&P 500s average When trailing 12-month monthly return since inflation is... 1871 is... Below 0 0.61% Between 0% and 1% 0.50% Between 1% and 2% 0.40% Between 2% and 3% 0.96% Between 3% and 4% 0.53% Between 4% and 5% -0.23% Above 5% -0.05% % of months falling into this category 28% 5% 13% 15% 10% 6% 22%

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

GDP: Potential GDP vs. Real GDP (Data link at Federal Reserve )

American Statistical Association and the National Bureau of Economic Research. The Federal Reserve Bank of Philadelphia took over the survey in 1990. The Survey of Professional Forecasters' web page offers the actual releases, documentation, mean and median forecasts of all the respondents as well as the individual responses from each economist. The individual responses are kept confidential by using identification numbers. Commodity Research Bureau Index (InvestmentTools.com) (CRB site chart) Status The CRB Index was weak into the summer and then collapsed in July. This is probably a good chart to watch to spot the eventual end of the current Bull Market. The current direction is down. 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.

(Use your viewers magnification/zoom setting to be able to read the graph. No, you really should do it the gap shown in the graph is amazing.) Status: Four years later inflation-adjusted GDP is just getting back to where it was in 2007- 2008. About the indicator: The nonpartisan Congressional Budget Office maintains a database and econometric model of Potential GDP which is the GDP that could result if the workforce was fully employed. The graph above shows both Real GDP and Potential GDP, all in constant chained 2005 dollars. If you really zoom-in on the graph you will see that since the late 1940s periods where the economy is booming and Real GDP is higher than Potential GDP tend to end badly the Federal Reserve takes away the punch bowl and the party ends with a crashing stock market followed by a recession. Currently the opposite situation exists and the Fed will continue to do all that is possible to get the economy performing better. Professional Economists Survey of Forecasts for Inflation, GDP, Unemployment, and Long Term S&P 500 Gains and Cong. Budget Office Economic Outlook Status: The 3nd 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 unemployment is tough for people, but has little relation to near term stock market moves. Next release early November. The CBO forecast has similar conclusions. 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

Corporate Profits (line 17) Undistributed Corporate Profits (line 21) (Bureau of Economic Analysis Quarterly Gross Domestic Income) S&P 500 Earnings (data courtesy Robert Shiller, site hosted by Josh Staigner) Philadelphia Federal Reserve Survey of Professional Forecasters Status: Corporate profits are nearly back to prerecession levels. Undistributed profits are back up as well there is corporate money still on the sidelines. Now that profits have returned, the forecasted annual rates of profit growth are down to normal levels. About the Indicator: Rising corporate profits is what stock market investing is all about. The U.S. Department of Commerce, Bureau of Economic Analysis posts quarterly results of U.S. economic performance. Here is a primer on the BEA National Income and Product Account data. Current National Financial Activity Index (CFNAI) (Source: Chicago Federal Reserve) Status: This index has been negative since April, but not horribly. This expects economic growth to be somewhat below average. 8

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

About the Indicator: The Current National Financial Activity Index is a weighted measure of total national business activity based on a weighted average of 85 economic indicators. Though developed primarily as a tool for forecasting inflation, some believe that it is a better indicator than GDP of short term actual economic performance.

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

Six-Month Stock Market Indicators C


Select to view: Overview Market Valuation Measures Economic Indicators Trader Signals - Fast Trader Signals - Slow International View Econometric Models About This Forecast

Trader Signals Fast (well, relatively fast)

None of these short-term tell tales are part of my 6month forecasting model. At best they may help to fine tune a buying or selling opportunity. (i.e. Buy the dip.) Any of my trend guesses here will probably be out of date by the time you read this. At the end of October the market appears overbought on a short term basis. 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) Broader Market (Barchart.com covers approximately 5,000 stocks) Status: At 93% the market is seriously overbought on a sort term basis. About the indicator: This is a very short term indicator for whether the market is overbought or oversold. The worry point is above 80%. The turn-around point is at around 20% to 30%. NYSE New Highs minus New Lows (StockCharts.com) Status: Until July, this was the most comforting of all the charts I followed. Then straight down OWWWW! Now it is heading up. Phew/ About the indicator: I like this short term indicator as it 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: Now it has headed down even while the market is up. Not good.

About the indicator: Often market breadth (A simple ratio of how many stocks go up vs. down.) leads actual swings of index prices. These charts are only for traders or for picking an auspicious moment to buy or sell. The initial view of this short term indicator is daily Advances-Declines -- Do a good few days follow a bad few days or what? Reset the chart to see a weekly view, again using the line view Type rather than the "candlestick: view. Every few weeks the market tends to get overextended creating a relatively good time to trade. Buy when the weekly line has plummeted and starts to rise; sell when it hits a dangerous peak and turns down. VIX - Implied Market Volatility (StockCharts.com. Shift to the weekly view with the solid- line setting -- I get confused by their default candlestick view view.) Status: Volatility is high now (24) and appears to be breaking out of the bumpy high plateau. According the Mark Hulbert analysis referred to below a VIX reading above 20 suggests that the market should be avoided for the next month. I am breathing easier now that the VIX appears to be on a fairly steady decline. About the indicator: The CBOE (Chicago Board Options Exchange) Volatility Index (VIX) measures market expectations of near-term volatility conveyed by stock index option prices. According to the CBOE "since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility". When the VIX shoots up you are in the midst of a crisis - if you didn't know that already from the rapidly crashing stock market. In this August, 2011 MarketWatch.com article Mark Hulbert describes a very simple VIX strategy: avoid the stock market for the coming month if the VIX reading is above, say, 20 which he notes is approximately the median VIX level for the last two decades. Hopefully the VIX signal will come early enough to help avoid developing market crashes. The negative side is that it will also lead to missing sharp market rebounds. For example, following it would have led to missing nearly the entire market rebound from the crash of the winter of 2008-2009, Historically, this VIX strategy performs 10

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

slightly better than a buy-and-hold strategy. MACD S&P 500: Moving Index Average Convergence / Divergence Status: The fast moving average appears to be crossing back over the slow average. If the cross over holds, this is interpreted as a strongly positive sign. About this Indicator: Fidelity Investments has a good article on back- testing various MACD strategies here. After all is said and done, Im afraid that all of it 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 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 maximum time frame view) Status: All markets appear to be climbing out of the disappointment of the summer. About the indicator: The Dow-30 and the S&P-500 are what most people usually thing of as 'The Stock Market.' Take a look at some of these other long term graphs. I prefer: Value Line Arithmetic Index (VAY) (My preferred stock market index. Status: Encouraging. About the indicator: Taking a many-year view, this remarkably consistent index appears to have nearly caught up with its long term trend -- making the slingshot rebound from the crash of 2008-2009 weaker The Value Line Arithmetic Average includes the top 1700 companies in the U.S. -- all weighted equally. (Similar equal weight ETFs are EWRI and RSP) Historically, the arithmetic index it has had an amazingly consistent growth pattern, much steadier than the Dow 30, S&P 500, or NASDAQ Composite indices. Because of the equal weighting, portfolio rebalancing is built-in. As a result, besides being more predictable, the equal weight index will regularly outperform a conventional index of the same stocks. Until recently it was not possible to buy an equal weight EFT, but now a number of equal-weight index fund ETFs such as EWRI and RSP have been introduced. They have only been around a few months, but so far they appear to have very similar tracks to the Value Line Arithmetic Index. Good news! Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice. 11 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.

Six-Month Stock Market Indicators


Select to view: Overview Market Valuation Measures Economic Indicators Trader Signals - Fast Trader Signals Slow International View Econometric Models About This Forecast

Trader Signals Slow Moving

Several of these slow moving trading indicators may seem far-fetched, irrational or bizarre. None the less, a few are probably the most helpful market timing tools for a part-time investor. The old adage of Sell in May leads the pack with a documented track record going back several hundred years. The Second Great Contraction (link to This Time is Different: Eight Centuries of Financial Folly at Amazon.com) Status: The world still teeters at the edge of an economic abyss that threatens to come from credit disruption. The U.S. and the rest of the world are only mid-way through the world-wide economic debt collapse that began in 2007. Typically, economic pains from credit destruction last much longer than ordinary recessions (Ezra Klein, Washington Post 10/9/2011) . Slow growth is the best that can be expected for years to come. (IMF) Risk remains that cascading debt defaults, especially from sovereign debt collapse in Europe, can cascade into a world-wide economic collapse. Unfortunately, mistakes by any number of fairly independent players still can bring on the nightmare at most any time. About the indicator: Reinhart and Rogoff powerfully demonstrate in This Time is Different the current economic trauma is more like the Great Depression than any of the comparatively short-lived recessions that occurred since then. The resolution of our Second Great Contraction, as Rogoff calls it, will most probably take several more years. Because of government-created incredibly low interest rates, the worst may already be over for stocks. Since borrowing costs will remain abnormally low for years, corporate profits may remain strong despite continuing economic pain. This is not a market for the faint of heart, but it may also be seen as the early stages of a tremendous long term growth market.

Sell in May Indicator Status: It looks like the Halloween indicator kicked in early this year. 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. Investor Sentiment (AAII Investor Sentiment Guide) (Barrons.com Investor Sentiment page) Investor Confidence (StateStreet.com) Status: Investors have recently become much more bullish. That is bad from a contrarian view. About the Indicator: Investor sentiment tends to be a contrarian indicator. When there are vastly more Bulls than Bears, it is time to worry! When you have a bad sinking feeling in your gut, you probably should be a buyer of stocks. Retail investors follow trends, but they dont lead them. As a result, they are usually late to the party. When too many people get to any party, the police usually come to bust it up. Peaks in investor sentiment usually lead the market by a few months. As Brett Arends, a writer for the Wall Street Journal notes in this MSN article on Why Market Timing Works our feelings are terrible guides. The American Association of Individual Investors publishes a weekly survey of member sentiment (bullish / bearish / neutral. According to AAII, the current historical averages are bullish 39% (standard deviation

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

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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. Fourth Year of the Preidential Election Cycle (Mark Hulbert, MarketWatch.com) 3rd Year of the Presidential Cycle (Mark Hulbert, MarketWatch.com) 3rd article by Hulbert. Status: Historically the fourth year of the presidential cycle produces very modest 4% stock market returns less than average. The fact that we are in a major long term financial crisis probably trumps this cyclic indicator as the Federal Reserve still is pushing the economy up with historically low interest rates. About the Indicator: According to Mark Hulbert's statistical calculations of the Dow Jones Industrials since 1896 there is statistical validity at the 95% confidence level that year 3 of the presidential election cycle yields outsize gains. Year 4 should also produce some gains. Year 2 typically yields nearly zero.

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. But then, this article, also by Hulbert finds little value in the slow moving average As said above, I now disagree if a very large number of investors follow ANY particular market timing tool it is bound to stop working. The average investor just cant beat the market average. % 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: The current value for the S&P 500 of 52% and rising. That is just fine. In the broader market 41% of the 5000 stocks are above their 200 day average, not overbought. 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, Use the 5 year view.)) Status: Using the 5-year view, the faltering over the summer doesnt look too bad. 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

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: The S&P500 is back above its 200 day moving average. That is good news for this very popular indicator. 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 identify market trends and serve as a market timing

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

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TomTs 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 NASDAQ composite, or especially, the Value Line Arithmetic Index. That is different than previous decades when the averages followed more similar tracks. About the indicator: As shown in this Yahoo.com chart reproduced below, something strange has happened in the U.S. stock market since the crash of 2000. From 1984 through the S&P 500 (red), the NASDAQ (green) and the Value Line Arithmetic Index followed very similar paths. In the DotCom bubble, NASDAQ shot up, and the S&P500 rose appreciably, but the Value Line was remarkably untouched. Since the crash the popular stocks of the S&P500 and the NASDAQ have floundered while the Value Line has gone on almost undeterred. Does this signify a massive shift in markets? Or, is this actually a massive negative stock market bubble that will soon send the popular market averages soaring as retail investors flock back to stocks?

Thats what the chart above shows 10-year rolling returns of the S&P 500. Right now the picture implies that we have gone through a terrible decade of stock performance, so now things most likely will get better. Thats clearly what typically happens. But, this simpleseeming chart is largely an illusion. Ten years to most people is what long-term investing means. (The lazy Law of Round Numbers leads people to choose 10 years as opposed to something irregular like 17 years.) Because we already know what happened 10 years ago (an historic boom followed by a terrible crash), we already know that in a couple of years this chart will show a much rosier picture. (Comparing the current market to the peak of the Dot Com bubble looks a lot worse that comparing it to the low point of the ensuing crash.) As a result there is an incredibly high probability that for several years to come, thousands of financial advisors will be showing their clients that the stock market actually gives excellent long-term rewards! A gradual, but long-running increase of investor enthusiasm is almost certain. For the simple reason that long-term means 10 years to most people!

Rolling 10-year S&P 500 Total Return (Article by Anthony Mirhaydari, MSN Money Central) Status: This chart practically guarantees a multi-year significant increase in stock investor enthusiasm, with a big boost over the next year or so, that corresponds to the 10-year anniversary of the pit of the Dot Com market crash. Read below for the reason.

About the Indicator: Most financial advisors tell their clients to take a long term view of owning stocks. Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice. 14

Six-Month Stock Market Indicators


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International View
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 World 9/2011 Status: IMF sees a slowing of growth for the next couple of years: just 1.1% for the U.S. and an uninspiring 4% for the globe as a whole. This is a disappointment. About the indicator: All you have ever read about World growth trends becomes clear in this customizable chart from the International Monetary Fund. Going back to 1980 you can see the development of major regions of the world and projections for the future -- all in constant currency units. (The zoom feature is super! Also, at the very bottom of the chart the button "Play Time" runs an animated history of world growth patterns.) The 'take home' from this chart is that for the past several decades the rest of the world has been playing catch up with the developed economies. As a result, other economies have consistently been growing at faster rates than ours. For an investor growth RATE is what counts. Sovereign Public Debt Ratio (CIA World Factbook) Status: The U.S. with debt equal to 63% of GDP using the CIAs estimate, not the one from IMF which is at 92%. (The difference is the Social Security Trust Fund that Congress can legislate away if necessary. Looks like that is what the Republicans would like to do.) Greece is at 142%. Italy is at 119%. And look at Japan 225% of GDP! (But, most of that debt is actually foreign currency reserves making the actual debt much less worrisome.) In the later stages of a recession, especially one initiated with a banking crisis, sovereign debt defaults always become a major concern, especially when interest rates begin to rise making debt levels more burdensome. Point of fact: Greece has been in sovereign debt default for almost exactly half of the years from 1800 to now. This time is NOT different. 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

The world keeps getting smaller. For the next several decades most of the best market investment opportunities probably lie outside the U.S. The reason is simple: it is easier to increase wealth in percentage terms if you are poor rather than wealthy. And percentage growth is what investing for profit is all about. U.S. growth will probably average 2% to 4% for the next decade while China will probably have growth in the 8% to 10% range 3 to 4 times higher! Case in point: U.S. housing construction is struggling to get back to the 1 million units per year level. China, on the other hand, has just announced plans for a crash program to build an additional 10 million housing units for each of the next several years. Commodity prices may well skyrocket. Multinationals based in the U.S. may well perform much better than the overall U.S. economy. The long overdue growth of emerging nations creates a double sided situation. On side provides immense growth opportunities for business, and the low cost of overseas labor means U.S. inflation probably will be contained for many years. The other side of the situation constrains U.S. worker incomes it is hard for many working people to seek higher incomes when they are directly competing against overseas workers making 1/10th as much money. It is easy to sit back and be philosophical about all of this until your particular field is hit with devastating competition that destroys your business and your life. Believe me, I know. Organization for Economic Cooperation and Development. Status: OECD predicts world-wide economic growth not recession, but the growth 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

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

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U.S. Versus International Focus (Click to the 5 year view.) Status: For the last year, emerging market stocks have done even worse than the U.S. market. Emerging market long term GDP growth rates are again far ahead of the U.S. and other developed countries. About the indicator: The link is to a plot of U.S. stocks (the SP-500 index) versus a few emerging market favorite ETFs. 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!

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

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Six-Month Stock Market Indicators Tom Ts Stock Market Forecast


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Econometric Models
from May was rosey, and the market proceeded to tank. My forecast from May, 2002 to November 2010 was right on target (13% gain forecasted and 12% actual gain), and the last years 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.

Anyone forecasting stock prices deserves your skepticism. Monkeys (trained or not) often beat both forecasters and investment managers. Unfortunately for this October update, most of the published forecasts I could find were New Years predictions and so are out of date. (I find it bizarre that people tend to make forecasts at the turn of the year rather than any other time. It must be just another herd-based round number phenomena.) Countless stock market forecasts are posted by groups and individuals, but there is seldom much performance evidence given to prove their credibility. Some forecasts may be wacky like those based on astrology. Other forecasts actually may be brilliant, but no track record is provided. A few forecasts, however, do have enough of an experience basis so that they can be tested and have some credibility. I have my own econometric forecasting models and have been evaluating them since 2007 so far, with good results. (See next page) I 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.

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. This forecast is from last December so it is out of
date.

My statistical models see a bright half-year ahead for the stock market: 10% to 15% gains for the Value Line Arithmetic Average (VAY) between October 31 and June 1, 2012. (Actually, the raw prediction is for a 20% 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? The forecast

Other Econometric Stock Market Models Sorry, most of these are not current for some reason people seem to care more about forecasts in January. 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 Hulberts 9/2/2011 update on Sam Eisenstadts model reported a forecast of 18% gains for the S&P 500 by February. In the same update Norman Fosbacks model was reported as anticipating a 17% market gain over the next 12 months. Mark Hulbert reported 4/5/2011 at MarketWatch.com that Sam Eisenstadts current economic model is 17

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

forecasting a gain by September 30, 2011 of 9.1%. The article noted that Eisenstadts model has an excellent Rsquared 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 2011. (As of late October the S&P 500 was at 1,285). None of the respondents forecasted a negative year for the S&P . 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. Philadelphia Federal Reserve Survey of Professional Economists 10-Year S&P 500 Forecast Status: For 2011 the median estimate in the survey of economists is for a 7.25% annual appreciation rate for the S&P 500 for the coming decade. About the indicator: The forecasts for the Survey of Professional Forecasters are provided by the Federal Reserve Bank of Philadelphia. The quarterly survey, formerly conducted by the American Statistical Association (ASA) and the National Bureau of Economic Research (NBER), began in 1968:Q4 and was taken over by the Philadelphia Fed in 1990:Q2. The measure here STOCK10 includes percentage point forecasts for the annual average rate of return to equities (S&P 500) over the next 10 years. While this indicator is a survey rather than an econometric model, it is reasonable to expect that numerous survey responses by professional economists are based on independent econometric models. I have not made an analysis if this indicator has any relationship at all to stock market moves in future 6month periods.

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

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Six-Month Stock Market Indicators


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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. This is research, not investment advice.

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Six-Month Stock Market Indicators


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Tom Ts Stock Market 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. Id appreciate any comments you may have. Please send them to: tomtiedeman@gmail.com

Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. This is research, not investment advice.

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