Technical Breadth Indicators: Historical Data

As promised, below is a Chart and Table of historical data for Technical Indicators which were first written about on 1/29/11.   As a refresher, both indicators are used to indicate whether investors are being compensated for risk.  Alternatively, when they blink SELL, the market is at a High Risk of sudden drops.

As one can infer from the line-chart below, the indicators turned into Negative Territory (about -3% and lower) about 1 week ago.   Though, they’ve been lower, reaching as low as -8.9% near the market top of March 2000.  Does anyone remember the “Tech Wreck” ?

While a negative 3% value isn’t as low as the 2000 time period, note that it hasn’t given a sell signal for a long, long time (since 2008).  Thus, this signal may be more reliable.  I find that it’s less reliable in periods of high market volatility.  Data start date is 1994, which wasn’t shown as the chart would’ve been too small.

Furthermore, I can’t recall the last time both the Sentiment and Technical Signals indicated that the market was at such a High Risk.  For perspective, the last time they both gave Buy Signals was in March 13, 2009 (at +10.7% for this Indicator).

 The table below shows how the stock market performed (Gain/loss or flat market) after 1 week, 2 weeks, etc. time periods after the Down Signal indicator reached significant low values.  The higher the percentage, the more times the Indicator was accurate.

Best time period was T5 (6 weeks after signal) at 57%.  This is lower than the accuracy of the Sentiment Indicator.   However, note that I always use what’s called Dummy signals. These are incorrect signals I place purposely to avoid any potential biases.  Essentially, they make the results look worse than they actually were.  Removing the Dummies, yields the actual % Declining/Total of 65% (meaning the indicator worked 65% of the time at the T5 period.  Still not great, but better than before.

Technical Breadth Indicator turns BEARISH…

Technical Indicators turn Bearish:   

To All readers of the Socially Responsible Investing website:

While I advocate always being invested in the market (see Background Information below), duly note that my Technical Indicators are now saying we’re in a Above-average Risk environment.  The indicators turned Bearish on January 21, 2011.

Though, as I’m writing this capital markets of all shapes and sizes (from stocks to commodities) were being agitated by the implications of the Tunisian Turmoil.  As many of you already aware, peoples’ demands for freedom have now reached Egypt.  This time the establishment is refusing to “cave in” so easily.  Going forward, Monday’s markets may bounce, but the contagion may reach other countries, particularly Saudi Arabia (which has publicly stated its support of Mubarak).  Obviously, that would be a shock to the oil markets, (Strait of Hormuz, etc). Further, the Euro-Crisis remains an unresolved issue.

Behind the Indicators:
The Technical Indicators measure how the average stock is performing compared to the major market indices. For example, if the Dow Jones is performing well but there are more stocks declining than advancing, the indicators would turn Bearish.  A Bearish reading is approximately -3% or lower.

Conclusion: Investors are not being compensated for all the risk they’re taking on (witness the low corporate Bond spreads).  By the very least, I would expect higher market volatility. At worst, a correction will ensue.  I do not expect a Bear Market as economic fundamentals are improving (see below).

Note on Economic Growth:  The headline news was that GDP for the fourth quarter 2010 was below expectations (up 3.2% vs 3.5% expectations).  Actually, it was one of the best I’ve seen in years, looking behind the numbers.  Consumer Spending was good and Final Sales were great, rising 7.1%, and the best since 1984  (this is GDP adjusted for the affects of inventories.).

 BACKGROUND INFORMATION:
As a long-term investor, I believe the time for Socially Responsible Investing is now…right NOW.  Long-term investors are not concerned over the current level of the stock market and whether the Market’s going to rise or fall the next day.

I propose investors be “fully invested” in equities most of the time.  Being “fully-invested” is different for different people depending on age, risk tolerance, etc.  As a Heuristic, I suggest being 75% long equities as a “base-case” level.  The remainder would be invested in bonds, real-estate, hard assets, and alternative/exotic investments (e.g., natural gas, platinum, rare-earth anyone?).

With that being said, there are certain times that are better to invest in the market.  Rather than choosing tops and bottoms based on certain fundamental criteria (e.g. price to earnings ratio), I have developed two Market Timing Indicators.  These indicators help me maintain objectivity with regards to my investment positions, as I have no influence on them.  They were designed during late 1992 and have been updated weekly since.

The two major indicators are:

1.    Sentiment:  based on human behavior, and supported by theories backed by Behavioral Finance. 

2.    Technical:  which measures market breadth, or underlying strength in the broad market.  This indicator was Neutral-Slightly Negative early Jan’11, but turned Bearish on 1/21/11.

These indicators are used to obtain my Portfolio’s Investment Position.  Note, they do not know, or represent market levels.  They are measures of perceived risk, especially the Sentiment Indicators.  I have often taken mental notes of how everyone seems to clamor to buy things when their expected rate of returns are minimal compared to their inherent risks. 

This website will include three simple colored (traffic) signals.  Green for “Buy” (i.e, low-risk levels) which means allocate your portfolio to a fully-invested equity position.  For me, that’s about 75-80% invested, but it could be lower for a more-risk adverse, or retired individual.  Yellow, means caution, risk levels rising.  Red means “High-Risk”; investors should reduce their investment positions to conservative levels perhaps 30-40% equity.  The remainder could be in treasuries, gold, high-grade corporate bonds, etc.

Feel free to contact me for additional clarity or to answer other questions.

SRI Sentiment Indicator: Historical Data

The chart below shows the Sentiment Indicator going back from 2005 to the present day.  As you can see, it’s not perfect, but does do a decent job at showing market tops.  The Sentiment Indicator has been back-tested, by hand for reliability.  Data goes back to 1992/93.

                   Sentiment Indicator: Historical Chart vs. S&P500 Index.

The table below shows the results of my Backtesting.  Highest accuracy was in the T1 (one month time period) after Sentiment Indicator gave a High Risk/Bearish Signal (which would be a lower number, e.g., below 4.0).  Average subsequent S&P 500 loss was 2%.

I refined the Accuracy/predictive power of the Sentiment Indicator by examining at (and from) what levels it worked best.  When the Sentiment Indicator is well-below its recent peak, the Sentiment Indicator works best.  The most recent signal (1/2011),  and two previous: 1/2010 and 4/2010, have followed the above trend.  This raises my Confidence level in the implications of the current reading.

SRI Sentiment Indicator at a HIGH Risk level (Bearish Reading)

Sentiment Indicators turn Bearish:   

To All readers of the Socially Responsible Investing website:

While I advocate always being invested in the market (see Background Information below), duly note that my Sentiment Indicators are now saying we’re in a very HIGH RISK environment.

Though, as I’m writing this, markets, both here and abroad, are up in overnight trading after hearing the great earnings releases from mega-techs, Apple and IBM, and growing comfort over European Union support of PIGS (e.g., Portugal, etc..)

What does this mean?
Essentially, investors are not adequately being compensated for all the risk they’re taking in equity, as well as Bond markets (e.g., lower corporate bond spreads).  There is a high probability of a sudden, unexpected correction in capital markets over the next month.

Conclusion:  Now…right now… would be an opportune time to take profits.

What people are saying:  You know, so many people are telling me that they’re earning little, if any in their bank. And so, they have to invest in stocks and bonds.  My answer is this, “No one’s twisting your arm”, “There’s nothing wrong w/ keeping some of your assets in zero-yielding money markets.”  Don’t listen to what your friends are doing folks, do what you think makes good sense.

 BACKGROUND INFORMATION:
As a long-term investor, I believe the time for Socially Responsible Investing is now…right NOW.  Long-term investors are not concerned over the current level of the stock market and whether the Market’s going to rise or fall the next day.

I propose investors be “fully invested” in equities most of the time.  Being “fully-invested” is different for different people depending on age, risk tolerance, etc.  As a Heuristic, I suggest being 75% long equities as a “base-case” level.  The remainder would be invested in bonds, real-estate, hard assets, and alternative/exotic investments (e.g., natural gas, platinum, rare-earth anyone?).

With that being said, there are certain times that are better to invest in the market.  Rather than choosing tops and bottoms based on certain fundamental criteria (e.g. price to earnings ratio), I have developed two Market Timing Indicators.  These indicators help me maintain objectivity with regards to my investment positions, as I have no influence on them.  They were designed during late 1992 and have been updated weekly since.

The two major indicators are:

1.    Sentiment:  based on human behavior, and supported by theories backed by Behavioral Finance. 

2.    Technical:  which measures market breadth, or underlying strength in the broad market.  This indicator was Neutral-Slightly Negative as of 1/2011.

These indicators are used to obtain my Portfolio’s Investment Position.  Note, they do not know, or represent market levels.  They are measures of perceived risk, especially the Sentiment Indicators.  I have often taken mental notes of how everyone seems to clamor to buy things when their expected rate of returns are minimal compared to their inherent risks. 

This website will include three simple colored (traffic) signals.  Green for “Buy” (i.e, low-risk levels) which means allocate your portfolio to a fully-invested equity position.  For me, that’s about 75-80% invested, but it could be lower for a more-risk adverse, or retired individual.  Yellow, means caution, risk levels rising.  Red means “High-Risk”; investors should reduce their investment positions to conservative levels perhaps 30-40% equity.  The remainder could be in treasuries, gold, high-grade corporate bonds, etc.

Feel free to contact me for additional clarity or to answer other questions.