Market Models

Big Picture Market Models – 1/31/13

The State of the Market Models

A weekly review of the Big Picture Models is an easy way to stay in tune with the market. We believe that the first step in successful investing is to identify the “big picture” environment, because, in short, different environments require different strategies.

For example, using the same aggressive strategy that is successful in a Bull Market can be devastating in a Bearish Environment. By reviewing the “Big Picture” on a regular basis, you can be assured that a major change in the environment won’t take you and your investments by surprise.

The indicators and models presented in our “Big Picture” Report are intended to provide indications of the market’s momentum, trend, fundamentals, sentiment, and valuation. The range of “Scores” is 0-10, with 10 being the highest. Below is a table displaying the latest readings.

The “Big Picture” Models
(Our Guide to Market Environment)
 
ScoreRating
“State of the Markets” Model7.03Moderately Positive
Projected Annualized Return of Market+9.36%
(Projected Annualized Return Based on State of Markets Model Score)

Key Market ModelsScoreRating
Long-Term Trend & Momentum:8.50Moderately Positive
Monetary Conditions: 5.36Neutral
Economic Conditions: 5.74Neutral
Inflation (Updated Monthly):5.00 Moderately Positive
Market Valuation:6.18 Moderately Positive


Big Picture Models Explained

  • State of the Markets Model: This is our most important market model. The model is been designed to provide an overall reading on the health of the market. The model itself is really a model of models, each successful in their own right. Since we believe in staying “in line” with the overall market environment, 60% of the model is based on key long-term trend and momentum indicators, while the remaining 40% is split between our Sentiment, Valuation, Monetary, and Economic models. In short, staying in tune with the reading of our State of the Market Model has kept us mostly invested during major bull market moves and mostly defensive during bear market periods.

  • Long-Term Trend and Momentum Model: If we were forced to choose only one market indicator to take with us to the desert island, this would be the one. Designed to provide a reading on the technical health of the overall market, our Long-Term Trend and Momentum Model takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, we find that when the model is rated as “positive,” the S&P has averaged returns in excess of 23% per year. When the model carries a “neutral” reading, the S&P has returned over 11% per year. But when the model is rated “negative,” stocks fall by more than -13% a year on average.

  • Monetary Conditions Model: The popular cliche, “Don’t fight the Fed” is really a testament to the profound impact that interest rates and Fed policy have on the market. It is a proven fact that monetary conditions are one of the most powerful influnces on the direction of stock prices. Therefore, we force ourselves to focus on the more than 25 indicators that make up the monetary model each and every week.

  • Economic Conditions Model: During the middle of bull and bear markets, understanding the overall health of the economy and how it impacts the stock market is one of the few truly logical aspects of the stock market. When our Economic model sports a “positve” reading, history (beginning in 1965) shows that stocks enjoy returns in excess of 21% per year. Yet, when the model’s reading falls into the “negative” zone, the S&P has lost nearly -25% per year. However, it is vital to understand that there are times when good economic news is actually bad for stocks and vice versa. Thus, we turn to our Economic model to help us stay in tune with where we are in the ovearll economic cycle.

  • Inflation Model: They say that “the tape tells all.” However, one of the best “big picture” indicators of what the market is expected to do next is inflation. Simply put, since 1962, when the model indicates that inflationary pressures are strong, stocks have lost ground. Yet, when inflationary pressures are low, the S&P 500 has gained ground at a rate in excess of 13%.

  • Market Valuation Model: If you want to get analysts really riled up, you need only to begin a discussion of market valuation. While the question of whether stocks are overvalued or undervalued appears to be a simple one, the subject is actually extremely complex. To simplify the subject dramatically, investors must first determine if they should focus on relative valuation (which include the current level of interest rates) or absolute valuation measures (the more traditional readings of Price/Earnings, Price/Dividend, and Price/Book Value). We believe that it is important to recognize that environments change. And as such, the market’s focus and corresponding view of valuations are likely to change as well. Thus, we depend on our Valuation Models to help us keep our eye on the ball.

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    The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Stocks should always consult an investment professional before making any investment.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided â??as isâ? without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    The information contained in our websites and StateoftheMarkets.com publications is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered with the U.S. Securities and Exchange Commission as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Returns for the Market Models are a hypothetical implementation of the model signals. When a signal is given, the closing price for the S&P 500 is used. Hypothetical returns do not reflect actual trading. Please note that hypothetical test results do not take into account market conditions which could adversely affect management decisions.

    Index returns are price only and do not include the reinvestment of dividends. The S&P 500 is a stock market index containing the stocks of 500 large-cap corporations, most of which are US companies. The index is the most notable of the many indices owned and maintained by Standard & Poor’s, a division of McGraw-Hill. S&P 500 is used in reference not only to the index but also to the 500 companies that have their common stock included in the index.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

  • About the Author

    Donald B. Moenning is the head of equity research at Heritage Capital Management, a Chicago-based investment management firm founded in 1989, as well as StateoftheMarkets.com. Don holds degrees in Economics and Business Leadership from the University of Puget Sound, lives in Denver, Colorado, and is an avid snowboarder.