TomT Stock Market Model 2013-05-31

7/28/2019 TomT Stock Market Model 2013-05-31

1/18

Copyright 2013 Tom Tiedeman, Washington, D.C. All rights reserved. 1This private letter tries to provide somewhat objective research, not investment advice.

Surpr is ing ly Good Forecast

According to my forecasting models, prospects for the

stock market are better than average for the coming halfyear to 10/31/2013.

Probable market gain: 12%

Probabi l i ty of at least breaking even: 83%

Probabi l i ty of an 8% d ip along th e way: 50%.

Statistically the stock market tends to be weak over thesecond half of the year, but my model says that probablywill not be true this year. Why?1:The economy is still under-performing that leavesroom for improvement.2:Leading economic indicators are very slowly rising.

3:Recession probabilities are low and still falling, mainlybecause the Federal Reserve is still pushing downinterest rates.

My econometric models of the stock market are basedon just a few basic measures tied to the U.S. economyand stock markets. They are sophisticated guesses, atbest.

How did m y forecas ts work o ut in the past

hal f year? The mo del k icked my bu tt !

Last October the model forecast a terrific 19% gain from

Halloween to the end of May. Seeing the looming fiscalcliff I personally discounted that to a 10% expected gain.The final outcome was an amazing 24% gain for theValue Line Arithmetic Index, my primary market gauge.

How have my forecas ts per formed dur ing

the past 6 years?

I have been testing my forecasting models in real timesince May, 2007. That has been a tough test since itincluded a major market collapse during the worstrecession since the Great Depression.

At the back of this report I haveupdated graphscomparing the models predictions with reality.

The models are far from perfect. However, they aremore accurate than my personal guesses and hunches.So far, I think the forecasts are worth following..

Market Valuation MeasuresMost measures consider the market to be near fairvalue. However, the indicator Warren Buffet likes best

says it is somewhat overvalued. .

Economic IndicatorsOnly about 15% of U.S. economists expect any sort ofrecession in the U.S. in the coming year. MostComposite Leading Economic Indicators anticipate slowgrowth for the U.S. Business profits should continue tobe high as debt costs are at the lowest relative levels inseveral hundred years and businesses already are lean.Though profits should stay high, there isnt much roomfor quick expansion. Too bad, thats what the marketlikes.

Trader Signals - FastI have finally found a couple of indicators that appear tolead the market by a month or so. No guarantees. Bythe time you read this, these short term signals may givean entirely different picture.

Trader Signals SlowThe long running Second Great Contraction will likelycontinue to play out as a decade long grind much likethe 1930s.Sell in May is statistically valid and itdeprecates the second half of the year.

International ViewGrowth estimates generally are below normal. Emerging

economies will probably have faster growth than majordeveloped nations. Government austerity in Europe is anegative facote..

Econometric ModelsMost number crunchers conclude that the economy isstill bad enough that it will likely keep getting somewhatbetter sooner or later. Reversion to the mean isworking in our favor times are tough so eventually theyare likely to improve. The pull back toward the mean,however, is not as strong as it has been for the past 3years.

Six-Month Stock Market Indicators May 31, 2013Over 50 timing indicators focused on market behavior a few months ahead

Overview


2/18

Copyright 2013 Tom Tiedeman, Washington, D.C. All rights reserved. 2This is research, not investment advice.

Still more than fully invested. (Margined)

=====

If there was any real agreement on how to accuratelyvalue stocks, prices wouldnt go up and down as muchas they do. The never ending stream of world news,economic, business and company developments withlargely unknowable consequences, however, makebusiness valuation an approximate art rather than aclear science. The measures here gauge only roughly-- whether the stock market as a whole is priced

reasonably. My favorite is the Morningstar MarketValuation Graph below.

Morningstar.Com Market Valuation Graph (Clickto the Max. time period view of the chart.)Status: Valuation at 1.01 is right at fair value. Gettingabove 1.0 has eluded the market for the past severalyears so a pullback would not be surprising.About the indicator: This graph is a fundamentalfinancial analysis / accounting calculation based on netpresent value calculations of long-term projected profitsfor the thousands of stocks Morningstar tracks. It is abasic check to see if the stock market pricing makes

sense.

S&P 500 to Book Value (Barrons) VectorGraderStatus: The current market price-to-book value of about2.47 is below the median level of 2.77 and well belowthe typical historical market peak valuation ratio ofapproximately 3. At the pit of the 2008-2009 crash theratio sank to 1.5.About the indicator: Book Value is the money youwould get if you closed a business and sold off all of itsphysical plant and inventory. Its one of the most basicvaluation tools for stocks. On its own it doesnt meantoo much since valuations can be quite debatable.

However, reasonable book value levels confirm thatstocks are not wildly overpriced today and that roomremains on the upside.

Total Market Valuation vs. GNP(GuruFocus.comFree registration required. The linked page is a goodprimer on valuation.) VectorGrader chartStatus: My two data sources do not agree. GuruFocusscored the ratio at 110% and VectorGrader says 117%.Either way the market is modestly overvalued.

About the Indicator: In a mildly famous 2001 Fortunemagazinearticle Warren Buffet wrote that despite somelimitations, the ratio of total stock market valuation toGross National Product is probably the best singlemeasure of where valuations stand at any givenmoment. At 55% stocks would a fantastic buy. At 110%it would be time to be worried.

. S&P-500 Price Earnings Ratio VectorGraderBarrons Table andS&P 500 Earnings(The link above istowww.multpl.com, courtesy of Josh Staiger). Sourcedata available onlinecourtesy of Robert Shiller and S&PStatus: Depends how you look at it. If you judge bycurrent earnings, the SP 500 at 19 is fine. Alternatively,a rolling 10-year average tags the S&P 500 as pricey. Iside with the short-term view because the past decadehas contained two very nasty recessions skewing theaverage.About the indicator: Intuitively, the ratio of a stock'sprice to the company's earnings should be the keyobjective tool for judging if a stock is properly valued and

for comparing multiple stocks. High Price-to-Earningsratios should make investors worry that a stock is over-priced. Likewise, low P/E ratios should help to flagbargains. Unfortunately, as indicated inthis Mark Hulberarticle, P/E ratios have negligible value in predictingeither one-year or even 10-year stock price moves. Asdiscussed in the Fed Model (below) my own statisticalanalysis does not find any validity in using P/E ratios for6-month stock market analysis.

The Fed Model(Wikipedia.org explanation)Sourcedata for S&P Earnings and long interest rates madeavailable courtesy of Robert Shiller.

Status: Today you can read this measure as sayingeither that the market is overpriced or that it isunderpriced. The interpretation mainly depends on howlong an historical average of earnings you want toconsider. (Given the current long T-Bond rate of 2.7%,and based on experience since 1960, a regressionmodel predicts that the S&P 500 P/E should beapproximately:P/E = 1/ (0.808 T +0.010)P/E = 1/ ( 0.808 (0.03) + 0.010) = 39!!!!!.

Select to view:OverviewMarket Valuation MeasuresEconomic Indicators

Trader Signals - FastTrader Signals SlowInternational ViewEconometric Models

About This Forecast

Six-Month Stock Market Indicators

Market Valuation Measures
http://www.morningstar.com/cover/pfvgraph.htmlhttp://www.morningstar.com/cover/pfvgraph.htmlhttp://online.barrons.com/public/page/9_0210-indexespeyields.htmlhttp://online.barrons.com/public/page/9_0210-indexespeyields.htmlhttp://online.barrons.com/public/page/9_0210-indexespeyields.htmlhttp://www.vectorgrader.com/indicators/price-bookhttp://www.vectorgrader.com/indicators/price-bookhttp://www.gurufocus.com/stock-market-valuations.phphttp://www.gurufocus.com/stock-market-valuations.phphttp://www.vectorgrader.com/indicators/market-cap-gdphttp://www.vectorgrader.com/indicators/market-cap-gdphttp://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/http://www.multpl.com/http://www.multpl.com/http://www.multpl.com/http://www.vectorgrader.com/indicators/price-earningshttp://www.vectorgrader.com/indicators/price-earningshttp://online.barrons.com/public/page/9_0210-indexespeyields.htmlhttp://www.multpl.com/s-p-500-earnings/http://www.multpl.com/s-p-500-earnings/http://www.multpl.com/s-p-500-earnings/http://www.multpl.com/http://www.multpl.com/http://www.multpl.com/http://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.marketwatch.com/story/are-stocks-really-undervalued-2010-09-03http://www.marketwatch.com/story/are-stocks-really-undervalued-2010-09-03http://www.marketwatch.com/story/are-stocks-really-undervalued-2010-09-03http://www.marketwatch.com/story/are-stocks-really-undervalued-2010-09-03http://en.wikipedia.org/wiki/Fed_modelhttp://en.wikipedia.org/wiki/Fed_modelhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.multpl.com/http://www.bloomberg.com/apps/cbuilder?ticker1=.SPXBOOK:INDhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://en.wikipedia.org/wiki/Fed_modelhttp://www.bloomberg.com/apps/cbuilder?ticker1=.SPXBOOK:INDhttp://www.marketwatch.com/story/are-stocks-really-undervalued-2010-09-03http://www.marketwatch.com/story/are-stocks-really-undervalued-2010-09-03http://www.econ.yale.edu/~shiller/data.htmhttp://www.multpl.com/http://www.multpl.com/s-p-500-earnings/http://online.barrons.com/public/page/9_0210-indexespeyields.htmlhttp://www.vectorgrader.com/indicators/price-earningshttp://www.multpl.com/http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/http://www.vectorgrader.com/indicators/market-cap-gdphttp://www.gurufocus.com/stock-market-valuations.phphttp://www.vectorgrader.com/indicators/price-bookhttp://online.barrons.com/public/page/9_0210-indexespeyields.htmlhttp://www.morningstar.com/cover/pfvgraph.html


3/18


The current S&P-500 P/E based on 10-year trailingearnings is roughly 21.About the indicator: This popular classic stock marketvaluation model starts from the simple premise that theearnings to price ratio (E/P) of basket of quality stockslike the S&P 500 index and the yield from long termquality bonds should be just about the same, with thestocks having a little higher return to reflect their higherinherent risk. ThisMark Hulbert (MarketWatch.com)article says there is not much predictive value to theindicator. My own analysis finds no statistical link inthe 6-month time frame between P/E ratios and theS&P-500 average.

Value Line 3-5 Year Appreciation PotentialStatus: At the end of December VLMAP is at about50%, right where it was last October. This is a sellsignal for this long term indicator.About the Indicator: As it has for many years, each week

the Value Line Investment Survey announces an estimateof the three to five year median appreciation potential for

the 1700 stocks they track. The lowest recent appreciationestimate was 35% at the previous market high on7/13/2007. The highest appreciation potential recorded was

185% at the panic market low of 3/9/2009. In general, areading of 55% points to a sell and 100% signals buyaccording tothisMark Hulbert MarketWatch.com article

Tobins Q (VectorGrader.com).Status: Neutral to mildly.About the Indicator: (From VectorGrader.com linkedpage) The Tobin's Q is the ratio of price to replacementcost, which is in many ways similar to book value. It wasdeveloped by Economic Nobel laureate James Tobin in

the 1960s as a metric for valuing the stock market.The Q ratio can be calculated from themost recentFederal Reserve Flow of Fundsrelease. The ratio iscalculated by dividing line 35 of table B.102 by line 32.The historical data is also available on theSt. LouisFRED website. However, because the Flow of Fundsreport is released long after the quarter end, we updatethe Q ratio for the change in stock prices since the mostrecent flow of funds report.
http://www.marketwatch.com/story/fed-model-more-bullish-than-in-decades-2011-09-20?dist=afterbellhttp://www.marketwatch.com/story/fed-model-more-bullish-than-in-decades-2011-09-20?dist=afterbellhttp://www.marketwatch.com/story/where-stock-market-will-be-in-fall-of-2016-2012-09-28?link=home_carouselhttp://www.marketwatch.com/story/where-stock-market-will-be-in-fall-of-2016-2012-09-28?link=home_carouselhttp://www.marketwatch.com/story/where-stock-market-will-be-in-fall-of-2016-2012-09-28?link=home_carouselhttp://www.vectorgrader.com/indicators/tobins-qhttp://www.vectorgrader.com/indicators/tobins-qhttp://www.federalreserve.gov/releases/z1/default.htmhttp://www.federalreserve.gov/releases/z1/default.htmhttp://www.federalreserve.gov/releases/z1/default.htmhttp://www.federalreserve.gov/releases/z1/default.htmhttp://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=MVEONWMVBSNNCB_TNWMVBSNNCB&transformation=lin_lin&scale=Left&range=Max&cosd=1949-10-01&coed=2010-04-01&line_color=%230000FF&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2010-10-04_2010-10-04&revision_date=2010-10-04_2010-10-04&mma=0&nd=_&ost=&oet=&fml=a%2Fbhttp://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=MVEONWMVBSNNCB_TNWMVBSNNCB&transformation=lin_lin&scale=Left&range=Max&cosd=1949-10-01&coed=2010-04-01&line_color=%230000FF&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2010-10-04_2010-10-04&revision_date=2010-10-04_2010-10-04&mma=0&nd=_&ost=&oet=&fml=a%2Fbhttp://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=MVEONWMVBSNNCB_TNWMVBSNNCB&transformation=lin_lin&scale=Left&range=Max&cosd=1949-10-01&coed=2010-04-01&line_color=%230000FF&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2010-10-04_2010-10-04&revision_date=2010-10-04_2010-10-04&mma=0&nd=_&ost=&oet=&fml=a%2Fbhttp://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=MVEONWMVBSNNCB_TNWMVBSNNCB&transformation=lin_lin&scale=Left&range=Max&cosd=1949-10-01&coed=2010-04-01&line_color=%230000FF&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2010-10-04_2010-10-04&revision_date=2010-10-04_2010-10-04&mma=0&nd=_&ost=&oet=&fml=a%2Fbhttp://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=MVEONWMVBSNNCB_TNWMVBSNNCB&transformation=lin_lin&scale=Left&range=Max&cosd=1949-10-01&coed=2010-04-01&line_color=%230000FF&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2010-10-04_2010-10-04&revision_date=2010-10-04_2010-10-04&mma=0&nd=_&ost=&oet=&fml=a%2Fbhttp://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=MVEONWMVBSNNCB_TNWMVBSNNCB&transformation=lin_lin&scale=Left&range=Max&cosd=1949-10-01&coed=2010-04-01&line_color=%230000FF&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2010-10-04_2010-10-04&revision_date=2010-10-04_2010-10-04&mma=0&nd=_&ost=&oet=&fml=a%2Fbhttp://www.federalreserve.gov/releases/z1/default.htmhttp://www.federalreserve.gov/releases/z1/default.htmhttp://www.vectorgrader.com/indicators/tobins-qhttp://www.marketwatch.com/story/where-stock-market-will-be-in-fall-of-2016-2012-09-28?link=home_carouselhttp://www.marketwatch.com/story/fed-model-more-bullish-than-in-decades-2011-09-20?dist=afterbell


4/18


Despite all of its semi-random craziness, eventual lythestock market reflects corporate profits which in turnreflect the economy and especially interest rates.Usually the stock market nervously anticipates ( andover-reacts to) economic conditions by several months.(An old adage says that since 1948, the stock markethas predicted 20 of the last 10 recessions.) Theindicators here are my favorites for looking ahead for theeconomy 6 months to a year.

Economic Cycles Research Institute U.S.Leading Indicator (Scroll down on the linked page)U.S. Leading Economic Indicator (e-forecasting.comSee bottom of linked page.)Philly Fed 6 Month Leading Indicator(St. LouisFederal Reserve)Conference Board Leading Economic IndexOrganization for Economic Cooperation andDevelopment.Status: Most composite leading economic indicators areslightly positive, but muted, signaling slow economicgrowth ahead. Highly regarded ECRI remains

convinced that the U.S. is already in recession despitethe fact that their own leading indicator has been risingsince last July.About the indicators: These are just a few of thegroups that compile and aggregate statistics of severaleconomic factors that tend to lead the economy both upand down. Changes and directions of the leadingeconomic indicators are worth paying attention to. Aspictured below, there is a strong long term linkagebetween composite leading indicators and periods ofrecession.

Anxious Index for Recession Probability(Philadelphia Fed. xls file)Status: The jury is split. ECRIandGary Shillingareconvinced that the U.S. is already in recession. But, onaverage, the gurus of economics have eased off theirfears of a near-term recession. As of 2/15/2013 A panelof 54 economists polled by the Philadelphia FederalReserve sees about a 15% chance of another recessionin the coming half year. (Next Anxious Index release on

May 10, 2013.)About the indicator: Thisarticle by David Leonhardt inthe NY Times in February, 2008 coined the popularname for this index. ThisSurvey of ProfessionalForecastersmaintained by the Philadelphia FederalReserve hasn't missed calling a recession or called afalse positive in all the years since 1968 when it wasstarted. This Anxious Index is the successor to theearlier Livingston Indexa personal project of aPhiladelphia journalist.

Effective Federal Funds Rate (from St. LouisFederal Reserve)

Status:. In essence the Fed is paying banks to borrow!Eventually rate cuts will stimulate the economy. But,because of lag times, for now it remains a contraryreminder of just how worried they are at the FedAbout the indicator: The Federal Reserve largelycontrols interest rates. Interest rates largely determinebusiness profitability. And profitability controls the stockmarket. Enough said.MarketWatch.com forecast ofinterest rates

Probability of Recession Predicted by InterestRate Spread(NY Federal Reserve Go to linked page oruse your browser zoom on the chart below.) St. Louis

Fed Recession Model (data can be downloaded)l


Trader Signals - FastTrader Signals SlowInternational ViewEconometric ModelsAbout This Forecast


Economic Indicators
http://www.businesscycle.com/resources/http://www.businesscycle.com/resources/http://www.businesscycle.com/resources/http://www.e-forecasting.com/US_Leading_Economic_Indicator.htmhttp://research.stlouisfed.org/fred2/series/USSLINDhttp://research.stlouisfed.org/fred2/series/USSLINDhttp://www.conference-board.org/data/bcicountry.cfm?cid=1http://www.conference-board.org/data/bcicountry.cfm?cid=1http://www.conference-board.org/data/bcicountry.cfm?cid=1http://www.conference-board.org/data/bcicountry.cfm?cid=1http://stats.oecd.org/Index.aspx?DatasetCode=MEI_CLIhttp://stats.oecd.org/Index.aspx?DatasetCode=MEI_CLIhttp://stats.oecd.org/Index.aspx?DatasetCode=MEI_CLIhttp://www.philadelphiafed.org/files/spf/anxious_index_chart.xlshttp://www.businesscycle.com/http://www.businesscycle.com/http://www.marketwatch.com/story/shilling-new-recession-has-begun-2012-08-03?link=home_carouselhttp://www.marketwatch.com/story/shilling-new-recession-has-begun-2012-08-03?link=home_carouselhttp://www.marketwatch.com/story/shilling-new-recession-has-begun-2012-08-03?link=home_carouselhttp://www.nytimes.com/2008/02/12/business/12cnd-econ.html?ref=businesshttp://www.nytimes.com/2008/02/12/business/12cnd-econ.html?ref=businesshttp://www.nytimes.com/2008/02/12/business/12cnd-econ.html?ref=businesshttp://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/publications/business-review/1997/march-april/brma97dc.pdfhttp://www.philadelphiafed.org/research-and-data/publications/business-review/1997/march-april/brma97dc.pdfhttp://research.stlouisfed.org/fred2/series/FFhttp://research.stlouisfed.org/fred2/series/FFhttp://www.marketwatch.com/news/economy/economic_calendar.asp?siteIdhttp://www.marketwatch.com/news/economy/economic_calendar.asp?siteIdhttp://www.marketwatch.com/news/economy/economic_calendar.asp?siteIdhttp://www.marketwatch.com/news/economy/economic_calendar.asp?siteIdhttp://www.newyorkfed.org/research/capital_markets/Prob_Rec.pdfhttp://www.newyorkfed.org/research/capital_markets/Prob_Rec.pdfhttp://www.newyorkfed.org/research/capital_markets/Prob_Rec.pdfhttp://research.stlouisfed.org/fred2/series/RECPROUSM156Nhttp://research.stlouisfed.org/fred2/series/RECPROUSM156Nhttp://research.stlouisfed.org/fred2/series/RECPROUSM156Nhttp://research.stlouisfed.org/fred2/series/FFhttp://research.stlouisfed.org/fred2/series/RECPROUSM156Nhttp://research.stlouisfed.org/fred2/series/RECPROUSM156Nhttp://www.newyorkfed.org/research/capital_markets/Prob_Rec.pdfhttp://www.newyorkfed.org/research/capital_markets/Prob_Rec.pdfhttp://www.bloomberg.com/apps/cbuilder?ticker1=.SPXBOOK:INDhttp://www.marketwatch.com/news/economy/economic_calendar.asp?siteIdhttp://www.marketwatch.com/news/economy/economic_calendar.asp?siteIdhttp://research.stlouisfed.org/fred2/series/FFhttp://www.philadelphiafed.org/research-and-data/publications/business-review/1997/march-april/brma97dc.pdfhttp://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.nytimes.com/2008/02/12/business/12cnd-econ.html?ref=businesshttp://www.marketwatch.com/story/shilling-new-recession-has-begun-2012-08-03?link=home_carouselhttp://www.businesscycle.com/http://www.philadelphiafed.org/files/spf/anxious_index_chart.xlshttp://stats.oecd.org/Index.aspx?DatasetCode=MEI_CLIhttp://stats.oecd.org/Index.aspx?DatasetCode=MEI_CLIhttp://www.conference-board.org/data/bcicountry.cfm?cid=1http://www.conference-board.org/data/bcicountry.cfm?cid=1http://research.stlouisfed.org/fred2/series/USSLINDhttp://www.e-forecasting.com/US_Leading_Economic_Indicator.htmhttp://www.businesscycle.com/resources/http://www.businesscycle.com/resources/


5/18


Status: With short term interest rates near zero, the NYFed model sees a negligible 4.8% probability of being inrecession next year. St Louis sees about a 1.2% chanceof recession.About the indicators: When the Federal Reserve

raises short term interest rates high enough theeconomy quiets down -- and possibly goes intorecession. When the Fed lowers interest rates it suppliesa major economic stimulus. This well documentedindicator from the New York Federal Reserve is aneconometric model of the probability of economicrecession based on the difference between short terminterest rates and the rate on the 10-year Treasury Note.Raw dataThe St. Louis Federal Reserve has another recessionindicator that is based on more factors than just interestrates: non-farm payroll employment, the index ofindustrial production, real personal income excluding

transfer payments, and real manufacturing and tradesales

Citigroup Economic Surprise Index(BusinessInsider.com 4/13//2013)Status: (Bloomberg has stopped no-cost coverage ofthis indicator. Since I can only get occasional snapshotsof the Indicator, I dont put much store in it.) In late Aprilthe indicator may have finished a several month plunge..About the Indicator: The stock market reacts stronglyto unexpected news good or bad. This indicator is newto me, but there might just be a chance that this leadsthe market. The Bloomberg.com description of the chart

says: The Citigroup Economic Surprise Indices areobjective and quantitative measures of economic news.They are defined as weighted historical standarddeviations of data surprises (actual releases vs.Bloomberg survey median). A positive reading of theEconomic Surprise Index suggests that economicreleases have on balance beating consensus. Theindices are calculated daily in a rolling three-monthwindow. The weights of economic indicators are derivedfrom relative high-frequency spot FX impacts of 1

standard deviation data surprises. The indices alsoemploy a time decay function to replicate the limitedmemory of markets.

Long Treasury Bond vs DiscountRate (InvestmentTools.com)Status: As the subprime mortgage financial panic andsubsequent recession hit, the Fed dramatically loweredshort term lending rates to near-zero, creating a majorstimulus to try to pump up the economy. The differencebetween the short and long rates is seldom greater thanit is now.About the indicator: Interest rates are a primedeterminant of profitability and of economic activity. Thisis a major long term telltale of where the market will gonext. Long-term interest rates have been falling almoststeadily since 1980, corresponding with overall stockmarket growth over the same period. Federal Reserveactions moving the discount rate, however, are a primaryfactor in short-term business profits and therefore stockmarket prices. For now the big question is when will theFederal Reserve raise rates? Unfortunately, the flip sideof this is that low rates like we now have are a direct

statement that the Fed remains deeply worried about theeconomy.

TED Spread(StockCharts.com)Status: The TED spread has been heading down sincethe start of 2012. Good. Recent ups and downs of theTED spread have all been mild in comparison to theworld-wide financial panic that ran from late 2007 toearly 2009. The interest rate for banks lending to oneanother, LIBOR has remained essentially flat since2010. Major banks do not seem to be seriously worriedabout other banks failing in the near future.About the indicator: Credit markets only become

interesting when they fall apart. Lack of credit thenbrings the economy to an abrupt stop. This indicatortracks the difference between the 3-month Treasury rateand the 3-month LIBOR -- the interest rate at whichbanks loan to one another. (At least that is what it issupposed to be it the banks arent trying to rig thenumbers.) Normally these two banking insider ratesshould be close.
http://www.newyorkfed.org/research/capital_markets/ycfaq.htmlhttp://www.newyorkfed.org/research/capital_markets/ycfaq.htmlhttp://www.newyorkfed.org/research/capital_markets/ycfaq.htmlhttp://www.newyorkfed.org/research/capital_markets/allmonth.xlshttp://www.newyorkfed.org/research/capital_markets/allmonth.xlshttp://www.bloomberg.com/quote/CESIUSD:IND/charthttp://www.bloomberg.com/quote/CESIUSD:IND/charthttp://www.businessinsider.com/citi-economic-surprise-index-just-went-negative-2013-4http://www.investmenttools.com/thefed/long_term_t_bond_rate_minus_discount_rate.htmhttp://www.investmenttools.com/thefed/long_term_t_bond_rate_minus_discount_rate.htmhttp://www.investmenttools.com/thefed/long_term_t_bond_rate_minus_discount_rate.htmhttp://stockcharts.com/h-sc/ui?s=$TED&p=W&b=5&g=0&id=p50764669041http://stockcharts.com/h-sc/ui?s=$TED&p=W&b=5&g=0&id=p50764669041http://www.moneycafe.com/library/libor.htm#graphhttp://www.moneycafe.com/library/libor.htm#graphhttp://www.wikinvest.com/rate/LIBOR/WikiCharthttp://www.wikinvest.com/rate/LIBOR/WikiCharthttp://www.wikinvest.com/rate/LIBOR/WikiCharthttp://www.bloomberg.com/apps/cbuilder?ticker1=.SPXBOOK:INDhttp://www.wikinvest.com/rate/LIBOR/WikiCharthttp://www.moneycafe.com/library/libor.htm#graphhttp://stockcharts.com/h-sc/ui?s=$TED&p=W&b=5&g=0&id=p50764669041http://www.investmenttools.com/thefed/long_term_t_bond_rate_minus_discount_rate.htmhttp://www.investmenttools.com/thefed/long_term_t_bond_rate_minus_discount_rate.htmhttp://www.businessinsider.com/citi-economic-surprise-index-just-went-negative-2013-4http://www.bloomberg.com/quote/CESIUSD:IND/charthttp://www.newyorkfed.org/research/capital_markets/allmonth.xlshttp://www.newyorkfed.org/research/capital_markets/ycfaq.html


6/18


Money Supply (M1 y/y Federal Reserve) (MZMy/y Federal Reserve)Status: We are receiving an open-ended expansion ofthe money supply via QE4.About the Indicator: The economic theory is thatincreasing the money supply should raise asset pricesand lower interest rates. Im not an economist so Illavoid this debate.

Building PermitsandHousing Starts(St. LouisFederal Reserve)Status: Construction is definitely up from the pits, buthome building is still at depression levels. Over the nextfew years this could be the most significant sector ofimprovement in the economy.About the indicator: Housing and construction areimportant economic indicators, usually leading the stockmarket by about a year. Housing construction itself is

just about 2% of the economy, but when all relatedfactors such as new appliance purchases housingconstitutes a larger slice. These linked charts from theSt. Louis Federal Reserve show clearly that if you haveseveral years of over-building then payback in the form

of a dead market for new construction must eventuallyfollow.

Another housing bubble is not likely to start soonaccording tothis article by Robert Shiller (NY Times,free subscription required), Housing Bubbles Are Fewand Far Between.

Dollar Index(MarketWatch.com)Dollar Index(StockCharts.com)Status: The race to the bottom in currency valuationscontinues. The Buck has been roughly constant for thepast two years compared to other currencies. It is in anuptick. Nothing serious yet.About the indicator: The primary difficulty in reducingthe value of the Dollar is that other countries will alsoinflate their currencies in order to maintain their relativetrading advantage.

Household Net Worth (Federal Reserve, see Line42)Status: The overal wralth total is nearly back to pre-recession levels. Improving overall, but still down $1.5trillion from 2007! Thanks mainly to the rebounding stockmarket, total net worth has come back from being down$18 trillion an incredible amount. The problem,however, is that home prices, where the net worth of themiddle class is centered, have not risen much. Themiddle class setback is also a setback for the economyand the stock market.About the indicator: Net worth is the score that counts.Personal wealth fell by an incredible 18 trillion dollarsduring the Great Recession, equivalent to a full year ofGDP, and it could have been much worse. All that wouldhave been needed for a complete collapse would have

been for cascading bank, business and personal wealthfailures to get rolling in a domino sequence as they did inthe Great Depression. The couple of trillion dollars thatthe Government threw down as part of the TARP andstimulus efforts looks like a smart investment if it savedus from what could have been another ten or twentytrillion dollars of damage.

U.S. Federal Deficit(St. Louis Federal Reserve)

Status: Has the knife stopped falling?This 5/1/2011article by Lori Montgomery(Washington Post, freesubscription required) remains the best summary of thedeficit problem that I have read.About the indicator: A lot of investors make a lot ofnoise about the deficit, but the deficit does not correlatevery well with changes in the stock market. Still, fear ofthe rising deficit has stopped any chance of furtherstimulus from Congress. So a very slow and falteringrecovery is almost certain.

U.S. Balance of Payments(Federal Reserve link)Status: The balance of payments has stabilized but ata high negative level.About the indicator: The worsening Balance ofPayments probably means little in the short term, but is amajor negativelong term problemfor the U.S. Thepersistent balance of payments deficit is the centralissue in the current round ofcompetitive currencydevaluationsunderway around the world.(WashingtonPost.com, free subscription required)

Shipping & Transportation Sector StrengthBaltic Dry Index BDI(StockCharts.com) HARPEX

(Harper Peterson Container shipping index)Transportation Stocks USDOT Transportation ServicesIndexStatus: Taking a long term view, theUSDOTTransportation Services Index (afairly good leadingeconomic indicator) is flat, pointing to very weak growth.Shipping rates may have bottomed, but their continuingweakness signals a slow recover.. Container shippingrates covered by theHARPEX more closely related toexpectations of retailers remain below historically-average levels. The Dow Jones Transportation Index(StockCharts.com) had been roughly flat for the wholeyear, but has surged since November.About the indicator: Shipping rates and pricing oftransportation industry stocks are much followed andbasically believable long-lead economic indicators. The

reasoning is simple; if a lot of goods are being shippedthen the economy must be improving.TheDow Theory (Wikipedia),for example, one of theoldest and most followed technical indicators is based onthe relative strength of the Dow Jones Industrial Averageversus the Dow Jones Transportation Index. How muchit actually counts is debatable (Mark Hulbert column).The Baltic Dry Index(Wikipedia),The Best EconomicIndicator You've Never Heard oftracks the cost of
http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5b1%5d%5bid%5d=M1&s%5b1%5d%5btransformation%5d=pc1http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5b1%5d%5bid%5d=MZM&s%5b1%5d%5btransformation%5d=pc1http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5b1%5d%5bid%5d=MZM&s%5b1%5d%5btransformation%5d=pc1http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5b1%5d%5bid%5d=MZM&s%5b1%5d%5btransformation%5d=pc1http://research.stlouisfed.org/fred2/series/PERMIT?cid=97http://research.stlouisfed.org/fred2/series/PERMIT?cid=97http://research.stlouisfed.org/fred2/series/HOUST?cid=97http://research.stlouisfed.org/fred2/series/HOUST?cid=97http://research.stlouisfed.org/fred2/series/HOUST?cid=97http://www.marketwatch.com/story/housing-is-dead-it-cant-hurt-the-economy-2011-03-24?link=home_carouselhttp://www.marketwatch.com/story/housing-is-dead-it-cant-hurt-the-economy-2011-03-24?link=home_carouselhttp://www.nytimes.com/2011/02/06/business/06view.html?_r=1&scp=1&sq=shiller&st=csehttp://www.nytimes.com/2011/02/06/business/06view.html?_r=1&scp=1&sq=shiller&st=csehttp://www.marketwatch.com/investing/index/DXY/charts?countryCode=US&submitted=true&intflavor=advanced&origurl=%2Ftools%2Fquotes%2Fintchart.asp&time=20&freq=2&comp=Enter%20Symbol(s)%3A&compidx=aaaaa~0&compind=aaaaa~0&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=1&optstyle=1013http://www.marketwatch.com/investing/index/DXY/charts?countryCode=US&submitted=true&intflavor=advanced&origurl=%2Ftools%2Fquotes%2Fintchart.asp&time=20&freq=2&comp=Enter%20Symbol(s)%3A&compidx=aaaaa~0&compind=aaaaa~0&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=1&optstyle=1013http://stockcharts.com/h-sc/ui?s=$USD&p=D&b=5&g=0&id=p24077287617http://stockcharts.com/h-sc/ui?s=$USD&p=D&b=5&g=0&id=p24077287617http://stockcharts.com/h-sc/ui?s=$USD&p=D&b=5&g=0&id=p24077287617http://www.federalreserve.gov/releases/z1/current/z1r-5.pdfhttp://www.federalreserve.gov/releases/z1/current/z1r-5.pdfhttp://www.washingtonpost.com/business/us-household-wealth-tops-pre-recession-peak-on-rising-stock-market-and-higher-home-prices/2013/03/08/cd17fdfe-87ad-11e2-a80b-3edc779b676f_story.htmlhttp://www.washingtonpost.com/business/us-household-wealth-tops-pre-recession-peak-on-rising-stock-market-and-higher-home-prices/2013/03/08/cd17fdfe-87ad-11e2-a80b-3edc779b676f_story.htmlhttp://ycharts.com/indicators/total_assets_balance_sheet_of_households_and_nonprofit_organizations_unadjusted#series=type:indicator,id:total_assets_balance_sheet_of_households_and_nonprofit_organizations_unadjusted,calc:&zoom=10&startDate=&endDate=&format=real&recessions=falsehttp://ycharts.com/indicators/total_assets_balance_sheet_of_households_and_nonprofit_organizations_unadjusted#series=type:indicator,id:total_assets_balance_sheet_of_households_and_nonprofit_organizations_unadjusted,calc:&zoom=10&startDate=&endDate=&format=real&recessions=falsehttp://www.research.stlouisfed.org/fred2/series/FYFSDhttp://www.research.stlouisfed.org/fred2/series/FYFSDhttp://www.washingtonpost.com/business/economy/running-in-the-red-how-the-us-on-the-road-to-surplus-detoured-to-massive-debt/2011/04/28/AFFU7rNF_story.htmlhttp://www.washingtonpost.com/business/economy/running-in-the-red-how-the-us-on-the-road-to-surplus-detoured-to-massive-debt/2011/04/28/AFFU7rNF_story.htmlhttp://www.washingtonpost.com/business/economy/running-in-the-red-how-the-us-on-the-road-to-surplus-detoured-to-massive-debt/2011/04/28/AFFU7rNF_story.htmlhttp://www.washingtonpost.com/business/economy/running-in-the-red-how-the-us-on-the-road-to-surplus-detoured-to-massive-debt/2011/04/28/AFFU7rNF_story.htmlhttp://research.stlouisfed.org/fred2/series/BOPGSTBhttp://research.stlouisfed.org/fred2/series/BOPGSTBhttp://www.marketwatch.com/story/were-worrying-about-the-wrong-deficit-2011-04-13http://www.marketwatch.com/story/were-worrying-about-the-wrong-deficit-2011-04-13http://www.marketwatch.com/story/were-worrying-about-the-wrong-deficit-2011-04-13http://www.washingtonpost.com/wp-dyn/content/article/2010/10/21/AR2010102100306.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/10/21/AR2010102100306.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/10/21/AR2010102100306.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/10/21/AR2010102100306.htmlhttp://stockcharts.com/h-sc/ui?s=$BDI&p=W&b=5&g=0&id=p83126497019http://stockcharts.com/h-sc/ui?s=$BDI&p=W&b=5&g=0&id=p83126497019http://www.harperpetersen.com/harpex/harpexRH.do?showData=true&period=7&&checkedIndexes=0&floatleft=0&floatright=0&exponleft=0&exponright=0&indicator=0http://www.harperpetersen.com/harpex/harpexRH.do?showData=true&period=7&&checkedIndexes=0&floatleft=0&floatright=0&exponleft=0&exponright=0&indicator=0http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#chart3:symbol=^gspc;range=5y;compare=unp+csx+ups+^djt;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#chart3:symbol=^gspc;range=5y;compare=unp+csx+ups+^djt;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://www.bts.gov/xml/tsi/src/index.xmlhttp://www.bts.gov/xml/tsi/src/index.xmlhttp://www.bts.gov/xml/tsi/src/index.xmlhttp://www.bts.gov/xml/tsi/src/index.xmlhttp://www.bts.gov/xml/tsi/src/index.xmlhttp://www.bts.gov/publications/bts_transportation_trends_in_focus/2009_09_01/html/entire.htmlhttp://www.bts.gov/publications/bts_transportation_trends_in_focus/2009_09_01/html/entire.htmlhttp://www.bts.gov/publications/bts_transportation_trends_in_focus/2009_09_01/html/entire.htmlhttp://www.bts.gov/publications/bts_transportation_trends_in_focus/2009_09_01/html/entire.htmlhttp://www.harperpetersen.com/harpex/harpexRH.do?showData=true&period=7&&checkedIndexes=0&floatleft=0&floatright=0&exponleft=0&exponright=0&indicator=0http://www.harperpetersen.com/harpex/harpexRH.do?showData=true&period=7&&checkedIndexes=0&floatleft=0&floatright=0&exponleft=0&exponright=0&indicator=0http://www.harperpetersen.com/harpex/harpexRH.do?showData=true&period=7&&checkedIndexes=0&floatleft=0&floatright=0&exponleft=0&exponright=0&indicator=0http://stockcharts.com/h-sc/ui?s=$TRAN&p=W&b=5&g=0&id=p67301153609http://en.wikipedia.org/wiki/Dow_theoryhttp://en.wikipedia.org/wiki/Dow_theoryhttp://en.wikipedia.org/wiki/Dow_theoryhttp://www.marketwatch.com/story/true-meaning-of-dow-transports-weakness-2012-09-25?link=home_carouselhttp://www.marketwatch.com/story/true-meaning-of-dow-transports-weakness-2012-09-25?link=home_carouselhttp://www.marketwatch.com/story/true-meaning-of-dow-transports-weakness-2012-09-25?link=home_carouselhttp://en.wikipedia.org/wiki/Baltic_Dry_Indexhttp://en.wikipedia.org/wiki/Baltic_Dry_Indexhttp://en.wikipedia.org/wiki/Baltic_Dry_Indexhttp://www.slate.com/id/2090303/http://www.slate.com/id/2090303/http://www.slate.com/id/2090303/http://www.slate.com/id/2090303/http://research.stlouisfed.org/fred2/series/BOPGSTBhttp://www.research.stlouisfed.org/fred2/series/FYFSDhttp://research.stlouisfed.org/fred2/series/PERMIT?cid=97http://www.slate.com/id/2090303/http://www.slate.com/id/2090303/http://en.wikipedia.org/wiki/Baltic_Dry_Indexhttp://www.marketwatch.com/story/true-meaning-of-dow-transports-weakness-2012-09-25?link=home_carouselhttp://en.wikipedia.org/wiki/Dow_theoryhttp://stockcharts.com/h-sc/ui?s=$TRAN&p=W&b=5&g=0&id=p67301153609http://www.harperpetersen.com/harpex/harpexRH.do?showData=true&period=7&&checkedIndexes=0&floatleft=0&floatright=0&exponleft=0&exponright=0&indicator=0http://www.bts.gov/publications/bts_transportation_trends_in_focus/2009_09_01/html/entire.htmlhttp://www.bts.gov/publications/bts_transportation_trends_in_focus/2009_09_01/html/entire.htmlhttp://www.bts.gov/xml/tsi/src/index.xmlhttp://www.bts.gov/xml/tsi/src/index.xmlhttp://www.bts.gov/xml/tsi/src/index.xmlhttp://www.bts.gov/xml/tsi/src/index.xmlhttp://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#chart3:symbol=^gspc;range=5y;compare=unp+csx+ups+^djt;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://www.harperpetersen.com/harpex/harpexRH.do?showData=true&period=7&&checkedIndexes=0&floatleft=0&floatright=0&exponleft=0&exponright=0&indicator=0http://stockcharts.com/h-sc/ui?s=$BDI&p=W&b=5&g=0&id=p83126497019http://www.washingtonpost.com/wp-dyn/content/article/2010/10/21/AR2010102100306.htmlhttp://www.washingtonpost.com/wp-dyn/content/article/2010/10/21/AR2010102100306.htmlhttp://www.marketwatch.com/story/were-worrying-about-the-wrong-deficit-2011-04-13http://research.stlouisfed.org/fred2/series/BOPGSTBhttp://www.washingtonpost.com/business/economy/running-in-the-red-how-the-us-on-the-road-to-surplus-detoured-to-massive-debt/2011/04/28/AFFU7rNF_story.htmlhttp://www.washingtonpost.com/business/economy/running-in-the-red-how-the-us-on-the-road-to-surplus-detoured-to-massive-debt/2011/04/28/AFFU7rNF_story.htmlhttp://www.research.stlouisfed.org/fred2/series/FYFSDhttp://ycharts.com/indicators/total_assets_balance_sheet_of_households_and_nonprofit_organizations_unadjusted#series=type:indicator,id:total_assets_balance_sheet_of_households_and_nonprofit_organizations_unadjusted,calc:&zoom=10&startDate=&endDate=&format=real&recessions=falsehttp://www.washingtonpost.com/business/us-household-wealth-tops-pre-recession-peak-on-rising-stock-market-and-higher-home-prices/2013/03/08/cd17fdfe-87ad-11e2-a80b-3edc779b676f_story.htmlhttp://www.washingtonpost.com/business/us-household-wealth-tops-pre-recession-peak-on-rising-stock-market-and-higher-home-prices/2013/03/08/cd17fdfe-87ad-11e2-a80b-3edc779b676f_story.htmlhttp://www.federalreserve.gov/releases/z1/current/z1r-5.pdfhttp://stockcharts.com/h-sc/ui?s=$USD&p=D&b=5&g=0&id=p24077287617http://www.marketwatch.com/investing/index/DXY/charts?countryCode=US&submitted=true&intflavor=advanced&origurl=%2Ftools%2Fquotes%2Fintchart.asp&time=20&freq=2&comp=Enter%20Symbol(s)%3A&compidx=aaaaa~0&compind=aaaaa~0&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=1&optstyle=1013http://www.nytimes.com/2011/02/06/business/06view.html?_r=1&scp=1&sq=shiller&st=csehttp://www.marketwatch.com/story/housing-is-dead-it-cant-hurt-the-economy-2011-03-24?link=home_carouselhttp://research.stlouisfed.org/fred2/series/HOUST?cid=97http://research.stlouisfed.org/fred2/series/PERMIT?cid=97http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5b1%5d%5bid%5d=MZM&s%5b1%5d%5btransformation%5d=pc1http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5b1%5d%5bid%5d=MZM&s%5b1%5d%5btransformation%5d=pc1http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5b1%5d%5bid%5d=M1&s%5b1%5d%5btransformation%5d=pc1


7/18


moving materials by sea. A higher value indicates risingshipping levels and therefore points to economicexpansion.This Wall Street Journal article andthisBloomberg article (1/10/2011)say that the Baltic DryIndex and most other shipping indexes may give a fuzzyindication of world economic activity this year because ofan unusually large number of new ships this year.

Inflation Rate(Consumer Price Index, Rate ofchange, Federal Reserve has set an inflation goal ofroughly 2% and at the current 2.3% inflation we are stillnear the goal. Excellent! It is pretty hard to get scaredabout the inflation boogeyman after you see this graph.This is about as low as inflation has been in ourlifetimes. In the U.S. and other developed economiesinflation is very low deflation still remains the greaterworry. If U.S. inflation resumes, dont worry until itreaches 4% annually (see below). The inflation situationis quite different in developing economies (MSN JimJubak 1/21/2011) where inflation is already at worrisomelevels. How is it that developing nations can have highinflation while the Dollar is crashing? The falling Dollarshould be causing U.S. inflation to skyrocket. The

answer is that developing nations are trying to maintaintheir favorable trade balances by inflating theircurrencies faster than we sink ours.About the indicator: High interest rates whethercaused by inflation or central bank policy tend toprecipitate stock market declines and recessions. Asdiscussed inthis Mark Hulbert MarketWatch.com article,(1/18/2011) rates of inflation greater than 4% tend tocoincide with poor market performance. (Chart below isfrom Mark Hulbert article.)

When trailing 12-monthinflation is...

S&P 500s averagemonthly return since1871 is...

% of months falling intothis category

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%

Current National Financial Activity Index(CFNAI)(Source: Chicago Federal Reserve)Status: This index is weak. It has hovered around zerofor nearly 2 years now, more evidence of the SecondGreat Contraction. This expects economic growth tostagnate for the next couple of monthswhich, at least,is a lot better than being truly rotten.About the Indicator: The Current National Financial

Activity Indexis a weighted measure of total nationalbusiness activity compiled monthly and based on 85economic indicators. Though developed primarily as atool for forecasting inflation,somebelieve that it is abetter indicator than GDP of short term actual economicperformance.

GDP: Potential GDP vs. Real GDP

(Data link at Federal Reserve)

(Use your viewers magnification/zoom setting to beable to read the graph. No, you really should do itthe gap shown in the graph is amazing.)

Status: Four years later, inflation-adjusted GDP is justgetting back to where it was in 2007- 2008. It is still farbelow potential providing room for significant growth.Potential GDP has recently been recalculated andscaled down a bit, but the gap between actual andpotential remains at about 6% -- much higher than anyother historical point.About the indicator: The nonpartisan CongressionalBudget Office maintains a database and econometricmodel of Potential GDP which is the GDP that couldresult if the workforce was fully employed. The graphabove shows both Real GDP and Potential GDP, all inconstant chained 2005 dollars. If you really zoom-in onthe graph you will see that since the late 1940s periodswhere the economy is booming and Real GDP is higherthan Potential GDP tend to end badly the FederalReserve takes away the punch bowl and the party endswith a crashing stock market followed by a recession.Currently the opposite situation exists and the Fed willcontinue to do all that is possible to get the economyperforming better.

Professional Economists Survey of Forecastsfor Inflation, GDP, Unemployment, and Long TermS&P 500 Gains and Cong. Budget Office EconomicOutlookStatus: The 1st quarter 2013 forecasts by a survey of

professional economists are slightly stronger than lastquarter: weak GDP gains (1.9% annual rate for 2013);modest inflation (2.1% headline for 2013); continuinghigh unemployment (8.4%, an improvement, and onlygoing down to 7.4% by 2014) and normal 10-yearaverage expected gains for the S&P 500 (6.1%), but forthe second time, down from the previous survey. All ofwhich point to continuing modest economic growth. Thehigh lingering unemployment is tough for people, but has
http://finance.yahoo.com/banking-budgeting/article/108953/baltic-drying-up-as-a-gaugehttp://finance.yahoo.com/banking-budgeting/article/108953/baltic-drying-up-as-a-gaugehttp://finance.yahoo.com/banking-budgeting/article/108953/baltic-drying-up-as-a-gaugehttp://www.bloomberg.com/news/2011-01-10/freight-rates-poised-to-tumble-as-35-mile-line-of-ships-passes-coal-demand.htmlhttp://www.bloomberg.com/news/2011-01-10/freight-rates-poised-to-tumble-as-35-mile-line-of-ships-passes-coal-demand.htmlhttp://www.bloomberg.com/news/2011-01-10/freight-rates-poised-to-tumble-as-35-mile-line-of-ships-passes-coal-demand.htmlhttp://www.bloomberg.com/news/2011-01-10/freight-rates-poised-to-tumble-as-35-mile-line-of-ships-passes-coal-demand.htmlhttp://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5b1%5d%5bid%5d=CPILFENS&s%5b1%5d%5btransformation%5d=pc1http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5b1%5d%5bid%5d=CPILFENS&s%5b1%5d%5btransformation%5d=pc1http://money.msn.com/investing/prepare-for-the-inflation-fight-now-jubak.aspxhttp://money.msn.com/investing/prepare-for-the-inflation-fight-now-jubak.aspxhttp://money.msn.com/investing/prepare-for-the-inflation-fight-now-jubak.aspxhttp://money.msn.com/investing/prepare-for-the-inflation-fight-now-jubak.aspxhttp://www.marketwatch.com/story/inflation-doesnt-have-to-be-bad-for-stocks-2011-01-18http://www.marketwatch.com/story/inflation-doesnt-have-to-be-bad-for-stocks-2011-01-18http://www.marketwatch.com/story/inflation-doesnt-have-to-be-bad-for-stocks-2011-01-18http://research.stlouisfed.org/fredgraph.png?g=3LVhttp://research.stlouisfed.org/fredgraph.png?g=3LVhttp://research.stlouisfed.org/fredgraph.png?g=3LVhttp://www.chicagofed.org/webpages/publications/cfnai/index.cfmhttp://www.chicagofed.org/webpages/publications/cfnai/index.cfmhttp://www.chicagofed.org/webpages/publications/cfnai/index.cfmhttp://www.marketwatch.com/story/imprecise-data-skews-economic-view-top-forecaster-2011-06-13?dist=beforebellhttp://www.marketwatch.com/story/imprecise-data-skews-economic-view-top-forecaster-2011-06-13?dist=beforebellhttp://www.marketwatch.com/story/imprecise-data-skews-economic-view-top-forecaster-2011-06-13?dist=beforebellhttp://www.research.stlouisfed.org/fred2/graph/?id=GDPC1http://www.research.stlouisfed.org/fred2/graph/?id=GDPC1http://www.research.stlouisfed.org/fred2/graph/?id=GDPC1http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.cbo.gov/publication/43539http://www.cbo.gov/publication/43539http://www.cbo.gov/publication/43539http://www.cbo.gov/publication/43539http://www.cbo.gov/publication/43539http://www.cbo.gov/publication/43539http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.research.stlouisfed.org/fred2/graph/?id=GDPC1http://www.marketwatch.com/story/imprecise-data-skews-economic-view-top-forecaster-2011-06-13?dist=beforebellhttp://www.chicagofed.org/webpages/publications/cfnai/index.cfmhttp://www.chicagofed.org/webpages/publications/cfnai/index.cfmhttp://research.stlouisfed.org/fredgraph.png?g=3LVhttp://research.stlouisfed.org/fredgraph.png?g=3LVhttp://www.marketwatch.com/story/inflation-doesnt-have-to-be-bad-for-stocks-2011-01-18http://money.msn.com/investing/prepare-for-the-inflation-fight-now-jubak.aspxhttp://money.msn.com/investing/prepare-for-the-inflation-fight-now-jubak.aspxhttp://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5b1%5d%5bid%5d=CPILFENS&s%5b1%5d%5btransformation%5d=pc1http://www.bloomberg.com/news/2011-01-10/freight-rates-poised-to-tumble-as-35-mile-line-of-ships-passes-coal-demand.htmlhttp://www.bloomberg.com/news/2011-01-10/freight-rates-poised-to-tumble-as-35-mile-line-of-ships-passes-coal-demand.htmlhttp://finance.yahoo.com/banking-budgeting/article/108953/baltic-drying-up-as-a-gauge


8/18


little relation to near term stock market moves. The CBOforecast has similar conclusions.About the indicator: Next release May 10, 2013. TheSurvey of Professional Forecastersis the oldestquarterly survey of macroeconomic forecasts in theUnited States. The survey began in 1968 and wasconducted by the American Statistical Association andthe National Bureau of Economic Research. The FederalReserve Bank of Philadelphia took over the survey in1990.TheSurvey of Professional Forecasters' web pageoffersthe actual releases, documentation, mean and medianforecasts of all the respondents as well as the individualresponses from each economist. The individualresponses are kept confidential by using identificationnumbers.

Commodity Research Bureau Index(InvestmentTools.com) (CRB site chart)Status The CRB Index has been weak indicatingrelatively limp demand in the economy. Not so good.The mildly good news is that i t isnt falling badly.About the Indicator: If the stuff we use to make things

costs more, thats probably a good sign that at leastpeople are trying to make things. When it is flat likenow it is a sign of stagnation. TheCommoditiesResearch Bureau (CRB)Index (Wikipedia description)represents a market basket of futures prices for majorworld commodities. According to CRB: Thecommodities used are in most cases either rawmaterials or products close to the initial productionstage which, as a result of daily trading in fairly largevolume of standardization qualities, are particularlysensitive to factors affecting current and futureeconomic forces and conditions. Highly fabricatedcommodities are not included for two reasons: (1) they

embody relatively large fixed costs which fact causesthem to react less quickly to changes in marketconditions; and (2) they are less important as pricedeterminants than the more basic commodities whichare used throughout the producing economy. The CRB

Index measure is further influenced by the fact that itis measured in U.S. Dollars so a fall in the Dollar willautomatically make it appear that world commodityprices have shot up.

Corporate Profits (St. Louis Federal Reserve)Domestic Income)S&P 500 Earnings(data courtesyRobert Shiller, site hosted by Josh Staigner)Philadelphia Federal Reserve Survey of Professional

ForecastersStatus: Corporate profits are well above pre-recessionlevels, though still down a bit from late 2011. Liquidassetsavailable for new investment are extremely high.Now that profits have returned, the forecasted annualrates of profit growth are down to normal levels.

About the Indicator: Rising corporate profits is whatstock market investing is all about. The U.S. Departmentof Commerce, Bureau of Economic Analysis posts

quarterly results of U.S. economic performance. Here isa primer on the BEA National Income and Product

Account data.
http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.investmenttools.com/futures/crb_index.htmhttp://www.investmenttools.com/futures/crb_index.htmhttp://www.crbtrader.com/data.asp?page=chart&sym=BZY00&domain=crb&studies=Volume;&cancelstudy=&a=Whttp://www.crbtrader.com/data.asp?page=chart&sym=BZY00&domain=crb&studies=Volume;&cancelstudy=&a=Whttp://www.crbtrader.com/data.asp?page=chart&sym=BZY00&domain=crb&studies=Volume;&cancelstudy=&a=Whttp://www.crbtrader.com/http://www.crbtrader.com/http://www.crbtrader.com/http://www.crbtrader.com/http://en.wikipedia.org/wiki/Commodity_Research_Bureauhttp://en.wikipedia.org/wiki/Commodity_Research_Bureauhttp://en.wikipedia.org/wiki/Commodity_Research_Bureauhttp://research.stlouisfed.org/fredgraph.png?g=bLNhttp://www.multpl.com/s-p-500-earnings/http://www.multpl.com/s-p-500-earnings/http://www.multpl.com/s-p-500-earnings/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/CPROF/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/CPROF/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/CPROF/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/CPROF/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/CPROF/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/CPROF/http://research.stlouisfed.org/fredgraph.png?g=bLQhttp://research.stlouisfed.org/fredgraph.png?g=bLQhttp://research.stlouisfed.org/fredgraph.png?g=bLQhttp://www.bea.gov/national/pdf/nipa_primer.pdfhttp://www.bea.gov/national/pdf/nipa_primer.pdfhttp://www.bea.gov/national/pdf/nipa_primer.pdfhttp://www.bea.gov/national/pdf/nipa_primer.pdfhttp://www.bea.gov/national/pdf/nipa_primer.pdfhttp://www.bea.gov/national/pdf/nipa_primer.pdfhttp://www.bea.gov/national/pdf/nipa_primer.pdfhttp://research.stlouisfed.org/fredgraph.png?g=bLQhttp://research.stlouisfed.org/fredgraph.png?g=bLQhttp://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/CPROF/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/CPROF/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/CPROF/http://www.multpl.com/s-p-500-earnings/http://research.stlouisfed.org/fredgraph.png?g=bLNhttp://en.wikipedia.org/wiki/Commodity_Research_Bureauhttp://www.crbtrader.com/http://www.crbtrader.com/http://www.crbtrader.com/data.asp?page=chart&sym=BZY00&domain=crb&studies=Volume;&cancelstudy=&a=Whttp://www.investmenttools.com/futures/crb_index.htmhttp://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/


9/18


C

None of these short-term tell tales are part of my 6-month forecasting model. At best they may help to finetune a buying or selling opportunity. (i.e. Buy the dip.)

Any of my trend guesses here will probably be out ofdate by the time you read this.

For the part-time investor trend following is dangerousyou enter the trend too late and miss most of the gains.Then the inevitable crash happens before you can reactin time. Using short term trading indicators is a lot likeplaying a carnival game it looks so simple, butsomehow you always lose. But, if you want to look atwhat is likely for the next couple of months, I like the firsttwo of these indicators best.

NYSE New Highs minus New Lows(StockCharts.com)Status: Clear sailing again..

About the indicator: I like this short term indicator ofthe broad stock market as it is really easy to read,

changes infrequently, and tends to lead the marketaverages. A bullish signal occurs when the ratio is in anuptrend. Longer term investors will mainly pay attentionto the Weekly view lower on the page

Consumer versus Cyclical Stocks(StockCharts.com)Status: Bounced back up again in the strong May rally.About this indicator: In thisMSN MoneyCentral article(11/18/2011) Anthony Mirhaydari makes a case thatcyclical stocks beating consumer staples is a sign of abull market and vice versa

Emerging Markets versus Consumer Staples

Status: This chart has been negative for years, a sign ofrisk averseness. Often foreign stocks lead the U.S.market.About this indicator: Are investors turning to riskieremerging market stocks, or just hunkering down with oldreliable blue chips?

Stocks versus BondsStatus: Both Daily and Weekly charts are positive.About this Indicator: In theory, over the long haulholding bonds should give about the same yield asholding stocks. This chart shows how a bond fund isfaring against a stock fund.

% Stocks Trading Above 50-Day Average(StockCharts.com) Broader Market(Barchart.com coversapproximately 5,000 stocks)Status: Going down is a pullback underway?About the indicator: This is a very short term indicatorfor whether the market is overbought or oversold. Theworry point is above 80%. The turn-around point is ataround 20% to 30%.

MACD S&P 500: Moving Index AverageConvergence / DivergenceStatus:The fast moving average is above the slow

average good.About this Indicator: Fidelity Investments has a goodarticle on back- testing various MACD strategies here.

After all is said and done, Im afraid that all of it soundslike both mumbo and jumbo.

Moving averages are plots of the arithmetic orexponential mean of prices for some period of time in thepast. The one shown in the link is the S&P 500, themost commonly followed average for MACD charts. TheMoving Average Convergence Divergence is a plot oftwo moving averages; a slow moving average thatincludes more days than the second fast average. Apositive divergence occurs when the fast average hasrisen above the level of the slow average. I am notreally a big fan of these moving averages. If you usevery long time periods for your MACD then it generatesbuy and sell signals too late to be of real value. Usingshorter periods for your MACD graph generates manymore false buy and sell signals.


Trader Signals - FastTrader Signals - SlowInternationalViewEconometric Models

About This Forecast


Trader Signals Fast (well, relatively fast)
http://stockcharts.com/charts/gallery.html?$NYHLhttp://stockcharts.com/charts/gallery.html?$NYHLhttp://stockcharts.com/h-sc/ui?s=%24CYC:XLP&p=D&b=5&g=0&id=p85973789034http://stockcharts.com/h-sc/ui?s=%24CYC:XLP&p=D&b=5&g=0&id=p85973789034http://money.msn.com/investment-advice/article.aspx?post=9e8bca86-4f70-449d-92e1-3daf7b0837d7http://money.msn.com/investment-advice/article.aspx?post=9e8bca86-4f70-449d-92e1-3daf7b0837d7http://money.msn.com/investment-advice/article.aspx?post=9e8bca86-4f70-449d-92e1-3daf7b0837d7http://stockcharts.com/h-sc/ui?s=EEM:XLP&p=W&b=5&g=0&id=p50223770207http://stockcharts.com/h-sc/ui?s=EEM:XLP&p=W&b=5&g=0&id=p50223770207http://stockcharts.com/h-sc/ui?s=IVV:IEF&p=D&b=5&g=0&id=p04923955819http://stockcharts.com/h-sc/ui?s=$spxa50rhttp://stockcharts.com/h-sc/ui?s=$spxa50rhttp://www.barchart.com/stocks/momentum.phphttp://www.barchart.com/stocks/momentum.phphttp://stockcharts.com/h-sc/ui?s=$SPX&p=W&b=5&g=0&id=p32425078812http://stockcharts.com/h-sc/ui?s=$SPX&p=W&b=5&g=0&id=p32425078812http://stockcharts.com/h-sc/ui?s=$SPX&p=W&b=5&g=0&id=p32425078812https://guidance.fidelity.com/viewpoints/measuring-the-macdhttps://guidance.fidelity.com/viewpoints/measuring-the-macdhttps://guidance.fidelity.com/viewpoints/measuring-the-macdhttp://stockcharts.com/h-sc/ui?s=$SPX&p=W&b=5&g=0&id=p32425078812http://stockcharts.com/h-sc/ui?s=$SPX&p=W&b=5&g=0&id=p32425078812http://www.barchart.com/stocks/momentum.phphttp://stockcharts.com/h-sc/ui?s=$spxa50rhttp://stockcharts.com/h-sc/ui?s=IVV:IEF&p=D&b=5&g=0&id=p04923955819http://stockcharts.com/h-sc/ui?s=EEM:XLP&p=W&b=5&g=0&id=p50223770207http://money.msn.com/investment-advice/article.aspx?post=9e8bca86-4f70-449d-92e1-3daf7b0837d7http://stockcharts.com/h-sc/ui?s=%24CYC:XLP&p=D&b=5&g=0&id=p85973789034http://stockcharts.com/charts/gallery.html?$NYHL


10/18


NYSE Daily - Weekly Advance Decline Line(StockCharts.com)Status: Slammed down to an unusually low levelnormally a contrarian positive indicator.About the indicator: Often market breadth (A simpleratio of how many stocks go up vs. down.) leads actualswings of index prices.These charts are only for traders or for picking anauspicious moment to buy or sell. The initial view of thisshort term indicator is daily Advances-Declines -- Do agood few days follow a bad few days or what? Reset thechart to see a weekly view, again using the line viewType rather than the "candlestick: view. Every few weeksthe market tends to get overextended creating arelatively good time to trade. Buy when the weekly linehas plummeted and starts to rise; sell when it hits adangerous peak and turns down.

VIX - Implied Market Volatility(StockCharts.com.)Status: The fear gage has turned up from an incrediblylow level. The market is way overdue for some badnews. About the indicator: The CBOE (Chicago Board

Options Exchange) Volatility Index (VIX) measuresmarket expectations of near-term volatility conveyed bystock index option prices. According to the CBOE "sinceits introduction in 1993, VIX has been considered bymany to be the world's premier barometer of investorsentiment and market volatility". When the VIX shoots upyou are in the midst of a crisis - if you didn't know thatalready from the rapidly crashing stock market.InthisAugust, 2011 MarketWatch.com article MarkHulbert describes a very simple VIX strategy: avoid thestock market for the coming month if the VIX reading isabove, say, 20 which he notes is approximately themedian VIX level for the last two decades. Hopefully the

VIX signal will come early enough to help avoiddeveloping market crashes. The negative side is that itwill also lead to missing sharp market rebounds. Forexample, following it would have led to missing nearlythe entire market rebound from the crash of the winter of2008-2009. Historically, this VIX strategy performsslightly better than a buy-and-hold strategy.

Viewing Multiple Stock Markets(Click to themaximum time frame view)Status: Is the current downturn just a blip? Emergingmarkets have been the weakest.About the indicator: TheDow-30and theS&P-500arewhat most people usually thing of as 'The Stock Market.'Take a look at some of these other long term graphs. Iprefer:

Value Line Arithmetic Index (VAY) (My preferredstock market index.Status: Going strong.About the indicator: Taking a many-year view, thisremarkably consistent index appears to have nearlycaught up with its long term trend -- making the slingshot

rebound from the crash of 2008-2009 weaker The ValueLine Arithmetic Average includes the top 1700companies in the U.S. -- all weighted equally. (Similarequal weight ETFs are EWRI and RSP) Historically, thearithmetic index it has had an amazingly consistentgrowth pattern, much steadier than the Dow 30, S&P500, or NASDAQ Composite indices. Because of theequal weighting, portfolio rebalancing is built-in. As aresult, besides being more predictable, the equal weightindex will regularly outperform a conventional index ofthe same stocks. Until recently it was not possible to buyan equal weight EFT, but now a number ofequal-weightindex fund ETFssuch as EWRI and RSP have beenintroduced. They have only been around a few months,but so far they appear to have very similar tracks to theValue Line Arithmetic Index. Good news!

EEMThe MSCI Emerging Markets Fund representsvaluations of the developing markets that have thegreatest potential for growth. Emerging markets havebeen at a plateau since early 2010. Profits need to grow,but this average still is well below trend. A new equalweight emerging market ETF isEWEM.
http://stockcharts.com/h-sc/ui?s=$NYAD&p=W&b=5&g=0&id=p65777657866http://stockcharts.com/h-sc/ui?s=$VIX&p=W&b=5&g=0&id=p96397516333http://stockcharts.com/h-sc/ui?s=$VIX&p=W&b=5&g=0&id=p96397516333http://www.marketwatch.com/story/using-the-vix-to-spike-august-returns-2011-08-01http://www.marketwatch.com/story/using-the-vix-to-spike-august-returns-2011-08-01http://www.marketwatch.com/story/using-the-vix-to-spike-august-returns-2011-08-01http://finance.yahoo.com/echarts?s=%5eVAY#chart1:symbol=^vay;range=1y;compare=eem+^dji+îxic+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eVAY#chart1:symbol=^vay;range=1y;compare=eem+^dji+îxic+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eDJU#chart1:symbol=^dju;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eDJU#chart1:symbol=^dju;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eDJU#chart1:symbol=^dju;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eGSPC#chart2:symbol=^gspc;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eGSPC#chart2:symbol=^gspc;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eGSPC#chart2:symbol=^gspc;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eVAY#chart1:symbol=^vay;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://www.marketwatch.com/story/equal-weight-etfs-tip-investment-returns-2010-12-19http://www.marketwatch.com/story/equal-weight-etfs-tip-investment-returns-2010-12-19http://www.marketwatch.com/story/equal-weight-etfs-tip-investment-returns-2010-12-19http://www.marketwatch.com/story/equal-weight-etfs-tip-investment-returns-2010-12-19http://finance.yahoo.com/echarts?s=EEM#chart1:symbol=eem;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=EEM#chart1:symbol=eem;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://stockcharts.com/h-sc/ui?s=EWEM&p=D&b=5&g=0&id=p54634918693http://stockcharts.com/h-sc/ui?s=EWEM&p=D&b=5&g=0&id=p54634918693http://stockcharts.com/h-sc/ui?s=EWEM&p=D&b=5&g=0&id=p54634918693http://stockcharts.com/h-sc/ui?s=EWEM&p=D&b=5&g=0&id=p54634918693http://finance.yahoo.com/echarts?s=EEM#chart1:symbol=eem;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://www.marketwatch.com/story/equal-weight-etfs-tip-investment-returns-2010-12-19http://www.marketwatch.com/story/equal-weight-etfs-tip-investment-returns-2010-12-19http://finance.yahoo.com/echarts?s=%5eVAY#chart1:symbol=^vay;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eGSPC#chart2:symbol=^gspc;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eDJU#chart1:symbol=^dju;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://finance.yahoo.com/echarts?s=%5eVAY#chart1:symbol=^vay;range=1y;compare=eem+^dji+îxic+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefinedhttp://www.marketwatch.com/story/using-the-vix-to-spike-august-returns-2011-08-01http://stockcharts.com/h-sc/ui?s=$VIX&p=W&b=5&g=0&id=p96397516333http://stockcharts.com/h-sc/ui?s=$NYAD&p=W&b=5&g=0&id=p65777657866


11/18


Several of these slow moving trading indicators mayseem far-fetched, irrational or bizarre. None the less, afew are probably the most helpful market timing tools fora part-time investor. The old adage of Sell in May leadsthe pack with a documented track record going backseveral hundred years.

The Second Great Contraction(link to This Time isDifferent: Eight Centuries of Financial Follyat

Amazon.com)Status: The world still teeters at the edge of aneconomic abyss that threatens to come from creditdisruption. The U.S. and the rest of the world are onlymid-way through the world-wide economic debt collapsethat began in 2007. Typically, economic pains fromcredit destruction last much longer than ordinaryrecessions (Ezra Klein, Washington Post 10/9/2011) .Slow growth is the best that can be expected for years tocome. (IMF) Risk remains that cascading debt defaults,especially from sovereign debt collapse in Europe, cancascade into a world-wide economic collapse.Unfortunately, mistakes by any number of fairly

independent players still can bring on the nightmare atmost any time.About the indicator: Reinhart and Rogoff powerfullydemonstrate in This Time is Differentthe currenteconomic trauma is more like the Great Depression thanany of the comparatively short-lived recessions thatoccurred since then. The resolution of our Second GreatContraction, as Rogoff calls it, will most probably takeseveral more years. Because of government-createdincredibly low interest rates, the worst may already beover for stocks. Since borrowing costs will remainabnormally low for years, corporate profits may remainstrong despite continuing economic pain. This is not a

market for the faint of heart, but it may also be seen asthe early stages of a tremendous long term growthmarket.

Sell in May IndicatorStatus: For the past two years people seem to have

jumped the gun and started to sell in April rather thanMay. In April that appeared to be the case again butthem the market sailed up in May.About the indicator:Hereis an update from MarkHulbert on the Halloween Indicator still going strong. Ifyou had to pick just a single stock market timing signal,this old and crazy-seeming one might well be the best.Statistically, performance of stock markets worldwideduring the summer months is not as good as during thewinter. When the market crashes it usually is duringSeptember and October. The summer - winter tradingpattern has been shown to occur in many markets worldwide for the past several hundred years.ThisMarkHulbert article from MarketWatch.com cites a definitivestudy showing that the pattern has been valid for at least317 years in the U.K. This MarketWatch column by SyHardingsummarizes his variant on the approach whichincludes also being invested on holidays. My ownanalyses show that the Sellin May or Halloween

effect is greatest when the economy is heading into arecession. On the other hand, when coming out of arecession the effects of a rising economy overpower thesemiannual pattern.

According to a Charles Schwab report (5/14/2012) thereappears to be a distinct split among sectors inseasonality as shown in the table below.

Select to view:Overview

Market Valuation MeasuresEconomic Indicators

Trader Signals - FastTrader Signals SlowInternational ViewEconometric Models

About This Forecast


Trader Signals Slow Moving
http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165http://www.washingtonpost.com/business/financial-crisis-and-stimulus-could-this-time-be-different/2011/10/04/gIQALuwdVL_story.htmlhttp://www.washingtonpost.com/business/financial-crisis-and-stimulus-could-this-time-be-different/2011/10/04/gIQALuwdVL_story.htmlhttp://www.washingtonpost.com/business/financial-crisis-and-stimulus-could-this-time-be-different/2011/10/04/gIQALuwdVL_story.htmlhttp://www.washingtonpost.com/business/financial-crisis-and-stimulus-could-this-time-be-different/2011/10/04/gIQALuwdVL_story.htmlhttp://www.marketwatch.com/story/imf-key-economies-to-be-fragile-for-several-years-2011-10-03?dist=beforebellhttp://www.marketwatch.com/story/imf-key-economies-to-be-fragile-for-several-years-2011-10-03?dist=beforebellhttp://www.marketwatch.com/story/imf-key-economies-to-be-fragile-for-several-years-2011-10-03?dist=beforebellhttp://www.marketwatch.com/story/imf-key-economies-to-be-fragile-for-several-years-2011-10-03?dist=beforebellhttp://www.marketwatch.com/story/will-halloween-come-early-this-year-2012-10-05http://www.marketwatch.com/story/will-halloween-come-early-this-year-2012-10-05http://www.marketwatch.com/story/will-halloween-come-early-this-year-2012-10-05http://www.marketwatch.com/story/the-halloween-indicator-kicks-into-gear-2010-10-29http://www.marketwatch.com/story/the-halloween-indicator-kicks-into-gear-2010-10-29http://www.marketwatch.com/story/the-halloween-indicator-kicks-into-gear-2010-10-29http://www.marketwatch.com/news/story/if-you-sold-may-should/story.aspx?guid=%7B0D95807D-0AEF-4EC9-B852-215D5F664605%7Dhttp://www.marketwatch.com/news/story/if-you-sold-may-should/story.aspx?guid=%7B0D95807D-0AEF-4EC9-B852-215D5F664605%7Dhttp://www.marketwatch.com/news/story/if-you-sold-may-should/story.aspx?guid=%7B0D95807D-0AEF-4EC9-B852-215D5F664605%7Dhttp://internet.statestreet.com/industry_insights/investor_confidence_index/ici_overview.htmlhttp://www.marketwatch.com/news/story/if-you-sold-may-should/story.aspx?guid=%7B0D95807D-0AEF-4EC9-B852-215D5F664605%7Dhttp://www.marketwatch.com/news/story/if-you-sold-may-should/story.aspx?guid=%7B0D95807D-0AEF-4EC9-B852-215D5F664605%7Dhttp://www.marketwatch.com/story/the-halloween-indicator-kicks-into-gear-2010-10-29http://www.marketwatch.com/story/will-halloween-come-early-this-year-2012-10-05http://www.marketwatch.com/story/imf-key-economies-to-be-fragile-for-several-years-2011-10-03?dist=beforebellhttp://www.marketwatch.com/story/imf-key-economies-to-be-fragile-for-several-years-2011-10-03?dist=beforebellhttp://www.marketwatch.com/story/imf-key-economies-to-be-fragile-for-several-years-2011-10-03?dist=beforebellhttp://www.washingtonpost.com/business/financial-crisis-and-stimulus-could-this-time-be-different/2011/10/04/gIQALuwdVL_story.htmlhttp://www.washingtonpost.com/business/financial-crisis-and-stimulus-could-this-time-be-different/2011/10/04/gIQALuwdVL_story.htmlhttp://www.washingtonpost.com/business/financial-crisis-and-stimulus-could-this-time-be-different/2011/10/04/gIQALuwdVL_story.htmlhttp://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165


12/18


Investor Sentiment (AAII InvestorSentiment Guide)(Barrons.com InvestorSentimentpage)Status: Some people pay serious attention to theseindicators. I dont.About the Indicator: Investor sentiment tends to be acontrarian indicator. When there are vastly more Bullsthan Bears, it is time to worry! When you have a badsinking feeling in your gut, you probably should be abuyer of stocks. Retail investors follow trends, but theydont lead them. As a result, they are usually late to theparty. When too many people get to any party, the policeusually come to bust it up. Peaks in investor sentimentusually lead the market by a few months. As Brett

Arends, a writer for the Wall Street Journal notesin thisMSN article on Why Market Timing Works our feelingsare terrible guides.

The American Association of Individual Investorspublishes a weekly surveyof member sentiment (bullish/ bearish / neutral. According to AAII,the currenthistorical averages are bullish 39% (standard deviationof 10.7 percentage points), neutral 31% (standard

deviation of 9 percentage points) and bearish 30%

(standard deviation of 10 percentage points).Thisarticle at the AAII websitecovers a statistical analysis

that verifies the sentiment survey as a solid contrarianindicator: danger lies ahead if investors get too bullish.

First Year of the Preidential Election Cycle(Mark Hulbert, MarketWatch.com)Status: It depends which stock market average isreviewed and for what historical period, but overall, thefirst year of the presidential cycle tends to be weak Thefact that we are in a major long term financial crisis,however, probably trumps this cyclic indicator as theFederal Reserve still is pushing the economy up with

historically low interest rates.About the Indicator:According to Mark Hulbert'sstatistical calculationsof the Dow Jones Industrials since1896 there is statistical validity at the 95% confidencelevel that year 3 of the presidential election cycle yieldsoutsize gains. Year 4 should also produce some gains.Year 2 typically yields nearly zero.

Stock Market Slow Moving Average(StockCharts.com 12 month SP-500 moving average)Status: In mid-November the index dropped down totouch the moving average, then bounced up. That is

generally considered to be a sign of strength.About the indicator: In my analysis, the movingaverage indicator had a poor track record for my favoritemarket average, the Value Line Arithmetic AverageIndex, in the years between 1985 and 2010 it wasusually better to bet against the long term movingaverage indicator! Since 1985 at my 6-month decisionpoints (October and May) where the Index price wasBELOW the 200-day moving average the average gains

were 9% in the next six months versus only 6% gainswhen Index value was ABOVE the moving average. Atthose times when the Index was below its 200-daymoving average it was right 2 out of 7 times not verygood. My conclusion: Most of the time (80%) thisindicator gives a positive reading which has littlepredictive value, but in the few instances when the Indexis significantly below the moving average, a marketpanic is probably in full swing and you should be startingto think about buying again! Mark Hulbertseems toagree that this indicator now fails to work.

% Stocks Trading Above 200-Day MovingAverage(stockcharts.com covers S&P-500 stock)Status: The S&P 500 is 93%, high enough to worryabout.About the indicator: As a general rule, when a stock's

price is above its 200-day moving average, the stock hasbeen in a long-term price rise. So, an increasingpercentage of stocks priced above their 200-day movingaverage is generally a good sign. However, when 80%to 90% of stocks are trading above their averages it isusually a signal that euphoria has gotten out of hand and

a market correction is due. Similarly, when only 20% to30% of stocks are trading above average, a sharp bullishupswing becomes very likely.

NYSE Advance-Decline Line (cumulative)(InvestmentTools.com))Status: Still points up. Good.About the indicator: The indicator is a cumulative counof advances on the NYSE minus declines since 1996.Click to the 5-year view. This good MID-TERM indicatortends to form a rounded to

TomT Stock Market Model 2013-05-31

Documents

Transcript of TomT Stock Market Model 2013-05-31