TomT Stock Market Model 2012-11-05

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Copyright 2011 Tom Tiedeman, Washington, D.C. All rights reserved. 1This private letter tries to provide somewhat objective research, not investment advice.

The Next Months: Nice Gains If We DontFall Off the Cliff

My econometric models of the stock market are basedon just a few basic macroeconomic variables tied to theU.S. economy and stock markets. They are far fromomniscient. The models forecast a super 19% gain forthe broad stock market from now through the end ofMay, 2013. However, the models dont consider thingslike the loomingFiscal Cliff or the continuing Europeansovereign debt mess. So, I discount the forecast. I thinka 10% gain is a more realistic bet for the next 6 months.As long as the economy remains below par, there will beroom for growth.

The models give about 95% likelihood that there will at

least be some net stock price gain over the period. Themodels also see a less than 50% chance of an 8%temporary drop during the next half year. Id discountthis prediction due to the looming Cliff it is hard toimagine Congress quickly agreeing to a budgetcompromise. There is unfortunately a real risk that aprolonged stalemate will exist, probably upsetting stockmarkets.

How did my forecasts work out in the pasthalf year? Rather close.The model forecasted a 10% gain. I personallydiscounted that to a 6% gain. And the actual was 8.7%

gain.

.

Market Valuation MeasuresSeveral measures see the stock market as somewhatundervalued. However, the indicator Warren Buffet likes

best says it is slightly overvalued. I favor theundervalued argument for the next six months.

Economic IndicatorsOnly about 17% of U.S. economists expect a secondround of recession in the U.S. Most Composite LeadingEconomic Indicators anticipate slow growth rather thanrecession for the U.S.. Business profits should continueto be high as debt costs are at the lowest relative levelsin several hundred years and businesses already arelean. Though profits may stay high, there isnt muchroom for quick expansion. Too bad, thats what themarket likes.

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 it favorsmonths.

International View

Tough economic times and below-normal growth spanmost of the world. Growth estimates generally are belownormal. Emerging economies will probably have fastergrowth than major developed nations. The greatest fearsare for sovereign defaults in Europe or a hard landingin China. The kind of sovereign debt crisis that faces theworld is nothing radically new. Historically, the only pathout (lasting several years) is heavy inflation. Germany isblocking that path for Europe so collapse remains apossibility.

Econometric ModelsMost number crunchers, my aspiration, conclude that the

economy is still bad enough that it will likely keep gettingsomewhat better sooner or later... Reversion to themean is working in our favor times are tough soeventually they are likely to improve. The pull backtoward the mean, however, is not as strong as it hasbeen for the past 3 years.

Six-Month Stock Market Indicators November 5, 2011Over 50 mid-term market timing guides that might be helpful

Overview


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Copyright 2012 Tom Tiedeman, Washington, D.C. All rights reserved. 2This is research, not investment advice.

Still more than fully invested. (Margined)

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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 is 5% below fair value, andimproving. For the past two years this indicator has notbeen able to break out of the undervalued band.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 (BarronsStatus: The current market price-to-book value of about2.3 is well below the typical historical market peakvaluation ratio of approximately 3. At the pit of the 2008-2009 crash the ratio sank to 1.5.About the indicator: Book Value is the money 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 that

stocks 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.) See alsoDiscounted Cash FlowValuatorfor individual stocksStatus: According to this ratio, at 98.3% the market ismodestly overvalued. Using this factor and interestrates, GuruFocus.com calculates that the market is likely

to produce a below normal annual return of 3.8% goingforward not all that wonderful.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 think seriously about selling

. S&P-500 Price Earnings Ratio Barrons TableandS&P 500 Earnings(The link above is towww.multpl.com, courtesy of Josh Staiger). Sourcedataavailable onlinecourtesy of Robert Shiller and S&P)Status: If you judge by current earnings, the SP 500 at16.0 is fine, but not low. But, going by an average of10-year past earnings, the S&P is still pricey. I side withthe short-term view because the past decade hascontained two very nasty recessions skewing theaverage.About the indicator: Intuitively, the ratio of a stock's

price to the company's earnings should be the keyobjective tool for judging if a stock is properly valued andfor 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 Hulbertarticle, 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)Source

data 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:

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://online.barrons.com/public/page/9_0210-indexespeyields.htmlhttp://www.gurufocus.com/stock-market-valuations.phphttp://www.gurufocus.com/stock-market-valuations.phphttp://www.gurufocus.com/fair_value_dcf.phphttp://www.gurufocus.com/fair_value_dcf.phphttp://www.gurufocus.com/fair_value_dcf.phphttp://www.gurufocus.com/fair_value_dcf.phphttp://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://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.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.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.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.multpl.com/http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/http://www.gurufocus.com/fair_value_dcf.phphttp://www.gurufocus.com/fair_value_dcf.phphttp://www.gurufocus.com/stock-market-valuations.phphttp://online.barrons.com/public/page/9_0210-indexespeyields.htmlhttp://www.morningstar.com/cover/pfvgraph.html


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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 trailingearnings is roughly 21.About the indicator: This popular classic stock market

valuation 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 September VLMAP was atabout 55% -- a sell signal for this long term indicator.About the Indicator: As it has for many years, each week

the Value Line Investment Survey announces an estimate

of the three to five year median appreciation potential forthe 1700 stocks they track. The lowest recent appreciation

estimate was 35% at the previous market high on

7/13/2007. The highest appreciation potential recorded was

185% at the panic market low of 3/9/2009. In general, a

reading of 55% points to a sell and 100% signals buy

according tothisMark Hulbert MarketWatch.com article

.
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.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


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Despite all of its semi-random craziness, eventually thestock 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(YCharts.com)Conference Board Leading Economic IndexOrganization for Economic Cooperation andDevelopment.Status: Most composite leading economic indicators aremuted to slightly positive signaling slow economicgrowth ahead. Highly regarded ECRI, however, isconvinced that the U.S. is already in recession despite

the fact that their leading indicator is rising.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. Stock market performance is typically part ofthe group of measures that makes up a leadingeconomic indicator, so by definition, that part of theleading indicator cannot lead the stock market. Otherparts of a LEI, however, can lead the stock market.Changes and directions of the leading economicindicators are worth paying attention to. As picturedbelow, there is a strong long term linkage betweencomposite leading indicators and periods of recession.

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 on economics have eased off theirfears of a near-term recession. A panel of 54economists polled by the Philadelphia Federal Reservesees about a 17% to 20% chance of another recession

in the coming half year, back nearlast Septembers2011s 20% level. Interestingly, at the you-can-bet-on-anything-site Intrade.comon 11/5/2012 gave a 27%chance of the U.S. going into recession in 2013, downfrom a 42% probability back at the end of October, 2011(Next Anxious Index release later in November.)About the indicator: Thisarticle by David Leonhardt inthe NY Times in February, 2008 coined the popularname for this index. The noted thisSurvey ofProfessional Forecastersmaintained by the PhiladelphiaFederal Reserve hasn't missed calling a recession orcalled a false positive in all the years since 1968 when itwas started. This Anxious Index is the successor to the

earlier Livingston Indexa personal project of aPhiladelphia journalist.

Effective Federal Funds Rate (from St. LouisFederal Reserve)Status: The Fed is charging banks next to nothing toborrow, less than the inflation rate. In essence the Fed ispaying banks to borrow! Eventually rate cuts willstimulate the economy. But, because of lag times, fornow it remains a contrary reminder of just how worried


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://ycharts.com/indicators/philly_fed_united_states_leading_indexhttp://ycharts.com/indicators/philly_fed_united_states_leading_indexhttp://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.intrade.com/v4/markets/contract/?contractId=755863http://www.intrade.com/v4/markets/contract/?contractId=755863http://www.intrade.com/v4/markets/contract/?contractId=755863http://www.intrade.com/v4/markets/contract/?contractId=755863http://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://research.stlouisfed.org/fred2/series/FFhttp://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.intrade.com/v4/markets/contract/?contractId=755863http://www.intrade.com/v4/markets/contract/?contractId=755863http://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://ycharts.com/indicators/philly_fed_united_states_leading_indexhttp://www.e-forecasting.com/US_Leading_Economic_Indicator.htmhttp://www.businesscycle.com/resources/http://www.businesscycle.com/resources/


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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 or

use your browser zoom on the chart below.)

Status: With short term interest rates near zero, thisindicator says that there is a negligible 6% probability ofbeing in recession next November.About the indicator: When the Federal Reserve raisesshort term interest rates high enough the economyquiets down -- and possibly goes into recession. Whenthe Fed lowers interest rates it supplies a majoreconomic stimulus. This well documentedindicator fromthe New York Federal Reserve is an econometric modelof the probability of economic recession based on thedifference between short term interest rates and the rateon the 10-year Treasury Note. Raw data

Citigroup Economic Surprise Index(Bloomberg.com chart) (10/15/2012)Status: (Bloomberg has stopped no-cost coverage ofthis indicator.) The index is way up as corporations hadsent out negative expectations ahead of the currentround of quarterly reports. Starting from very lowexpectations the actual results look good, sending this

index very high.About the Indicator: The stock market reacts stronglyto unexpected news. This indicator is new to me, butthere might just be a chance that this leads the market.The Bloomberg.com description of the chart says: TheCitigroup Economic Surprise Indices are objective andquantitative measures of economic news. They aredefined as weighted historical standard deviations ofdata surprises (actual releases vs. Bloomberg survey

median). A positive reading of the Economic SurpriseIndex suggests that economic releases have on balancebeating consensus. The indices are calculated daily in arolling three-month window. The weights of economicindicators are derived from relative high-frequency spotFX impacts of 1 standard deviation data surprises. Theindices also employ a time decay function to replicatethe limited memory of markets.If an economic forecast is actually objective, (debatable)then any deviations from the forecast should,theoretically, be random This indicator tracks the actualpositive and negative deviations that occur in theBloomberg surveys of economists and clearly shows thaeconomic surprises are not random and follow definitetrends. The bottom line is that this indicator tracks thesentiments of economic forecasters. To my eyes, itappears that the chart is actually rather cyclic, with adistinct drop-off at roughly October to November of eachyear.

Long Treasury Bond vs DiscountRate (InvestmentTools.com)Status: As the subprime mortgage financial panic and

subsequent 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 stock

market 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 directstatement that the Fed remains deeply worried about theeconomy.

TED Spread(StockCharts.com)Status: The TED spread has been falling since January.Good. Recent ups and downs of the TED spread haveall been mild in comparison to the world-wide financialpanic that ran from late 2007 to early 2009. The interestrate for banks lending to one another, LIBOR isclimbing slightly, but overall it is fairly low. Major banks

do not seem to be seriously worried about other banksfailing in the near future.About the indicator: Credit markets only becomeinteresting 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 the
http://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://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.businessweek.com/news/2012-10-14/bullish-wagers-drop-to-eight-week-low-before-rally-commoditieshttp://www.businessweek.com/news/2012-10-14/bullish-wagers-drop-to-eight-week-low-before-rally-commoditieshttp://www.businessweek.com/news/2012-10-14/bullish-wagers-drop-to-eight-week-low-before-rally-commoditieshttp://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.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.businessweek.com/news/2012-10-14/bullish-wagers-drop-to-eight-week-low-before-rally-commoditieshttp://www.bloomberg.com/quote/CESIUSD:IND/charthttp://www.newyorkfed.org/research/capital_markets/allmonth.xlshttp://www.newyorkfed.org/research/capital_markets/ycfaq.htmlhttp://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?siteId


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numbers.) Normally these two banking insider ratesshould be close.

As the credit crisis started to hit in mid October, 2008 thebanking panic froze the credit markets and caused theLIBOR to skyrocket despite falling Treasury rates. TheTED spread had never been higher. Now, the situationhas calmed tremendously. Bond spreads also continueto improve with continuing declines in perceived risk.

Money Supply (M1 y/y Federal Reserve) (MZMy/y Federal Reserve)Status: We are receiving an open-ended expansion ofthe money supply via QE3.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: They may be moving up from the pits, but home

building is still at depression levels. Over the next fewyears 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 formof a dead market for new construction must eventuallyfollow.

How likely is another housing bubble to start up soon?According 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: Financial fears from Europe drove the Dollar upover the summer. The U.S. MUST reduce its balance ofpayment deficit, (Paul Krugman, NYTimes, 10/3/2011)and the main way available is with a weaker dollar. Theproblem is that other countries dont want to lose their

competitive edge so they are inflating their currencies aswell. The floundering of Europe doent help much.About the indicator: Watch the dollar slide as StevenPearlsteinwrote in the Washington Post (4/24/2011) thelong decline of the Dollar is both inevitable andeconomically desirable. Or, as Cristina Romer daredto write the truth that must not be spoken inthis(5/22/2011) NY Times piece: in a depressed economy,it isnt so clear that a strong dollar is desirable. Thegradual slide of the dollar is good for the stock market

and rebalancing the U.S. economy, but it can be bad foryour personal wealth if all your wealth is held in dollars.The flow of dollars from the U.S. is at flood stage. To tryto bring the U.S. balance of payments at least a little bitunder control the Bush administration set the value ofthe U.S. dollar on a big long slide while pretending inpublic ("Strong Dollar" ) that it had nothing to do with theslide. The Obama administration continues that policy,as it must. The only alternative means to restore somesemblance of a trade balance would have been to cutuse of foreign oil or resurrect the old strong array oftrade barriers and tariffs. The primary difficulty inreducing the value of the Dollar is that other countrieswill also inflate their currencies in order to maintain theirrelative trading advantage. The race to the bottom forworld currencies is now at high pitch as illustrated bythisBloomberg.com storyon the October, 2010 G20meeting.

Household Net Worth (Federal Reserve, see Line42)Status: Improving overall, but still down $3.5 trillionfrom 2007! Thanks mainly to the rebounding stock

market, Americans have gained back more than 2/3 ofthe wealth lost during the Great Recession.(MarketWatch.com commentary by Rex Nutting) Itsstill no time to celebrate a successful economicrecovery; and its no surprise that Treasury and the Fedare still doing everything possible to block further dropsin house prices and to increase business profitability byreducing borrowing costs. Economists are concludingthat all the intervention hashelped to avert deflation(Bloomberg) and total economic destruction. But, theeconomy is still far from normal.About the indicator: Net worth is the score that countsPersonal wealth fell by an incredible 18 trillion dollars

during 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 havebeen 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 5/1/2011

article 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.
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7/18


U.S. Balance of Payments(Federal Reserve link)Status: The balance of payments just keeps gettingworse.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.It looked for a while that shipping rates had bottomed,but their continuing weakness, signals a slow recoveryor worse. Container shipping rates covered by theHARPEX more closely related to expectations of

retailers remain below historically-average levels. TheDow Jones Transportation Index (StockCharts.com) hasbeen roughly flat for the whole year.About the indicator: Shipping rates and pricing oftransportation industry stocks are much followed andbasically believable long-lead economic indicators. Thereasoning 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 ofmoving 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 of change,Federal Reserve has set an inflation goal of roughly 2%and at the current 2.5% inflation we are still near the

goal. Excellent! It is pretty hard to get scared about theinflation boogeyman after you see this graph. This isabout as low as inflation has been in our lifetimes. In theU.S. and other developed economies inflation is very low

deflation still remains the greater worry. If U.S. inflationresumes, dont worry until it reaches 4% annually (seebelow). The inflation situation is quite different indeveloping economies (MSN Jim Jubak 1/21/2011)where inflation is already at worrisome levels. How is itthat developing nations can have high inflation while the

Dollar is crashing? The falling Dollar should be causingU.S. inflation to skyrocket. The answer is that developingnations are trying to maintain their favorable tradebalances by inflating their currencies faster than we sinkours.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 economic

performance.
http://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://stockcharts.com/h-sc/ui?s=$TRAN&p=W&b=5&g=0&id=p67301153609http://stockcharts.com/h-sc/ui?s=$TRAN&p=W&b=5&g=0&id=p67301153609http://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://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://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://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://research.stlouisfed.org/fred2/series/BOPGSTBhttp://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://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://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-gaugehttp://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://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/BOPGSTB


8/18


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 it the 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.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 3rd quarter 2012 forecasts by a survey ofprofessional economists are weaker than last quarter:weak GDP gains (2.1% annual rate for 2013); modestinflation (2.1% headline for 2013); continuing highunemployment (8.4%, an improvement, and only going

down to 7.9% by 2013) and normal 10-year averageexpected gains for the S&P 500 (6.8%), but down fromthe previous survey. All of which point to continuingmodest economic growth. The high lingeringunemployment is tough for people, but has little relationto near term stock market moves. The CBO forecast hassimilar conclusions.About the indicator: Next release November 9. TheSurvey of Professional Forecastersis the oldest

quarterly 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 FederaReserve 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 is weak indicating weak demandin the economy.About the Indicator: If the stuff we use to make thingscosts more, thats probably a good sign that at leastpeople are trying to make things. TheCommoditiesResearch Bureau (CRB)Index (Wikipedia description)represents a market basket of futures prices for majorworld commodities. According to CRB: The

commodities 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) theyembody 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 CRBIndex measure is further influenced by the fact that itis measured in U.S. Dollars so a fall in the Dollar will

automatically 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 ProfessionalForecastersStatus: Corporate profits well above pre-recessionlevels, though down roughly 10% 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.
http://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.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://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/http://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=GDPC1


9/18


About the Indicator: Rising corporate profits is whatstock market investing is all about. The U.S. Departmentof Commerce, Bureau of Economic Analysis postsquarterly results of U.S. economic performance. Here isa primer on the BEA National Income and Product

Account data.
http://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.pdf


10/18


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: The Daily and Weekly charts appears to be

heading back up good.About the indicator: I like this short term indicator of

the broad stock market as it is really easy to read,changes infrequently, and tends to lead the 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: Looking good.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 StaplesStatus: This chart has just turned positive.About this indicator: Are investors turning to riskieremerging market stocks, or just hunkering down with oldreliable blue chips?

Stocks versus BondsStatus: The winning streak is in question.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: Now at 49% and rising no problem.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 below the slowaverage not 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


11/18


NYSE Daily - Weekly Advance Decline Line(StockCharts.com)Status: Turning up.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 gauge remains low, but it has startedrising.About the indicator: The CBOE (Chicago BoardOptions Exchange) Volatility Index

(VIX

) measures

market 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 theVIX signal will come early enough to help avoid

developing 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: October was weak.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: October was week start of a new trend?.About the indicator: Taking a many-year view, thisremarkably consistent index appears to have nearlycaught up with its long term trend -- making the slingshotrebound from the crash of 2008-2009 weaker The Value

Line 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 markets that have the greatest potentiafor growth. Emerging markets have been at a plateausince early 2010. Profits need to grow, but this averagestill is well below trend. A new equal weight emergingmarket 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


12/18


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: The market is in the favorable half of the year..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 Halloweeneffect 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 the

semiannual 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.

Investor Sentiment (AAII InvestorSentiment Guide)(Barrons.com InvestorSentimentpage)Status: Some people pay serious attention to theseindicators. I dont.


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://www.aaii.com/sentimentsurvey/sent_resultshttp://www.aaii.com/sentimentsurvey/sent_resultshttp://www.aaii.com/sentimentsurvey/sent_resultshttp://www.aaii.com/sentimentsurvey/sent_resultshttp://www.aaii.com/sentimentsurvey/sent_resultshttp://online.barrons.com/public/page/9_0210-investorsentimentreadings.htmlhttp://online.barrons.com/public/page/9_0210-investorsentimentreadings.htmlhttp://online.barrons.com/public/page/9_0210-investorsentimentreadings.htmlhttp://online.barrons.com/public/page/9_0210-investorsentimentreadings.htmlhttp://online.barrons.com/public/page/9_0210-investorsentimentreadings.htmlhttp://online.barrons.com/public/page/9_0210-investorsentimentreadings.htmlhttp://online.barrons.com/public/page/9_0210-investorsentimentreadings.htmlhttp://internet.statestreet.com/industry_insights/investor_confidence_index/ici_overview.htmlhttp://online.barrons.com/public/page/9_0210-investorsentimentreadings.htmlhttp://www.aaii.com/sentimentsurvey/sent_resultshttp://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


13/18


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% (standarddeviation of 9 percentage points) and bearish 30%(standard deviation of 10 percentage points).Thisarticle at the AAII websitecovers a statistical analysisthat 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 withhistorically low interest rates.About the Indicator:According to Mark Hulbert'sstatistical calculationsof the Dow Jones Industrials since1896 there is statistical validity at the 95% confidence

level 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: Despite weakness in October, the S&P is stillabove its slow moving average. Falling below that linewould be a bearish indication to many investors.About the indicator: In my analysis, the movingaverage indicator had a poor track record for my favoritemarket average, the Value Line Arithmetic Average

Index, 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 gainswere 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 very

good. 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!

% Stocks Trading Above 200-Day MovingAverage(stockcharts.com covers S&P-500 stock)

Status: The S&P 500 is 69% and rising, not highenough to worry about.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 gotte

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TomT Stock Market Model 2012-11-05