tomt stock market model 2012-05-20

7/31/2019 TomT Stock Market Model 2012-05-20

1/20

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: Rough start thenprobably fairly good -- unless Europe fallsapart. (Forecast 6/30/2012)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 better-than-normal10% gain for the broad stock market from now throughthe end of October. Personally, I think a 6% gain is amore realistic bet since the models do not directly factorin anything about sovereign debt fears for Europe. Thisisnt a forecast to get very excited about, but it is still abetter than average return, especially considering thatthe summer period is statistically a time of weakperformance. As long as the economy remains belowpar, there will be room for growth.

The models give about 4 out of 5 odds that there will atleast be some net stock price gain over the period. Onthe negative side, the models show better-than-evenodds of a setback of at least 8% somewhere alongthe way. (I am guessing sooner rather than later.)Inshort: sell in Maylikely will hold true, at least for thestart of the summer. A late summer - early fall rallywould then be probable.

The economic case for more stock market gains isbelievable and valuations have room to increase. Thesegood prospects, however, could be destroyed quickly by

panic (crisis in Europe) or euphoria (more monetarystimulus here, in Europe, or in China). While I have beenterrifically optimistic about the market since November,2008, I am more restrained now. The market hasrecovered the lions share of its recession losses sothere is less force now pulling prices back to their longterm trends.

My hope is to be able to buy a significant summermarket dip.

How did my forecasts do over the past half

year? Meh.Last October my models were very optimistic, butlingering fear of European sovereign defaults held mypersonal optimism somewhat in check. Im glad it did. Ipublished a forecast of 12% to 15% gains in the ValueLine Arithmetic Average, my main market gauge. By5//1312 the market rose 10%. Fairly close.

.

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 15% 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. Themarket is falling as I write this. By the time you read thisthese short term signals may give an entirely differentpicture.

Trader Signals SlowThe long running Second Great Contraction will likelycontinue to play out as a decade long disappointmentmuch like the 1930s.Sell in May is statistically validand it governs the summer months.

International ViewTough 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 Models

Most number crunchers, my aspiration, conclude that theeconomy 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 two years.

Six-Month Stock Market Indicators May 20, 2011Over 50 mid-term market timing guides that might be helpful

Overview


2/20

Copyright 2012 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 (Click tothe Max. time period view of the chart.)Status: Valuation is 12% below fair value. Viewing thegraph at the Max setting, it appears that if the marketfollows a typical, ragged, recovery pattern, prices couldclimb another 15% - 20% from here.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 a

basic check to see if the stock market pricing makessense.

S&P-500 to Book Value(Bloomberg.com)Status: The current market price-to-book value of about2.06 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 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.) See alsoDiscounted Cash FlowValuatorfor individual stocksStatus: According to this ratio, at 90% the market isright at the upper bound of fairly valued. Using this

factor and interest rates, GuruFocus.com calculates thatthe market is likely to produce a below normal annualreturn of 4.2% going forward.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 given

moment. At 55% stocks would a fantastic buy. At 110%it would be time to think seriously about selling

. S&P-500 Price Earnings Ratio andS&P 500Earnings(The link above is towww.multpl.com, courtesyof Josh Staiger). Sourcedata available onlinecourtesyof Robert Shiller and S&P)Status: If you judge by forward looking earnings, the SP500 is now a bargain by historical standards. But, goingby an average of 10-year past earnings, the S&P is stillpricey. I side with the forward-looking view because thepast decade has contained two very nasty recessionsskewing the average.

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 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 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 regression

Select to view:OverviewMarket Valuation Measures

Economic Indicators

Trader Signals - FastTrader Signals SlowInternational ViewEconometric ModelsAbout This Forecast

Six-Month Stock Market Indicators

Market Valuation Measures
http://www.morningstar.com/cover/pfvgraph.htmlhttp://www.morningstar.com/cover/pfvgraph.htmlhttp://www.bloomberg.com/apps/cbuilder?ticker1=.SPXBOOK:INDhttp://www.bloomberg.com/apps/cbuilder?ticker1=.SPXBOOK:INDhttp://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://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/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.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://www.multpl.com/s-p-500-earnings/http://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://www.bloomberg.com/apps/cbuilder?ticker1=.SPXBOOK:INDhttp://www.morningstar.com/cover/pfvgraph.html


3/20


model 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!!!!!.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 Dow Jones Annual ForecastStatus: At todays (3/30/2012) 1,2481 level, the DJ-30 isamazingly close to Value Lines average price target of12,900 for 2012. They were right on for 2011, predictinga flat year overall. For 2012 VL forecasts a probable

range for the DJ-30 from 10,330 to 16,140.About the Indicator: At the close of every year since1980, the Value Line Investment Survey has published aforecast for the Dow Jones Industrial Average for thecoming year. The model, originally created by SamuelEisenstadt, is a straight-forward statistical model with

just 4 variables for the combined 30 Dow stocks: currentDJ-30 price, earnings per share, dividends per share,and Treasury bond yields. In each case the values usedare Value Lines staff forecasts of changes for thecoming year. The forecasting results of this model havebeen impressive as discussed inthis2006 researchpaper. VL notes that considerable deviation from their

forecast over the course of a year is to be expected.

.
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://faculty.smu.edu/tfomby/ValueLine_v2_1.pdfhttp://faculty.smu.edu/tfomby/ValueLine_v2_1.pdfhttp://faculty.smu.edu/tfomby/ValueLine_v2_1.pdfhttp://faculty.smu.edu/tfomby/ValueLine_v2_1.pdfhttp://www.marketwatch.com/story/fed-model-more-bullish-than-in-decades-2011-09-20?dist=afterbell


4/20


Despite all of its semi-random craziness, eventuallythestock 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 areup, predicting muted growth for the U.S. Highly regardedECRI is warning of very slow economic growth.About the indicators: These are just a few of the

groups 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 gurus on economics have eased off theirfears of a near-term recession. A panel of 54economists polled by the Philadelphia Federal Reservesees about a 13% chance of another recession in thecoming half year, down from last Septembers 20% levelInterestingly, at the you-can-bet-on-anything-site

Intrade.comon 5/18/2012 betting agreed, putting a 18%probability on a U.S. recession in 2012, way down froma 42% probability back at the end of October. (NextAnxious Index release August10.)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 theearlier Livingston Indexa personal project of aPhiladelphia journalist.

Effective Federal Funds Rate (from St. LouisFederal Reserve)Status: The Fed is charging banks next to nothing, lessto borrow 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 worriedthey are at the FedAbout the indicator: The Federal Reserve largely

Select to view:OverviewMarket Valuation MeasuresEconomic Indicators

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.intrade.com/v4/markets/contract/?contractId=693075http://www.intrade.com/v4/markets/contract/?contractId=693075http://www.intrade.com/v4/markets/contract/?contractId=693075http://www.intrade.com/v4/markets/contract/?contractId=693075http://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=693075http://www.intrade.com/v4/markets/contract/?contractId=693075http://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/


5/20


controls 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.)

Status: With short term interest rates near zero, thisindicator says that there is a negligible 4% 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) Change to the 5 year view on theinteractive chart in order to gain a longer termperspective.)Status: This leading index has topped and is droppingsharply. Its fall last April was over a month ahead of themarkets actual tailspin. Corporate profit growth isexpected to be weak this quarter.About the Indicator: The stock market reacts strongly

to 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 surveymedian). A positive reading of the Economic SurpriseIndex suggests that economic releases have on balance

beating 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 andsubsequent recession hit, the Fed dramatically loweredshort term lending rates to near-zero, creating a major

stimulus 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 side

of 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: After 6 months of steady rise, the TED spreadstarted to fall in January. Good. Despite this, recent upsand downs of the TED spread have all been mild incomparison to the world-wide financial panic that ranfrom late 2007 to early 2009. The interest rate for bankslending to one another, LIBOR ) is climbing slightly, butoverall it is fairly low. Major banks do not seem to beseriously worried about other banks failing 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. Normally these two bankinginsider rates should be close.
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.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.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


6/20


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: Money expansion remains high.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 slowly starting to move up from thepits, but home building is still at depression levels.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 upbeginning in early 2011. The U.S. MUST reduce itsbalance of payment deficit, (Paul Krugman, NYTimes,10/3/2011) and the main way available is with a weakerdollar. The problem is that other countries dont want tolose their competitive edge so they are inflating theircurrencies as well.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 marketand 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 in

public ("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 $7 trillion from2007! Thanks mainly to the rebounding stock market,Americans have gained back more than half of thewealth lost during the Great Recession, but thecapitulation of the housing market sent all the rest of thewealth off to money heaven.(MarketWatch.comcommentary by Rex Nutting) Its still no time tocelebrate a successful economic recovery; and its no

surprise that Treasury and the Fed are still doingeverything possible to block further drops in houseprices and to increase business profitability by reducingborrowing costs. Economists are concluding that all theintervention hashelped to avert deflation (Bloomberg)and total economic destruction. But, the economy is stillfar from normal.About the indicator: Net worth is the score that countsPersonal 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 havebeen for cascading bank, business and personal wealth

failures 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: Watch the knife fall! They are going to have toshift the axis on the graph because the deficit will neverhave been as bad as it is going to be! This 5/1/2011article by Lori Montgomery(Washington Post, freesubscription required) is the best summary of the deficit

problem that I have read recently.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.
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://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.nytimes.com/2011/10/03/opinion/holding-china-to-account.html?_r=1&hphttp://www.nytimes.com/2011/10/03/opinion/holding-china-to-account.html?_r=1&hphttp://www.nytimes.com/2011/10/03/opinion/holding-china-to-account.html?_r=1&hphttp://www.nytimes.com/2011/10/03/opinion/holding-china-to-account.html?_r=1&hphttp://www.nytimes.com/2011/10/03/opinion/holding-china-to-account.html?_r=1&hphttp://www.washingtonpost.com/business/economy/the-politics-and-economics-of-a-falling-dollar/2011/04/19/AFT5SGWE_story.htmlhttp://www.washingtonpost.com/business/economy/the-politics-and-economics-of-a-falling-dollar/2011/04/19/AFT5SGWE_story.htmlhttp://www.washingtonpost.com/business/economy/the-politics-and-economics-of-a-falling-dollar/2011/04/19/AFT5SGWE_story.htmlhttp://www.nytimes.com/2011/05/22/business/economy/22view.html?_r=1&scp=5&sq=romer&st=Searchhttp://www.nytimes.com/2011/05/22/business/economy/22view.html?_r=1&scp=5&sq=romer&st=Searchhttp://www.nytimes.com/2011/05/22/business/economy/22view.html?_r=1&scp=5&sq=romer&st=Searchhttp://www.bloomberg.com/news/2010-10-07/g-20-mega-trend-interventions-risk-protectionist-wave-as-officials-meet.htmlhttp://www.bloomberg.com/news/2010-10-07/g-20-mega-trend-interventions-risk-protectionist-wave-as-officials-meet.htmlhttp://www.bloomberg.com/news/2010-10-07/g-20-mega-trend-interventions-risk-protectionist-wave-as-officials-meet.htmlhttp://www.bloomberg.com/news/2010-10-07/g-20-mega-trend-interventions-risk-protectionist-wave-as-officials-meet.htmlhttp://www.federalreserve.gov/releases/z1/current/z1r-5.pdfhttp://www.federalreserve.gov/releases/z1/current/z1r-5.pdfhttp://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.marketwatch.com/story/how-the-bubble-destroyed-the-middle-class-2011-07-08?pagenumber=1http://www.marketwatch.com/story/how-the-bubble-destroyed-the-middle-class-2011-07-08?pagenumber=1http://www.marketwatch.com/story/how-the-bubble-destroyed-the-middle-class-2011-07-08?pagenumber=1http://www.marketwatch.com/story/how-the-bubble-destroyed-the-middle-class-2011-07-08?pagenumber=1http://www.bloomberg.com/news/2011-05-10/bernanke-qe2-averts-deflation-spurs-rally-expands-credit-as-program-ends.htmlhttp://www.bloomberg.com/news/2011-05-10/bernanke-qe2-averts-deflation-spurs-rally-expands-credit-as-program-ends.htmlhttp://www.bloomberg.com/news/2011-05-10/bernanke-qe2-averts-deflation-spurs-rally-expands-credit-as-program-ends.htmlhttp://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.research.stlouisfed.org/fred2/series/FYFSDhttp://research.stlouisfed.org/fred2/series/PERMIT?cid=97http://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://www.bloomberg.com/news/2011-05-10/bernanke-qe2-averts-deflation-spurs-rally-expands-credit-as-program-ends.htmlhttp://www.marketwatch.com/story/how-the-bubble-destroyed-the-middle-class-2011-07-08?pagenumber=1http://www.marketwatch.com/story/how-the-bubble-destroyed-the-middle-class-2011-07-08?pagenumber=1http://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.federalreserve.gov/releases/z1/current/z1r-5.pdfhttp://www.bloomberg.com/news/2010-10-07/g-20-mega-trend-interventions-risk-protectionist-wave-as-officials-meet.htmlhttp://www.bloomberg.com/news/2010-10-07/g-20-mega-trend-interventions-risk-protectionist-wave-as-officials-meet.htmlhttp://www.nytimes.com/2011/05/22/business/economy/22view.html?_r=1&scp=5&sq=romer&st=Searchhttp://www.washingtonpost.com/business/economy/the-politics-and-economics-of-a-falling-dollar/2011/04/19/AFT5SGWE_story.htmlhttp://www.nytimes.com/2011/10/03/opinion/holding-china-to-account.html?_r=1&hphttp://www.nytimes.com/2011/10/03/opinion/holding-china-to-account.html?_r=1&hphttp://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=pc1http://en.wikipedia.org/wiki/List_of_countries_by_public_debt


7/20


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, the USDOTTransportation Services Index (afairly good leadingeconomic indicator) points to continuing growth.Shipping rates appear to have bottomed, but theircontinuing weakness, signals a slow recovery. Containershipping rates covered by theHARPEX more closelyrelated to expectations of retailers remain below

historically-average levels. The Dow JonesTransportation Index (StockCharts.com) took a bad hitthis summer like most everything else, but has beenrecovering.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. The Baltic

Dry Index(Wikipedia),The Best Economic IndicatorYou've Never Heard oftracks the cost of movingmaterials by sea. A higher value indicates rising shippinglevels and therefore points to economic expansion.ThisWall Street Journal article andthis Bloomberg article(1/10/2011)say that the Baltic Dry Index and most othershipping indexes may give a fuzzy indication of worldeconomic activity this year because of an unusuallylarge number of new ships this year.

Inflation Rate(Consumer Price Index, Rate of change,Federal Reserve)Status: The Federal Reserve has finally set an inflation

goal of 2%. 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 high

inflation while the Dollar is crashing? The falling Dollarshould be causing U.S. inflation to skyrocket. Theanswer 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 has hovered around zero for nearly 2years now, more evidence of the Second GreatContraction. This expects economic growth to stagnatefor the next couple of monthswhich, at least, is a lotbetter than truly rotten.About the Indicator: The Current National FinancialActivity 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://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=$TRAN&p=W&b=5&g=0&id=p67301153609http://stockcharts.com/h-sc/ui?s=$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://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://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://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://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://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://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


8/20


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 andCong. Budget Office EconomicOutlookStatus: The 1st quarter 2012 forecasts by a survey ofprofessional economists are weaker than last quarter:weak GDP gains (2.3% annual rate for 2012,); modestinflation (2% headline for 2012); continuing highunemployment (8.4%, an improvement, and only going

down to 8.1% 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 May 10. 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 has been fairly stable so far thisyear. No one likes higher gas prices, but rising gasprices generally indicate that people are driving more agood sign.About the Indicator: If the stuff we make things withcosts 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: 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 particularly

sensitive 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 causes

them 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 (line 17) UndistributedCorporate Profits (line 21) (Bureau of EconomicAnalysis Quarterly Gross Domestic Income)S&P 500Earnings(data courtesy Robert Shiller, site hosted byJosh Staigner) Philadelphia Federal Reserve Surveyof Professional ForecastersStatus: Corporate profits are nearly back to pre-recession levels. Undistributed profits are back up as

well there is corporate money still on the sidelines.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 postsquarterly results of U.S. economic performance. Here isa primer on the BEA National Income and ProductAccount data.
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/ftpdocs/120xx/doc12076/CBO_Presentation_to_NEC_2-24-11.pdfhttp://www.cbo.gov/ftpdocs/120xx/doc12076/CBO_Presentation_to_NEC_2-24-11.pdfhttp://www.cbo.gov/ftpdocs/120xx/doc12076/CBO_Presentation_to_NEC_2-24-11.pdfhttp://www.cbo.gov/ftpdocs/120xx/doc12076/CBO_Presentation_to_NEC_2-24-11.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.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://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=51&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2002&LastYear=2011&3Place=N&Update=Update&JavaBox=nohttp://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=51&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2002&LastYear=2011&3Place=N&Update=Update&JavaBox=nohttp://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=51&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2002&LastYear=2011&3Place=N&Update=Update&JavaBox=nohttp://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/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.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://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://www.multpl.com/s-p-500-earnings/http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=51&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2002&LastYear=2011&3Place=N&Update=Update&JavaBox=nohttp://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=51&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Qtr&FirstYear=2002&LastYear=2011&3Place=N&Update=Update&JavaBox=nohttp://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/ftpdocs/120xx/doc12076/CBO_Presentation_to_NEC_2-24-11.pdfhttp://www.cbo.gov/ftpdocs/120xx/doc12076/CBO_Presentation_to_NEC_2-24-11.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.philadelphiafed.org/research-and-data/real-time-center/survey-of-professional-forecasters/http://www.research.stlouisfed.org/fred2/graph/?id=GDPC1


9/20



10/20


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.

Follow What Happens in the Real WorldStatus: I got slammed by the recession that didnthappen from the Greek default. I trusted my model toomuch and was seriously leveraged. Recovering sinceOctober, but the market has faltered in April.

NYSE New Highs minus New Lows(StockCharts.com)Status: The Daily chart has gone from horizontal to up

good.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 an

uptrend. Longer term investors will mainly pay attentionto the Weekly view lower on the page

Consumer versus Cyclical Stocks(StockCharts.com)Status: Cyclical stocks are relatively weak notparticularly encouraging.About this indicator: In thisMSN MoneyCentral article(11/18/2011) Anthony Mirhaydari makes a case thatclylical stocks beating consumer staples is a sign of abull market and vice versa

Bonds versus StocksStatus: Relative to stocks, the bond index is supermeaning stocks are tanking. This indicator says to shiftto Treasuries, or at least get out of stocks for a while.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: Low and falling but probably near a bottom.Almost time to buy.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 bad.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, the

Select to view:OverviewMarket Valuation MeasuresEconomic Indicators

Trader Signals - FastTrader Signals - SlowInternationalViewEconometric ModelsAbout This Forecast


Trader Signals Fast (well, relatively fast)
http://stockcharts.com/charts/gallery.html?$NYHLhttp://stockcharts.com/h-sc/ui?s=%24CYC:XLP&p=D&b=5&g=0&id=p85973789034http://stockcharts.com/h-sc/ui?s=%24CYC:XLP&p=D&b=5&g=0&id=p85973789034http://money.msn.com/investment-advice/article.aspx?post=9e8bca86-4f70-449d-92e1-3daf7b0837d7http://money.msn.com/investment-advice/article.aspx?post=9e8bca86-4f70-449d-92e1-3daf7b0837d7http://money.msn.com/investment-advice/article.aspx?post=9e8bca86-4f70-449d-92e1-3daf7b0837d7http://stockcharts.com/h-sc/ui?s=IEF:IVV&p=W&b=5&g=0&id=p71394359608http://stockcharts.com/h-sc/ui?s=$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=$spxa50rhttp://stockcharts.com/h-sc/ui?s=IEF:IVV&p=W&b=5&g=0&id=p71394359608http://money.msn.com/investment-advice/article.aspx?post=9e8bca86-4f70-449d-92e1-3daf7b0837d7http://stockcharts.com/h-sc/ui?s=%24CYC:XLP&p=D&b=5&g=0&id=p85973789034http://stockcharts.com/charts/gallery.html?$NYHL


11/20


most 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.

NYSE Daily - Weekly Advance Decline Line(StockCharts.com)Status: Turning up. Ready for some good news.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 view

Type 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: Volatility has been dropping since October afavorable sign. But, ata 54-month lowit has gotten lowenough to signal a probable market turn for the worse.About the indicator: The CBOE (Chicago BoardOptions Exchange) Volatility Index

(VIX

) measures

market expectations of near-term volatility conveyed by

stock 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 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: Everything seems to be going up for the past 6

monthsa risk off attitude. Small have been doingbest. Emerging markets have been the weakest linkAbout 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: The long fearful summer appears to be finallyover. A low was reached in December and it has grownconsiderably since then.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 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 a

result, 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 average

still 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://finance.yahoo.com/news/vix-54-month-low-sell-161130002.htmlhttp://finance.yahoo.com/news/vix-54-month-low-sell-161130002.htmlhttp://finance.yahoo.com/news/vix-54-month-low-sell-161130002.htmlhttp://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://finance.yahoo.com/news/vix-54-month-low-sell-161130002.htmlhttp://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


12/20


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 FollyatAmazon.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: It looks like the summer downside may havekicked in early.About the indicator: If you had to pick just a singlestock market timing signal, this old and crazy-seemingone might well be the best. Statistically, performance ofstock markets worldwide during the summer months isnot as good as during the winter. When the marketcrashes it usually is during September and October. Thesummer - winter trading pattern has been shown tooccur in many markets world wide for the past severalhundred years.ThisMark Hulbert article fromMarketWatch.com cites a definitive study showing thatthe pattern has been valid for at least 317 years in theU.K. This MarketWatch column by Sy Hardingsummarizes his variant on the approach which includesalso being invested on holidays. My own analyses showthat the Sellin May or Halloween effect is greatestwhen the economy is heading into a recession. On theother hand, when coming out of a recession the effectsof 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.About the Indicator: Investor sentiment tends to be acontrarian indicator. When there are vastly more Bulls

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/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.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/story/the-halloween-indicator-kicks-into-gear-2010-10-29http://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


13/20


than 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 BrettArends, 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.

Fourth Year of the Preidential Election Cycle(Mark Hulbert, MarketWatch.com)3rd Year of thePresidential Cycle(Mark Hulbert, MarketWatch.com)3rd articleby Hulbert.Status: It depends which stock market average isreviewed and for what historical period, but overall, thefourth year of the presidential cycle tends to producepositive, but modest stock market returns equal to orless than average. But, the fact that this year anincumbent is runningmay helpwith typical gains in the9% range. (Howard Gold, MarketWatch 11/11/11) 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: The S&P is still above its slow moving average.Falling below that line would 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 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 t

tomt stock market model 2012-05-20

Documents