Blog - Original (Primary) Research

Following are the introductory paragraphs of entries summarizing original CXO Advisory Group LLC research offered via the blog.

March 15, 2010 - Doing Momentum with Style (ETFs)

The blog entry of 3/25/09 concludes that "a trader who periodically switches to the hottest known anomaly based on a rolling window of past performance may be able to beat the market. Anomalies appear to have their own kind of momentum." Does momentum therefore work for style-based exchange-traded funds (ETF)? To investigate, we apply a simple momentum strategy to the following six ETFs that cut across capitalization (large, medium and small) and value versus growth:

iShares Russell 1000 Value Index (IWD) - large capitalization value stocks.
iShares Russell 1000 Growth Index (IWF) - large capitalization growth stocks.
iShares Russell Midcap Value Index (IWS) - mid-capitalization value stocks.
iShares Russell Midcap Growth Index (IWP) - mid-capitalization growth stocks.
iShares Russell 2000 Value Index (IWN) - small capitalization value stocks.
iShares Russell 2000 Growth Index (IWO)- small capitalization growth stocks.

The simple (6-1) strategy allocates all funds each month to the one style ETF with the highest total return over the past six months. A six-month ranking period is intuitively large enough to gauge style momentum but small enough to react to changes in business conditions that might favor one style over others. Using monthly dividend-adjusted closing prices for the style ETFs and S&P Depository Receipts (SPY) over the period 8/01-2/10 (103 months, limited by data for IWS/IWP), we find that: More...

March 4, 2010 - Update: Preliminary Test of RYT Model Daily Valuations

Since 7/9/09, Christophe Faugère has been publishing (almost) daily "Market Estimates" of the value of the S&P 500 Index based on Required Yield Theory (RYT). RYT views investors as: (1) requiring that U.S. stocks and bonds in aggregate prospectively provide a real after-tax yield directly related to real long-term GDP per capita growth; and then, (2) deciding between stocks and bonds based on the better after-tax real return. To test the predictive power of these market estimates, we focus on daily percentage mismatches between estimated and actual values of the S&P 500 Index [(Estimated-Actual)/Actual] and exploitability of these mismatches via S&P Depository Receipts (SPY). Using daily RYT market estimates and daily levels of the S&P 500 Index and SPY over the period 7/9/09 through 3/3/10 (160 daily model outputs), we find that: More...

February 19, 2010 - Simple Gold-Gold Stock Fund Pair Trading

A reader asked about the gold-gold stocks arbitrage-like argument in Jay Kaeppel's 2/2/10 article "Don't Give Up On Gold Stocks Just Yet", for which his 9/21/04 article "Gold Stock and Gold Bullion" is a more robust antecedent. Does the relationship between gold and gold stocks support more frequent switching than indicated in these articles? For example, if SPDR Gold Shares (GLD) have outperformed (underperformed) a gold/precious metals stock fund over the past quarter, does it then tend to underperform (outperform)? Using weekly adjusted closes for GLD and Market Vectors Gold Miners GDX) since inception (November 2004 and May 2006, respectively) through mid-February 2010 and for Rydex Precious Metals (RYPMX) over the same period as that for GLD, we find that: More...

February 18, 2009 - Alternative Sector ETF Momentum Metrics

Readers have suggested two alternative metrics for the simple momentum strategy tested in the blog entry of 12/22/09: (1) Sharpe Ratio over the past six months, and (2) slope of price over the past six months. Do these metrics outperform past six-month return in a momentum strategy applied to the following nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor's Depository Receipts (SPDR), all of which have trading data back to December 1998:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

The two alternative strategies are: (1) at the end of each month, allocate all funds to the sector ETF with the highest monthly Sharpe Ratio over the past six months (SR6-1); and, (2) at the end of each month, allocate all funds to the sector ETF with the highest monthly price slope over the past six months (Slope6-1). For comparison, we also update the strategy of monthly allocation to the sector ETF with the highest total return over the past six months (6-1). Using monthly dividend-adjusted closing prices for the nine sector ETFs and S&P Depository Receipts (SPY) over the period 12/98-1/10 (134 months), we find that: More...

February 11, 2010 - Testing the Equity Mutual Fund Liquidity Ratio

A reader citing Mark Hulbert's recent column on the Fosback Index and its Ned Davis variant requested an evaluation of the indicators. The reasoning for these indicators is that a high (low) ratio of cash equivalents to assets among equity mutual funds indicates strong (weak) potential for near-term purchasing of stocks. Norman Fosback adjusts the raw liquidity ratio based on current interest rates, reasoning that mutual fund managers have more (less) incentive to hold cash when interest rates are high (low). The Investment Company Institute (ICI) surveys mutual fund managers monthly to measure the aggregate mutual fund liquidity ratio. However, only the most recent survey results and year-end values of the liquidity ratio since 1984 are publicly available. Note that current-month values are available with a lag of about one month. Using year-end and February closes of the S&P 500 index, a year-end short-term Interest Rate Composite and year-end values of the equity mutual fund liquidity ratio for 1984 through 2009 (26 observations), we find that... More...

February 8, 2010 - The 2000s: A Market Timer's Decade? (Revised 2/9/10 to insert "long-only" based on a reader comment)

Did the poor returns and high volatility of the U.S. stock market during 2000-2009 represent a tailwind for market timers? To check, we measure the performances of various simple market timing approaches (equal weighting with cash, 10-month simple moving average signals, momentum, and coin-flipping) over the decade. Using monthly closes for S&P Depository Receipts (SPY), a short-term interest rate composite and the S&P 500 index from December 1999 through December 2009 (and earlier for S&P 500 Index signal calculations), we find that: More...

February 5, 2010 - Update: The Stock Market and the Super Bowl

Investor mood affects the market. Sports affect investor mood. The biggest mood-mover among sporting events in the U.S. is the National Football League's Super Bowl. Is the week before the Super Bowl especially distracting and anxiety-producing? Is the week after the Super Bowl focusing and anxiety-relieving? (Presumably, post-game elation and depression cancel between respective fan bases.) Using past Super Bowl dates since inception and daily/weekly S&P 500 Index data for 1967-2009 (43 events), we find that: More...

February 3, 2010 - Simple Sector ETF Momentum Strategy Robustness/Sensitivity Tests (Updated 2/3/10 with a reader comment)

Readers have requested sensitivity testing of the ranking interval for the simple sector momentum trading strategies described in the blog entry of 12/22/09. These strategies generally reallocate funds monthly, based on highest past return, to one of the nine sectors defined by the Select Sector Standard & Poor's Depository Receipts (SPDR) exchange-traded funds (ETF):

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

As noted in that prior analysis, available data is so limited that sensitivity test results may well be misleading. With that reservation, here are two additional robustness/sensitivity tests: (1) additional benchmarking of prior results against an equally weighted portfolio of sector ETFs; and, (2) comparison of ranking intervals ranging from one to 12 months applied to a narrowed XLK-XLP-XLU set of sectors. Using monthly adjusted closing prices for the sector ETFs and S&P Depository Receipts (SPY) over the period 12/98-11/09 (132 months), we find that: More...

January 19, 2010 - Update: Any Stock Market Anomalies Around Three-day Weekends?

A reader asked: "Is there any data on what typically happens after a three-day weekend?" Some stock market experts hypothesize that more traders than usual move to the sidelines before long weekends to avoid the risk of bad news during the extra long downtime. Assuming most traders are long, such selling would depress stock prices before three-day weekends and elevate them afterward as traders re-enter positions. To investigate, we analyze the historical behavior of the S&P 500 Index during the three trading days before and the three trading days after three-day weekends. Using daily closing levels of the S&P 500 Index for 1950-2009 (60 years and 337 three-day weekends), we find that... More...

January 14, 2010 - Testing a Complex Breakout Indicator

A reader, citing a technical indicator recommended in Mastering the Trade by John Carter, inquired about the usefulness of watching for times when certain Bollinger Bands (upper and lower bounds two standard deviations from a 20-day simple moving average) converge within a certain Keltner Channel (upper and lower bounds 1.5 times the 20-day average range from a 20-day average typical price). Breakouts from this condition are supposedly reliable for both indexes and individual securities, meaning that price continues in same direction for a while without material reversal, because the condition represents true "consolidation." There is no specification for trend duration after these "reliable" breakouts. Using daily high, low and unadjusted closing prices for S&P Depository Receipts (SPY) for band/channel calculations, and adjusted closing prices for return calculations, over the period 1/29/93 through 1/8/10 (nearly 17 years), we find that: More...

January 13, 2010 - Does the Turn-of-the-Month Effect Work for Sectors?

A reader inquired whether the Turn-of-the-Month Effect, a significant concentration of positive stock market returns around the turns of calendar months, works for stock market sectors. To investigate, we measure turn-of-the-month (TOTM) returns for the nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor's Depository Receipts (SPDR), all of which have trading data back to December 1998:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

In an additional (shorter) test, we add measurement of TOTM returns for SPDR Gold Shares (GLD) as a proxy for gold. We define TOTM (per the Strategy Test) as the eight-trading day interval from the close five trading days before the first trading day of a month to the close on the fourth trading day of the month. Using daily dividend-adjusted closes for the sector ETFs and for S&P Depository Receipts (SPY) as a benchmark from 12/22/98 through 1/8/10 (133 months) and for GLD from 11/18/04 through 1/8/10 (62 months), we find that: More...

January 5, 2010 - Testing the Rydex Asset Ratio

A reader suggested looking at Rydex asset ratios as stock market sentiment indicators. The reasoning for these indicators is that a high (low) ratio of assets in bullish funds to assets in bearish funds indicates an overbought (oversold) market. Are these indicators useful? The most timing-intensive traders arguably use leveraged exchange traded funds (ETF), thereby suggesting that bull-bear asset ratios for such funds may be especially informative. Using daily closing asset levels for the Rydex 2x S&P 500 ETF and the Rydex Inverse 2x S&P 500 ETF from the earliest available on 11/5/07 through 12/31/09 (544 trading days), along with contemporaneous daily opens and closes of the S&P 500 index, we find that... More...

January 1, 2010 - Backwards January Barometer?

Does the performance of the U.S. stock market in January relate to the performance of the market during the prior year, perhaps due to tax-related effects? Using monthly closes for the S&P 500 Index from December 1949 (using the January 1950 open) through January 2009 (60 years), we find that... More...

December 31, 2009 - The Hottest Spots in Site for 2009

In case you may have missed them, here are the most visited items at CXOadvisory.com for all of 2009 (below the main menu level): More...

December 30, 2009 - Update: Blogger Sentiment Analysis

Are prominent stock market bloggers in aggregate able to predict the market's direction? The Ticker Sense Blogger Sentiment Poll "is a survey of the web's most prominent investment bloggers, asking 'What is your outlook on the U.S. stock market for the next 30 days?'" (bullish, bearish or neutral) on a weekly basis. The site currently lists 18 active prognosticators. Participation has varied over time. Because Ticker Sense collects data weekly, we look at weekly measurements and changes in weekly measurements. Because the poll question asks for a 30-day outlook, we test the forecasts against stock market behavior four weeks into the future. Because polling takes place Thursday-Sunday, we use the coincident Friday close to represent the state of the stock market for each poll (except for the poll of 10/13/08, which took place on Monday and therefore relates to the Monday close). We use [% Bullish] minus [% Bearish] as the net sentiment measure for each poll. Using the 173 measurements from the poll from inception on 7/10/06 through 12/21/09 and contemporaneous weekly closes of the S&P 500 index as representative of the the broad stock market, we find that... More...

December 28, 2009 - Update: Stock Market Valuation Ratio Trends

To determine whether the stock market is expensive or cheap, some experts use aggregate valuation ratios, either trailing or forward-looking, such as price-earnings ratio (P/E) and price-dividend ratio. Operating under a belief that such ratios are mean-reverting, most imminently due to movement of stock prices, these experts expect high (low) future stock market returns when the these ratios are low (high). Where are the ratios now? Using the S&P 500 Index close for 12/24/09, actual and forecasted earnings and dividend data from Standard & Poor's as of 12/22/09, we find that: More...

December 24, 2009 - Update: Do Any Sector ETFs Reliably Lead or Lag the Market?

Do any of the major U.S. stock market sectors systematically lead or lag the overall market, perhaps because of some underlying business/economic cycle? To investigate, we examine the behaviors of the nine sectors defined by the Select Sector Standard & Poor's Depository Receipts (SPDR), all of which have trading data back to December 1998:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

Using monthly adjusted closing prices for these exchange traded funds (ETF) and for the S&P 500 index mimicking SPY (to represent the overall U.S. stock market) over the period 12/98-11/09 (132 months), we find that: More...

December 23, 2009 - Update: Sector Performance by Calendar Month

The Trading Calendar presents full-year and monthly cumulative performance profiles for the overall stock market (S&P 500 Index) based on its average daily behavior since 1950. How much do the corresponding monthly behaviors of the various stock market sectors deviate from an overall market profile? To investigate, we consider the nine sectors defined by the Select Sector Standard & Poor's Depository Receipts (SPDR), all of which have trading data back to December 1998:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

Using monthly adjusted closing prices for these exchange traded funds (ETF) since inception, along with contemporaneous data for Standard & Poor's Depository Receipts (SPY) as a benchmark, for 12/98-11/09 (132 months), we find that: More...

December 22, 2009 - Simple Sector ETF Momentum Strategy Performance (Updated 12/23/09 to add robustness test and correct calculation errors)

Do simple momentum trading strategies applied to the major U.S. stock market sectors outperform the overall U.S. market? To investigate, we apply three simple momentum strategies to the nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor's Depository Receipts (SPDR), all of which have trading data back to December 1998:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

The three strategies are: (1) at the end of each month, allocate all funds to the sector ETF with the highest total return over the past six months (6-1); (2) at the end of each month, allocate all funds to the sector ETF with the highest total return over the six months ending the prior month (6-1-1); and, (3) at the end of each month, allocate all funds either to the sector ETF with the highest total return over the past six months or to cash depending on whether the S&P 500 Index is above or below its 10-month simple moving average (6-1-SMA10). A six-month ranking period is intuitively large enough to gauge sector momentum but small enough to react to changes in business conditions that might favor one sector over others. Using monthly adjusted closing prices for the sector ETFs, the S&P 500 index, 3-month Treasury bills (T-bills) and S&P Depository Receipts (SPY) over the period 12/98-11/09 (132 months), we find that: More...

December 21, 2009 - Update: U.S. Stock Returns Around New Year's Day

Does the New Year's Day holiday, a time of replanning and income tax positioning, systematically affect investors in a way that translates into stock returns? To investigate, we analyze the historical behavior of the S&P 500 Index during the five trading days before and the five trading days after the holiday. Using daily closing levels of the S&P 500 index for 1950-2008 (59 events), we find that... More...

December 14, 2009 - Update: U.S. Stock Returns Around Christmas

Does the Christmas holiday, a time of putative good will toward all, give U.S. stock investors a sense of optimism that translates into stock returns? To investigate, we analyze the historical behavior of the S&P 500 Index during the five trading days before and the five trading days after the holiday. Using daily closing levels of the S&P 500 index for 1950-2008 (59 events), we find that... More...

December 4, 2009 - Update: The ADP Employment Report and Stock Returns

Does the monthly ADP National Employment Report predict U.S. stock market returns? This report "was developed to help meet the need for additional timely and accurate estimates of short-term movements in the national labor market among economists, financial professionals, and government policy-makers. Because ADP pays 1-in-6 private sector employees in the United States every pay period across a broad range of industries, firm sizes, and geographies, it has a unique and significant perspective on the U.S. labor market." ADP releases the report for each month near the beginning of the following month. Using historical monthly ADP estimates of seasonally adjusted non-farm payrolls for December 2000 through November 2009 (108 months) and contemporaneous monthly S&P 500 Index data, we find that: More...

December 3, 2009 - Comparing Lagged and Forward RTV and REY Models

The Reversion-to-Value (RTV) Model and the Real Earnings Yield (REY) Model are alternative ways of thinking about U.S. stock market (S&P 500) valuation. The former hypothesizes that the aggregate forward earnings yield (E/P) for the S&P 500 relates positively to future stock market returns, and the latter hypothesizes that the gap between the aggregate forward earnings yield and the forward total inflation rate (E/P - I) relates positively to future stock market returns. Both models use a technical Earnings Forecast based on short-term momentum/acceleration and long-term reversion to trend. The REY Model uses also a technical Inflation Forecast based on both persistence and momentum. Do these input earnings and inflation forecasts add value? Using forecast inputs and model outputs for March 1989 through August 2009 (246 months), we find that: More...

December 1, 2009 - Update: Productivity and the Stock Market

Does the quarter-to-quarter change in U.S. workforce productivity indicate anything about future U.S. stock market behavior? Specifically, does a rise (decline) in productivity portend strong (weak) earnings and therefore an advance (decline) for stocks? Using annualized quarterly changes in non-farm labor productivity as originally reported by the Bureau of Labor Statistics (BLS) and S&P 500 Index data spanning January 1950 through September 2009 (239 quarters), we find that: More...

November 18, 2009 - Update: U.S. Stock Returns Around Thanksgiving

Does the Thanksgiving holiday, a time of families celebrating plenty, give U.S. stock investors a sense of optimism that translates into stock returns? To investigate, we analyze the historical behavior of the S&P 500 Index during the three trading days before and the three trading days after the holiday. Using daily closing levels of the S&P 500 index for 1950-2008 (59 events), we find that... More...

November 17, 2009 - The Distress Index and Stock Returns

Since 1967, the Foundation for Economic Education has calculated early in each month the "Distress Index". This index combines currently available U.S. readings of: unemployment; consumer price index; gross domestic product; total capacity utilization;and, household financial obligations as a percent of disposable personal income. Is this index informative about future U.S. stock returns? Using monthly values of the Distress Index and monthly closes of the S&P 500 Index from January 1967 through October 2009 (514 months), we find that: More...

November 16, 2009 - Update: The Best and Worst Days and Weeks of the Year

Are there particular calendar dates or week-length intervals that are especially bad or good for U.S. stocks, perhaps because of culture, regulation or law? Using S&P 500 Index daily closes for 1/3/50 through 11/12/09 (nearly 60 years), we find that... More...

November 11, 2009 - Personal Savings Rate and the Stock Market

In an 11/6/09 entry in his blog, guru Marc Faber observes: "There seems to be an inverse relationship between the savings rate and the stock market performance. When the savings rate is declining it is favorable for equities whereas when savings rate is increasing such as was the case in the late 1960`s, early 1980`s, and now, stock prices tend to move sideward or down." Is this belief correct? If so, can investors exploit it? To check, we relate the U.S. personal saving rate as calculated quarterly by the Bureau of Economic Analysis (as a percentage of disposable personal income) to the quarterly change in the S&P 500 index. Using data from the first quarter of 1952 through the third quarter of 2009 (231 quarters), we find that: More...

November 6, 2009 - Update: Testing the Fed Model

The key guiding belief of the Fed Model of stock market valuation is that investors use a Treasury note (T-note) yield as a benchmark for the expected (forward) earnings yield of the stock market. When the gap between the forward earnings yield and the T-note yield is positive (negative), stocks are relatively attractive (unattractive), and investors bid stocks up (down) to restore yield parity. To test that belief, we relate the gap between the S&P 500 1-year forward earnings yield and the 1-year T-note yield to future returns for the S&P 500 index. We calculate the 1-year forward earnings yield from the Earnings Forecast and the level of the S&P 500 Index. Using end-of-month data for the two yields over the period March 1989 (limited by availability of an input variable for the Earnings Forecast) through October 2009, we find that: More...

October 28, 2009 - Testing a Market Neutral Equity Mutual Fund

A reader asked: "Could you review the TFS Market Neutral (TFSMX) mutual fund the same way you reviewed the Hussman Strategic Growth (HSGFX) mutual fund? TFSMX is a market neutral mutual fund from the same firm that runs a market neutral hedge fund available only to accredited investors." Using weekly adjusted prices for TFSMX during 9/7/04 (the earliest available) through 10/23/09 (268 weeks), along with comparable data for HSGFX, the S&P 500 Index and S&P Depository Receipts (SPY), we conclude that: More...

October 19, 2009 - Clustering of Market Closes Near Round Numbers?

There is a fair amount of research on clustering of prices for individual stocks and other assets near round numbers. (For examples, search the Social Science Research Network for "price clustering".) Do closing levels of the S&P 500 Index tend to cluster near round numbers? To investigate, we count the number of daily closes for adjacent 10-point ranges of the S&P 500 Index from one centered on 500 to one centered on 1570. The first range in the sample is therefore 495-505 and the last is 1565-1575. Using all closes of the index above 495 (roughly since 1995), we find that: More...

October 16, 2009 - U.S. Stock Market Performance by Intra-year Phase

The full-year the Trading Calendar suggests that the U.S. stock market may have three phases over the calendar year. What is the typical performance of the market during each phase? Using daily S&P 500 index closing levels from January 1950 through October 15, 2009 (nearly 60 years), we find that: More...

September 30, 2009 - Greatest Hits of 2009 (to Date)

There will be no posts or site updates for the next few days. In case you missed them, here are the most visited items at CXOadvisory.com during 2009 to date (among the top 50, excluding main menu items):

The most visited individual blog entries during 2009 to date, in descending order of visitors: More...

September 28, 2009 - Update: Does a Weak Dollar Favor Large Capitalization Stocks?

When the dollar weakens, large capitalization U.S. firms may benefit from their international footprints, generating substantial revenues around the globe in local currencies and converting those revenues into an increased number of dollars on their income statements. Should investors therefore shift toward (away from) large capitalization stocks when the dollar weakens (strengthens)? To check, we compare the performance of the Dow Jones Industrial Average (DJIA) (representing internationally positioned, large capitalization stocks) and the Russell 2000 Index (representing small capitalization stocks) while and after the dollar trends against the euro. We focus on non-overlapping three-month measurement intervals to match the corporate earnings release schedule. Using data for the stock indexes and the dollar-euro exchange rate over the period January 2000 through (most of) September 2009 (about 38 complete quarters), we find that: More...

September 25, 2009 - Update: The Dollar-Euro Exchange Rate and U.S. Stocks

Whenever a trend in the dollar-euro exchange rate develops, experts theorize. A falling dollar is good because U.S. exports boom and domestic employment rises. Or, a falling dollar is bad because capital flees the U.S., and import prices spur inflation. Are there any reliable and exploitable relationships between the dollar-euro exchange rate and U.S. stocks? To check, we apply regressions and rankings to characterize the short-term and intermediate-term interactions between the exchange rate and the stock market. Using daily data for the dollar-euro exchange rate and the S&P 500 Index over the period January 2000 through (most of) September 2009 (over 2,400 trading days), we find that: More...

September 23, 2009 - P/E10 and Future Stock Returns

A reader asked: "Have you looked at P/E10 as to the value of the markets?" The definitive P/E10 is perhaps that implied by the publicly available Robert Shiller data set, which calculates P/E10 monthly as the ratio of the inflation-adjusted S&P Composite Index level to the average monthly inflation-adjusted 12-month trailing earnings of the index companies over the previous ten years. Inflation adjustments approximately cancel in this calculation. To test the predictive power and usefulness of P/E10, we employ regression, ranking and cumulative value tests. Using the monthly value of P/E10 and the level of the S&P Composite Index as calculated by Robert Shiller over the period January 1881 through August 2009, we find that... More...

September 22, 2008 - Update: The Stock Market and the National Election Cycle

Many stock market experts cite the year (1, 2, 3 or 4) of the U.S. presidential term cycle as a useful indicator of U.S. stock market returns. Game theory suggests that presidents deliver bad news immediately after being elected and do everything in their power to create good news just before ensuing biennial elections. Are some presidential term cycle years reliably good or bad? If so, are these abnormal returns concentrated in certain quarters? Finally, what does the stock market do in the period immediately before and after a national election? Using S&P 500 index data from January 1950 through July 2009 (nearly 59.5 years) and focusing on "political quarters" (Feb-Apr, May-Jul, Aug-Oct and Nov-Jan), we find that: More...

September 18, 2009 - Short-term Net Money Flow and Stock Returns

A reader asked:

"Is there any tradable relationship between aggregate net money flows and market returns. I have read many articles pointing out how, according to money flows, investors got out at the bottom in 2008. Can flows into the equity market at large predict (or 'inversely' predict) returns?"

To check, we relate return to the net money flow reported in the referenced Wall Street Journal data, focusing on the Dow Jones Industrial Average (DJIA). Using DJIA net money flows and DJIA returns at weekly and monthly intervals since May 2007 (the earliest available), we find that... More...

September 16, 2009 - Shorting Leveraged ETF Pairs

Studies of leveraged exchange-traded funds (ETF), such as those summarized in "The Unintended Characteristics of Leveraged and Inverse ETFs" and "The Performance of Leveraged ETFs over Extended Holding Periods", find that the frequent rebalancing actions necessary to maintain targeted leverage substantially affect long-term performance. A reader observed:

"I've read so many articles about how the leveraged ETFs are screwy, and they chew up both sides of the market due to their rebalancing, etc. So I've been shorting equal amounts of the long and short double ETFs. I'm short the QID and the QLD, short the TWM and UWM, short the UGL and the GLL, and short the DIG and DUG. I figure, if they are bad longs, they must be good shorts. My thinking is that in a STRONGLY trending market, the position may lose some ground, at least temporarily. But in a weakly trending market, or sideways, both will decay nicely. When I look back on the ones that are a few years old, they just melt away (one side more than the other)."

Does this reverse thinking work? To check, we examine the inception-to-date performance of paired short positions for Ultra S&P500 ProShares (SSO) / UltraShort S&P500 ProShares (SDS) and Ultra QQQ ProShares (QLD) / UltraShort QQQ ProShares (QID). Using daily adjusted closes for these 2X and -2X ETFs for the period 7/13/06 (the first date prices for all four are available) through 9/11/09, we find that... More...

September 14, 2009 - Update: Should the "Anxious Index" Make Investors Anxious?

Since 1990, the Federal Reserve Bank of Philadelphia has conducted a quarterly Survey of Professional Forecasters. The American Statistical Association and the National Bureau of Economic Research conducted the survey from 1968-1989. Among other things, the survey solicits from experts on the economy the probabilities of recession in each of the next four quarters. The "Anxious Index" is the probability of recession in the next quarter. When professional forecasters are relatively pessimistic (optimistic) about the economy, does the stock market go down (up) over the coming quarters? Using raw survey results and quarterly S&P 500 Index data from the third quarter of 1968 through the second quarter of 2009 (164 surveys), we find that: More...

September 10, 2009 - Basic Equity Return Statistics

What do the basic statistics of stock market returns tell us about risk and predictability? Basic statistics are the measures of the moments of the return distribution: mean (average), standard deviation, skewness and kurtosis. Are these characteristics of stock market returns (and the risk-reward environment they imply), stable over time? To make the investigation manageable, we calculate these four statistics month-by-month based on daily returns for each month. Using daily closes of the Dow Jones Industrial Average (DJIA) for January 1930 through August 2009 (956 months) and the S&P 500 index for January 1950 through August 2009 (716 months), we find that: More...

September 9, 2009 - The Federal Deficit and Stock Returns

Does the level of the U.S. federal deficit systematically influence stock returns, perhaps by stimulating consumption and thereby lifting corporate earnings (bullish) or by igniting inflation and thereby elevating discount rates (bearish)? To check, we compare stock returns to the deficit as a percentage of Gross Domestic Product (GDP) from the Office of Management and Budget. We align stock returns with deficit calculations (federal fiscal years) as follows: (1) prior to 1977, we calculate annual returns from July through June; (2) we ignore the July 1976 through September 1976 transition quarter; and, (3) since 1977, we calculate annual returns from October through September. Using fiscal year deficit data and fiscal year returns for the Dow Jones Industrial Average (DJIA) during the 80-year period 1930-2009 (with 2009 data estimated and partial), we find that: More...

September 3, 2009 - Update: U.S. Stock Returns Around Labor Day

Does the Labor Day holiday, marking the end of summer vacations, signal any unusual return effects by refocusing U.S. stock investors on managing their portfolios? By its definition, this holiday brings with it any effects from three-day weekends and the turn of the month. To investigate the possibility of short-term effects on stock market returns around Labor Day, we analyze the historical behavior of the stock market during the three trading days before and the three trading days after the holiday. Using daily closing levels of the S&P 500 Index for 1950-2008 (59 observations), we find that... More...

August 28, 2009 - Enhancing Asset Class Momentum with Downside Risk Avoidance?

A reader wondered about the value of combining momentum and downside risk avoidance for tactical asset class allocation, as follows:

"One of the methods described in The Ivy Portfolio by Mebane Faber is a simple momentum-based asset class rotation system that shifts monthly into the one, two or three highest performing asset classes based on their performance over an average of the prior 3, 6 and 12 months. Instead of using just the 3, 6 and 12 month prior returns, what if we used an asset class Ulcer Performance Index (UPI): UPI = average return over prior 3, 6 and 12 months / average Ulcer Index (UI) over prior 3, 6 and 12 months. Would this modification identify which asset classes are in low-volatility uptrends and therefore the biggest bang for the buck? Would this allow us to invest comfortably in the top two asset classes, or even the top one asset class, instead of the top three as recommended by Faber?"

Calculation of UI over a rolling interval across a long sample period is cumbersome. As a substitute for UI, we use a standard deviation of downside weekly returns over past intervals for three asset classes: S&P Depository Receipts (SPY), iShares Barclays 20+ Year Treasury Bond (TLT) and iShares Russell 2000 Index (IWM) , with historical data limited to July 2002 (by TLT). Every four weeks, we allocate funds to whichever of SPY, TLT or IWM has the highest ratio of prior return to prior downside standard deviation, or to 13-week Treasury bills (T-bills) if all three past returns are less than the T-bill yield. Using weekly adjusted closes for the asset class proxies over the period 7/31/02 through 8/21/09 (369 weeks or about 89 months), we find that... More...

August 26, 2009 - Extreme Days Relative to Bear Market Ends

A reader hypothesized:

"Days of extreme volatility seem to cluster and generally in bear markets, and usually closer to the end of them. Might be a good analysis task."

For a simple test, we define "days of extreme volatility" as those for which the S&P 500 Index increases or decreases by more than 3%. We define "bear markets" as peak-to-trough declines of about 20% or more. Using daily closes of the S&P 500 index for 1/2/50 through 8/21/09 (15,006 trading days over about 60 years), we find that: More...

August 25, 2009 - The AAII Stock Screens

A reader asked:

"The American Association of Individual Investors (AAII) has a lot of strategies they have been paper-trading over the the last 11 years at AAII StockScreens. Have you ever done an evaluation of those performance results? It seem like every strategy builds upon a well-known investing book or otherwise publicized strategy from the last 40 years."

According to the AAII StockScreens "GettingStarted" introduction, the purpose of these screens "is to provide...access to a wide range of investment approaches. Some approaches follow the methods of well-know professionals, and allow you to implement their 'style of investing,' while other approaches implement time-tested techniques used to identify attractive stocks. These approaches run the full spectrum, from those that are value-based to those that focus primarily on growth. Some approaches are geared toward large-company stocks, while others uncover micro-sized firms. Most fall somewhere in the middle." AAII provides descriptions, characteristics and performance statistics for the screens. What can investors/traders learn from this collection of investment approaches? Using monthly performance statistics for the 59 screening approaches and for various potential benchmarks during the 139 months spanning January 1998 through July 2009 (available from AAII via download), we find that: More...

August 21, 2009 - Update: Testing the QQQQ Crash Trade Trigger

In 2007, a reader inquired about the usefulness of James Altucher's QQQQ Crash Trade Trigger. As stated by James Altucher: "The basic idea is that if the QQQQs, the volatile ETF representing the Nasdaq 100 index, make a sharp move down, then mean reversion will eventually kick in and bring the index back up. In other words, whenever people are panicking, that's the time to get in. The move is not always a huge move but it's been reliable." Using QQQQ daily open, low and closing prices for 3/10/99 (the earliest available) through 8/19/09, we find that: More...

August 18, 2009 - Update: Global Stock Market Contagion

A reader observed and asked in 2007:

"In the last few weeks, there have been several times when the Dow Jones Industrial Average (DJIA) was down a lot, and Asian stock markets followed it down the next day. How reliably do Asian stock markets follow sharp drops in the U.S. stock market?"

To investigate, we first examine the overall relationship between the U.S. stock market (represented, as suggested, by the DJIA) and Asian stock markets (Hang Seng and Nikkei 225). Then, we focus on what happens in Asian stock markets the day after sharp drops in the U.S. market. Using daily closing levels of the DJIA, the Hang Seng index and the Nikkei 225 index for 12/31/86-8/14/09 (roughly 5800 trading days), we find that: More...

August 14, 2009 - Aggregate Short Interest as a Stock Market Indicator

Does aggregate short interest serve as an intermediate-term stock market indicator based on either momentum (with an increase/decrease in aggregate short interest signaling a continuing stock market decline/advance) or reversion (with an increase/decrease in aggregate short interest signaling a stock market advance/decline)? To investigate, we compare the behavior of NYSE aggregate short interest with the behavior of the the NYSE Composite Index). The NYSE has measured aggregate short interest monthly (about mid-month) through August 2007 and approximately biweekly (mid-month and end of month) since. Using monthly/biweekly short interest data culled from NYSE news releases and contemporaneous NYSE Composite Index level/volume data for the period January 2002 through July 2009 (69 monthly followed by 35 biweekly observations), we find that... More...

August 13, 2009 - Update: Margin Debt as a Stock Market Indicator

Does margin debt serve as an intermediate-term stock market sentiment indicator based on either momentum (with an increase/decrease in margin debt signaling a continuing stock market advance/decline) or reversion (with high/low margin debt signaling a pending reversal)? To investigate, we compare the behavior of NYSE end-of-month margin debt with the monthly behavior of the the stock market (S&P 500 Index). Using data for the period January 1959 through June 2009 (607 months), we find that... More...

August 12, 2009 - Money Supply (M1) and the Stock Market

A reader wrote:

"I couldn't find an analysis for the M1 money supply similar to the one for M2. How about it? M2 cannot be an accurate money supply measure because it includes non-cash investments such as money market mutual funds. When the stock market corrects and people are exchanging stocks for say, money market mutual fund shares, the M2 figure will actually increase. The money supply is not literally increasing in such cases as no new cash is being created; there is merely an exchange of existing assets. Technically, only increasing the monetary base would increase the money supply, but M1 is a reasonable substitute for that as it includes the cash part of bank reserves."

The M1 money stock consists of funds that are readily accessible for spending: currency in circulation, traveler's checks, demand deposits and other checkable deposits. Is there a reliable relationship between historical variation in M1 and stock market returns? Using weekly data for seasonally adjusted M1 and the S&P 500 Index during January 1975 through July 2009 (1,804 weeks) , we find that: More...

August 10, 2009 - Update: POMO, TOMO and Stock Returns

A reader requested an update, as follows:

"Would you consider revisiting this piece and focusing only on 2009 year-to-date transactions? I'd suspect a much different outcome."

Another reader previously hypothesized that the Federal Reserve uses Open Market Operations repurchases to stimulate, or prop up, the stock market. The hypothesis supposes that private parties, such as prime brokers, use the funds released by these repurchases to buy (highly leveraged) stock futures contracts, immediately attracting arbitrageurs who simultaneously short futures and purchase stock indexes. Trend followers then pile on. The Federal Reserve states that open market operations regulate "the aggregate level of balances available in the banking system," thereby keeping the effective Federal Funds Rate close to a target level. The operations are predominantly repurchases, whereby the Federal Reserve provides liquidity. Do these Permanent Open Market Operations (POMO) and Temporary Open Market Operations (TOMO) affect the stock market? In other words, do the managers of POMO and TOMO transactions act as a "Plunge Protection Team?" Using accepted Treasuries transactions data for POMO (available since 8/25/05, 102 transactions) and TOMO (available since 7/7/00, 2,569 transactions) and contemporaneous daily closing S&P 500 index data, we find that: More...

August 6, 2009 - Simple Tests of an Asymmetric SMA Strategy

A reader asked:

"Should the moving average crossover threshold be symmetrical, or does it make sense to try getting back in close to the bottom?"

In other words, should we perhaps use a 200-day simple moving average (SMA) to stick with the typical long bull market grind upward and then switch to a 50-day SMA signal after crossing under the 200-day SMA so that we re-enter closer to a V-shaped bear market bottom? Using daily closes for the S&P 500 Index commencing 5/20/59, for the yield on 3-month Treasury bills (T-bills) commencing 1/4/60 and for S&P Depository Receipts (SPY), adjusted for dividends, commencing 1/29/93, all through the end of July 2009, we find that: More...

August 5, 2009 - Update: Money Supply (M2) and the Stock Market

Some investing experts track change in money supply as a potentially important indicator of future stock market behavior. When the money supply grows (shrinks), they theorize, asset prices go up (down). Or, money supply growth drives inflation, thereby elevating discount rates and depressing equity valuations. One measure of money supply is the M2 money stock, which consists of currency, checking accounts, saving accounts, small certificates of deposit and retail money market mutual funds. Is there a reliable relationship between historical variation in M2 and stock market returns? Using weekly data for seasonally adjusted M2 and the S&P 500 Index during November 1980 through July 2009 (1,499 weeks) , we find that: More...

July 31, 2009 - Update: Collective2, a Marketplace of Trading Systems

According to the introduction at Collective2, the site "monitors over 8,920 trading systems. Whether you trade stocks, futures, forex, or options - you'll find a trading strategy here... Think of us as an independent 'trading system auditor.' We’ll investigate which trading systems are profitable." Additionally, Collective2 serves sellers (renters) of trading systems: "If you are an expert trader, or have developed a 'black box' system, you can earn income by making your trade signals available to C2's over 32,000 registered users." What can investors/traders learn about stock trading systems from the aggregate data compiled at Collective2? Using statistics available there for 193 active stock trading systems (as of 7/29/09) and some contemporaneous returns for the S&P 500 Index and the NASDAQ Composite Index, we find that: More...

July 29, 2009 - Update: Leading Economic Index and the Stock Market

The Conference Board publishes "leading, coincident, and lagging indexes designed to signal peaks and troughs in the business cycle for nine countries around the world," including the widely cited Leading Economic Index (LEI) for the U.S. Does the LEI predict stock market behavior? Using the as-released monthly change in LEI from archived Conference Board press releases and contemporaneous S&P 500 Index data for June 2002 through June 2009 (85 monthly observations), we find that: More...

July 17, 2009 - The ISM PMI and Stock Returns

A reader asked:

"Lots of strategists and analysts look at Institute for Supply Management (ISM) data for guidance when it comes to the stock market. Does the ISM data predict stock returns?"

According to ISM, their Manufacturing Report On Business, published since 1931, "is considered by many economists to be the most reliable near-term economic barometer available." The summary component of this report is the Purchasing Managers' Index (PMI) aggregating monthly inputs from purchasing and supply executives across the U.S. regarding new orders, production, employment, deliveries and inventories. ISM releases the PMI for a month at the beginning of the following month. Presumably, a strong/increasing PMI corresponds to strong stock returns. Using monthly data for PMI and the monthly closes of the S&P 500 Index from January 1950 through June 2009 (714 months), we find that: More...

July 16, 2009 - Update: Home Prices and the Stock Market

Reader Richard Beddard, editor of Interactive Investor, inquired about the relationship between home prices and stock prices, citing concern that weakness in UK and US residential real estate markets may adversely affect stocks. Does weakness in home prices portend a decline in the stock market? Using annual median home price data from RealEstateABC.com (1968-2004) and the National Association of Realtors (2005-2008) and contemporaneous annual S&P 500 Index data for 1968-2008 (41 years), we find that: More...

July 13, 2009 - Update: Turn-of-the-Month Effect Persistence and Robustness

One of the stock market anomalies we seek to exploit in our Strategy Test is the Turn-of-the-Month Effect, a significant concentration of positive stock market returns around the turns of calendar months. Has the strength of this effect changed over time? Does it persist across indexes? Does it exist for all calendar months? Does it interact with the U.S. political cycle? To investigate, we define turn-of-the-month (TOTM) as the interval from the close six days before the last trading day of the month to the close five trading days after that day (a total of ten close-to-close trading days, centered on the monthly close). Using daily closes for the S&P 500 Index during January 1950 through June 2009 (714 months) and for the Russell 2000 Index during September 1987 through June 2009 (262 months), we find that: More...

July 6, 2009 - Update: Employment and Stocks Over the Intermediate Term

U.S. job gains or losses are a prominent element of the monthly investment-related news cycle, with the the business media and expert commentators generally interpreting changes in employment as an indicator of future economic and stock market health. Are these data in fact predictive of U.S. stock market behavior in subsequent months? Using monthly seasonally adjusted non-farm employment data from the Bureau of Labor Statistics and contemporaneous S&P 500 Index data for the period January 1950 through June 2009 (714 months), we find that: More...

July 2, 2009 - Regulatory Activity and Stock Returns

How does the U.S. Securities and Exchange Commission's (SEC) level of spending relate to U.S. stock market returns? Are expenditures reactive, growing after bear markets? Does higher spending boost investor confidence and subsequent stock returns? To investigate, we relate SEC outlays and the S&P 500 Index by federal fiscal year (October through September). Using agency outlay data for fiscal years 1990 through 2010 (estimates for the final two years) and S&P 500 closes for fiscal years 1986 through 2008, we find that: More...

July 1, 2009 - Update: End-of-Quarter Effect

Does the U.S. stock market offer a predictable pattern of returns around the ends of calendar quarters? Do funds deploy cash to bid stocks up at quarter ends to boost portfolio values at the end of reporting periods (with subsequent reversals)? Or, do they sell stocks to raise cash for redemptions? Is the end-of-quarter effect the same as the turn-of-the-month effect? To investigate, we examine average daily stock market returns from 10 trading days before to 10 trading days after the ends of calendar quarters. We also compare these returns to those for turns of all calendar months. Using daily closes for the S&P 500 index for January 1950 through June 2009, we find that: More...

June 30, 2009 - Update: Measuring the Size Effect with Capitalization-based ETFs

Do popular capitalization-based exchange-traded funds (ETF) confirm the existence of an exploitable size effect? To investigate, we compare the difference in returns (small minus large) for the following matched pair of small-large ETFs:

iShares Russell 2000 Index (Smallcap) Index (IWM)
iShares Russell 1000 (Largecap) Index (IWB)

Using monthly adjusted closing prices (incorporating dividends) for these ETFs during May 2000 (the earliest month available for both) through June 2009 (110 months), we find that: More...

June 29, 2008 - Update: Measuring the Value Premium with Style-based ETFs

Do popular style-based exchange-traded funds (ETF) confirm the existence of an exploitable value premium? To investigate, we compare the difference in returns (value minus growth) for each of the following three matched pairs of value-growth ETFs:

iShares Russell 2000 (Smallcap) Growth Index (IWO)
iShares Russell 2000 (Smallcap) Value Index (IWN)
iShares Russell Midcap Growth Index (IWP)
iShares Russell Midcap Value Index (IWS)
iShares Russell 1000 (Largecap) Growth Index (IWF)
iShares Russell 1000 (Largecap) Value Index (IWD)

Using monthly adjusted closing prices (incorporating dividends) for these ETFs during September 2001 (the earliest quarter available for IWP-IWS) through June 2009 (94 months), we find that: More...

June 26, 2009 - Update: Biotech Seasonality?

In an August 2004 article entitled "Time is Right for These 7 Biotechs", Jim Jubak states: "...in most years, biotechs decline in the spring as investors anticipate a summer hiatus in the conferences where new clinical results are announced. They rally in the fall as the conference schedule and the volume of news increases." Is this conventional wisdom correct? To check, we examine the behavior of the AMEX Biotechnology Index (BTK) across the calendar year. Using monthly closing levels for BTK from its inception in January 1995 through most of June 2009 (14.5 years), and contemporaneous monthly returns for the S&P 500 Index for detrending, we find that: More...

June 24, 2009 - Update: Trading Around Option Expiration Days

Does recent (post-1980s) data suggest any stock market return anomalies around the equity option expiration (OE) date (third Friday of each month)? To investigate, we examine close-to-close returns from five trading days before to five trading days after OE. Using daily closing prices for the S&P 500 index for January 1990 through June 2009 (233 OEs), we find that: More...

June 23, 2009 - Update: Any Recent Day-of-the-Week Anomalies?

Does recent (post-1980s) data suggest any day-of-the-week stock market return anomalies? To investigate, we examine close-to-close returns for the five trading days of the week during normal trading weeks (those having five trading days). In other words, we exclude weeks which have at least one day during which U.S. stock exchanges are closed all day. We do not exclude normal weeks adjacent to abnormal weeks, so a normal week occasionally follows or precedes a three-day weekend. Using daily closing prices for the S&P 500 index since the beginning of 1990 (847 normal weeks), we find that: More...

June 22, 2009 - Update: Stock Market Behavior Around the Mid-year Point

The middle of the year might be a time for funds to dress their windows and investors to review and revise portfolios. The 4th of July celebration might engender optimism among U.S. investors. Is there a reliable pattern to daily stock market returns around mid-year? To check, we analyze the historical behavior of the S&P 500 index from five trading days before through trading days after both the last trading day of June and the last trading day before the 4th of July. Using daily closing levels of the index for 1950-2008 (59 years), we find that... More...

June 18, 2009 - Do Investors Prefer an Idle Congress?

Our blog entry of 3/25/05 summarizes research finding that the U.S. stock market generates higher and less volatile when Congress is not in session. Is this finding robust to inclusion of recent data? To check, we examine average daily returns when the U.S. Senate is in session and out of session based on open-to-open market data (for alignment of daily Senate activity to potentially related daily trading). Using Senate in session data, party in power data and daily opening levels of the S&P 500 Index for 1978 through 2009 (partial through June 12), we find that... More...

June 16, 2009 - Revisiting Party in Power and Stock Returns

Past research relating U.S. stock returns to the party holding the Presidency mostly concludes that Democratic presidents are better for the stock market than Republican presidents. However, the President shares the power conferred by the electorate with Congress. Does historical data confirm that Democratic control of Congress is also better for stock returns than Republican control of Congress? Is control of the smaller Senate more decisive than control of the House of Representatives? To check, we relate annual stock returns to various combinations of party control of the Presidency, the Senate and the House of Representatives. Using party in power data and annual levels of the S&P 500 Index for 1950 through 2009 (partial), we find that... More...

June 11, 2009 - Is There a Best SMA Calculation Interval for Long-term Crossing Signals?

Is a 10-month simple moving average (SMA) the best SMA for long-term crossing signals (to exploit return momentum by capturing part of long uptrends while avoiding part of long downtrends)? If not, is there some other optimum SMA calculation interval? To check, we compare the average monthly returns and return variabilities from SMA crossing signals generated by SMA calculation intervals ranging from 3 to 48 months, as applied to the Dow Jones Industrial Average (DJIA). Using monthly DJIA closes for January 1930 through May 2009 and monthly yields for 3-month Treasury bills (T-bills) for January 1934 through May 2009, we find that: More...

June 10, 2009 - The Most Intriguing Gurus?

Which stock market experts intrigue investors and traders the most? For insight, we examine CXOadvisory.com log files for visits derived from web search engines based on search phrases associated with specific experts. We consider the top 50 search phrases for each of the last three years and consolidate similar searches (e.g., "jim jubak" and "jubak" or "ken fisher" and "fisher investments"). We also normalize results for each year by expressing relative interest in experts by dividing the number of searches for each by the total number of searches for all experts. Using the top 50 search phases arriving at CXOadvisory.com for each of 2007, 2008 and 2009 (to date), we find that: More...

June 4, 2009 - Performance Trend for Value Line's Timeliness Ranking

A reader observed and suggested:

"When I first started paying attention to markets in the 1980s and 1990s, one frequently cited argument against market efficiency was the Value Line anomaly - the fact that stocks with their best timeliness ranking had extraordinary returns over a long period. You can still find charts showing how well Group 1 has done versus Group 5 over a multi-decade period, but it seems that there has not been much cumulative performance separation among groups in recent years. Some raw data on their site shows that the predictive power of the ranking system seems to be missing from about 2000 onward. It might be interesting to look at what was once a widely discussed method of potential market outperformance."

The Value Line Timeliness Ranking System sorts stocks into five groups, with Group 1 (5) expected to exhibit the strongest (weakest) future performance. Value Line summarizes annual performance data for Groups 1 through 5 based on assumptions of both weekly and annual group re-sorting. Because the trading frictions of weekly re-sorting are likely high and difficult to estimate, we focus on performance by group for annual re-sorting. Specifically, we measure the Group 1 annual returns minus the Group 5 annual returns and the Group 2 annual returns minus the Group 4 annual returns. If the ranking system is persistently reliable, both sets of differences should be persistently positive, with the differences for the first set generally larger than those for the second set. Using the annual return data stated by Value Line for 1965 (partial year) through 2008 (nearly 44 years), we find that... More...

June 1, 2009 - Relative Strength of Indexes as a Future Return Indicator (Updated 6/3/09 to Correct a Reader-flagged Error in Methodology)

A reader pointed to the article "A Simple & Powerful Timing Indicator", which discusses the strength of the (risky) NASDAQ Composite Index relative to the (conservative) S&P 500 Index as a market timing indicator, and requested confirmation. The article cites the book Technical Analysis – Power Tools For Active Investors as the source for the indicator, which is based on the ratio of weekly index levels with respect to its 10-week moving average. This book has a copyright year 2005 and a second printing date of May 2005. We consider the use of both the NASDAQ Composite and Russell 2000 as risky indexes compared to the conservative S&P 500 Index. Using weekly closes for the S&P 500 Index, the NASDAQ Composite Index, the Russell 2000 Index, the readily tradable S&P Depository Receipts (SPY) and the 13-week Treasury bill (T-bill) yield from February 1993 (as limited by availability of SPY data) through May 2009, we find that: More...

May 19, 2009 - The Probability of Recession and Future Stock Returns

A reader suggested:

"Political Calculations has a tool to 'reckon the odds of U.S. recession in the next 12 months' based on a formula developed by the Econobrowser from a paper entitled 'The Yield Curve and Predicting Recessions' by the Federal Reserve Board's Jonathan Wright. What about looking at it the other way in trying to gauge the odds of recovery using the tool? There is the obvious question of how do you define recovery, but it may be a useful exercise."

Focusing on the usefulness of this yield curve model for predicting a recovery in the stock market, we relate its outputs to future stock market returns. Using monthly values for the 10-year Treasury note yield, the 13-week Treasury bill (T-bill) yield, the Federal Funds Rate (FFR) and the S&P 500 index over the period January 1990 through April 2009 (232 months), we find that: More...

May 14, 2009 - Turn-of-the-Month, Options Expiration and Trend

In our our blog entry of 5/5/09, we found that Russell 2000 Index returns have tended to be negative during the interval from options expiration (OE) to the turn of the month (TOTM), strongly positive during TOTM and near zero from TOTM to OE. Might the index trend leading up to these segments, defined by the index being over or under a simple moving average (SMA), discriminate the strength of monthly segment effects? Are the results robust? Using daily opening and closing levels of the Russell 2000 index over the period September 1987 through April 2009 (259 complete months), we find that: More...

May 12, 2009 - Combining Momentum and Moving Averages for Asset Classes

A reader wondered about the value of combining momentum and simple moving average signals for asset class allocation, as follows:

• Each month calculate the average momentum of each asset class over the prior 3, 6 and 12 months
• Hold the top positions as long as they are also trading above their 10-month SMA (otherwise go to cash)

We test these rules using exchange-traded funds (ETF) as easily tradable asset class proxies. However, many ETFs have very short histories, greatly restricting any such test. We use S&P Depository Receipts (SPY), iShares Barclays 20+ Year Treasury Bond (TLT) and iShares Russell 2000 Index (IWM) as available asset classes, with historical data limited to July 2002 (by TLT). We use the 13-week Treasury bill (T-bill) yield as a proxy for the return on cash. Each month, we allocate funds to the one asset class with the highest average momentum over the prior 3, 6 and 12 months, unless the momentum leader is below its lagged 10-month SMA, in which case we put all funds into T-bills. Using monthly values for SPY, TLT, IWM and the T-bill yield over the period July 2002 through April 2009 (82 months), we find that... More...

May 11, 2009 - "Sell in May" During Bull and Bear Conditions

A reader inquired:

"John Mauldin's 'Thoughts from the Frontline' of May 1, 2009 analyzes the 'Sell in May' concept separating out secular bull versus secular bear market cycles. There appears to be a stronger negative effect during the summer months in secular bear periods. I would be interested in your thoughts about this, given that you have already looked at the 'Sell in May' concept and found it to be fairly sound, at least since 1950."

One thought is that investors cannot reliably identify ex ante the beginnings and ends of secular bull and bear markets, so the retrospective observation is not confidently exploitable. Is there any exploitable (systematic) way to combine "Sell in May" with long-term stock market trend? To investigate, we return to Robert Shiller's dataset, which provides monthly levels of the S&P Composite Stock Index since 1871, and apply the following simple definition of stock market state: the stock market is in a bull (bear) state when its monthly close is above (below) its long-term simple moving average (SMA) of monthly closes. We consider both 1-year and 5-year SMAs to identify cyclical and secular trends. We split the investing year into two half-years (seasons): November (October close) through April (April close), and May (April close) through October (October close). We define the state of the market for a given season as bull or bear based on conditions at the end of the immediately preceding season. Using monthly closes for the S&P Composite Stock Index from 1951 through April 2009 (117 seasons), we find that... More...

May 8, 2009 - Pure Versus Buffered SMA Crossing Signals

A reader observed:

"One of the 'problems' with simple moving average (SMA) crossings is the churning from random price movements across the average. Lars Kestner proposes that an SMA crossing strategy can be improved by modifying the rules so that a BUY signal is generated when: (1) the close crosses over an SMA of the highs (rather than the closes); and, (2) the SMA of the closes is greater today than yesterday. A SELL signal occurs when the close crosses below an SMA of the lows (rather than the closes). These rules create a 'self-adaptive band' around the SMA to identify true trends, rather then random noise."

Do these "buffered" SMA crossing signals outperform "pure" crossing signals? To check, we compare the terminal values of contemporaneous pure and buffered signal strategies that buy on 200-day SMA crossovers and sell on 200-day SMA crossunders for both the long-run Dow Jones Industrial Average (DJIA) and its short-run exchange traded fund (ETF) proxy, the DIAMONDS Trust Series 1 (DIA). Using daily highs, lows and closes for DJIA and DIA over the entire periods available, we find that: More...

May 7, 2009 - Guru Stock Market Forecasting Accuracy Over Time

A reader inquired whether the average accuracy rate for U.S. stock market forecasts at Guru Grades has been stable over time. The average accuracy rate is a cumulative (inception-to-date) calculation. To test its stability, we calculate the inception-to-date, equally-weighted average guru accuracy rates as of October 1 for each of the past four years (with 2008 not yet fully graded). Over this time, the database has expanded, with some gurus lapsing to inactivity and others being added, so the mix of active forecasters changes over time. Using all currently collected and graded forecasts, we find that: More...

May 5, 2009 - The Turn-of-the-Month Effect and Option Strategy Losses

The Strategy Test presently focuses on iteratively selling put options on the Russell 2000 Index with less than one month to expiration to capture the volatility risk premium. The test strategy seeks to exploit the turn-of-the-month (TOTM) effect to enhance this capture. Are there characteristics of index returns from options expiration (OE) to TOTM, during TOTM and from TOTM to OE that might inform options moneyness and position adjustment decisions? Using daily opening and closing levels of the Russell 2000 Index over the period September 1987 through April 2009 (259 complete months), we find that: More...

May 4, 2009 - Persistence of Diversity in Investor/Trader Beliefs

Is there a "correct" (or at least most correct) view of what will happen in financial markets and why it will happen? If so, why do the beliefs of market participants, sophisticated and naive, never converge narrowly to that view? Why do we disagree so much all the time? The following items offer some ideas, from a generally behavioral perspective, on the persistence of diversity in investor/trader beliefs. Specifically: More...

April 17, 2009 - Update: Does Accurate Forecasting Get Attention?

Do individual experts whose stock market forecasting records are good (bad) attract (lose) attention? The "pro" argument is that investors/traders, seeking a market timing edge, eventually flock to good forecasters and ignore bad ones. The "con" arguments are that loud noise (for example, marketing-related or entertainment-driven) swamps information, and/or investors/traders do not or cannot measure forecaster accuracy, and/or investors/traders are more interested in ideas than forecasts. As a simple, partial test these arguments, we compare two data series: (1) the stock market forecasting accuracies of the 50 named gurus in the Guru Grades summary table; and, (2) the attention paid to these same individuals as defined by the number of matches found by a Google query on ("[guru name]" "stock market"), with the "stock market" term intended to filter out potential namesakes and relate each name to the forecasted variable. We find that: More...

April 9, 2009 - Update: ECRI's Weekly Leading Index and the Stock Market

Financial market experts sometimes cite the Economic Cycle Research Institute's (ECRI) Weekly Leading Index (WLI) as an important economic indicator, implying that it is somehow predictive of future stock market performance. According to ECRI, WLI "has an average lead of 10 months at business cycle peaks and three months at business cycle troughs..." with the most recent value summarizing any shift in overall outlook as a result of "data through the previous week." Does this indicator usefully foretell the future of equities? Using WLI readings for 3/2/01 to 3/27/09 (423 weeks) and contemporaneous weekly S&P 500 index data, we find that: More...

April 7, 2009 - Update: The Sunspot Cycle and Stock Returns (Testing Charles Nenner)

A reader asked:

"Have you had the opportunity to evaluate Charles Nenner as an equity and commodities forecaster?"

Charles Nenner is self-described as "the talk of Wall Street since accurately predicting some of the biggest moves in the Markets over the past few years." However, we found few references to him in the online business media. We therefore listened to a 7/12/07 Bloomberg-sponsored presentation/discussion of his methods (streaming "FEATURED PRESENTATION"). Dr. Nenner cites in that presentation a specific key indicator for equity returns, sunspot activity, that we can test. Using monthly sunspot counts from the National Geophysical Data Center (NGDC) and contemporaneous monthly S&P 500 index data for January 1950 through February 2009 (710 months), we find that... More...

April 6, 2009 - The DJIA-Gold Ratio as a Stock Market Indicator

A reader requested:

"Please test the following hypothesis [presented by Simon Maierhofer, co-founder of ETFguide.com] in the article 'Gold's Bluff - Is a 30 Percent Drop Next?': Ironically, gold is more than just a hedge against market turmoil. Gold is actually one of the most accurate indicators of the stock market's long-term direction. The Dow Jones measured in gold is a forward looking indicator."

For this analysis, we test relationships between the spot price of gold and the level of the Dow Jones Industrial Average (DJIA). We go back only as far as 1968, because: "On March 17, 1968, ...the price of gold on the private market was allowed to fluctuate...[, and] in 1975...the price of gold was left to find its free-market level." Using month-end data for the spot price of gold in dollars per ounce and the level of DJIA over the period 1968-2008 (492 months), we find that: More...

March 19, 2009 - Out-of-Sample Tests of Bullish Regime 2-day RSI Signals (Revised 3/21/09 to Correct a Calculation Error)

A reader suggested:

"It would be nice to see a study of a low 2-day Relative Strength Index (RSI) as a technical indicator as suggested by TradingMarkets.com."

We focus on exchange-traded funds (ETF) to perform two simple tests of 2-day RSI trading rules as described by TradingMarkets.com in "How to Trade ETFs: The 2-Period RSI and Entry Strategies for Traders" and "The Improved R2 Strategy: 84% Correct with Just 6 Rules". For the test of the first set of rules, we arbitrarily select the Technology Select Sector SPDR (XLK). For the test of the second set of rules, we use SPDRs (SPY) as specified. Since the in-sample rule selection period described in the latter article extends through 2006, we conduct the tests with subsequent data to avoid data snooping bias. Using daily adjusted closing prices for XLK and SPY over the period 3/20/06 through 3/17/09 and the Stockcharts.com RSI template, we find that: More...

March 16, 2009 - Insights from Google Insights?

Google Insights for Search enables users to "compare [normalized] search volume patterns across specific regions, categories, time frames and properties." Might search volume patterns for a stock or fund symbol reveal an investor/trader level of interest that later emerges predictably in price movements? For example, might search volume patterns for "XLF" reliably indicate future price movements for the Financial Select Sector SPDR (XLF)? Using weekly normalized U.S. "XLF" search volumes and weekly prices for XLF over the period 12/30/07 through 3/14/09 (64 weeks), we find that... More...

March 13, 2009 - Update: Converging Guru Accuracies

Do stock market gurus tend to anchor on bullish or bearish outlooks, regardless of market trends? If so, the distribution of their stock market forecasting accuracies should diverge when the market persists in one mode over a long period and converge when the market changes modes. The results at Guru Grades offer a limited way to test these hypotheses. Forecasts from the 2003-2007 bullish period still dominate the samples. If the gurus are mostly anchored on their outlooks, the 2008-2009 bearish period should be compressing the previously spreading distribution of accuracies by raising the grades of stuck bears and lowering the grades of stuck bulls. Based on trends in the Guru Grades accuracy rates over the past five bearish months, we find that: More...

March 5, 2009 - The President's Beliefs About the Stock Market

The President of the United States, especially when the President's party controls both houses of Congress, arguably has more power over the economy and financial markets than any other individual. This power derives from influence over legislation, including the tax code, and the latitude of the executive branch to set and implement policies not constitutionally or legislatively/judicially prohibited. What are the current President's beliefs about the stock market, as expressed directly or via proxies? Do these beliefs have implications for investors? We take whitehouse.gov as a potentially robust source of comments reflecting the President's beliefs, whether from the President himself or a proxy. Using the comments at whitehouse.gov directly indicating beliefs about the stock market, we find that... More...

February 9, 2009 - Turn-of-the-Month Effect in Rising and Falling Markets

One of the stock market anomalies we seek to exploit in our Strategy Test is the Turn-of-the-Month (TOTM) Effect, a significant concentration of excess stock market returns around the turns of calendar months. Does the TOTM effect work in both rising and falling stock markets? To answer this question, we define a rising (falling) market to be one that is above (below) its 200-trading day moving average. Using daily closes for the S&P 500 index for the period January 3, 1950 through January 8, 2009 (708 months), we find that: More...

January 13, 2009 - Do Stock Index Put-Call Ratio Trend Reversals Anticipate Trend Reversals of the Index Itself?

A reader inquired:

"In some technical analysis papers I read that trend reversals of the 10-day [lagging] average put-call ratio anticipate S&P 500 index trend reversals. Do you see any predictive power?"

In other words, does a change in the trend on an index put-call ratio (P/C) predict a general shift in investor sentiment? This question is fairly complicated from an analysis perspective, requiring definitions of "trend," "trend reversal" and "anticipate." We define "trend" as the normalized slope for the last ten trading days for both the S&P 500 index and the ten-day lagging average index P/C over the past ten trading days, normalizing by dividing the raw slope by the average value over the same ten trading days. We define "trend reversal" as a point at which the normalized slope crosses zero either from above or below (slope changes from positive to negative or negative to positive). We define "anticipate" as evidence of a systematic relationship between points at which the normalized slope of the ten-day average P/C changes sign and points at which the normalized slope of the S&P 500 index changes sign in the same direction. Using daily P/C data for the S&P 500 index from CBOE for the period 10/17/03 through 1/9/08 (1,317 trading days) and contemporaneous daily closing levels of the S&P 500 index, we find that... More...

January 9, 2009 - Hope for Stocks Around Inauguration Days?

Do investors (at least a plurality of them) tend to become more optimistic around U.S. presidential inauguration days, focusing on favorable changes for the coming four years and thereby pushing stock prices up? To investigate, we analyze the historical returns of the Dow Jones Industrial Average (DJIA) from five trading trading days before inauguration day through five trading days after inauguration day. Using historical inauguration dates since 1929 and daily closing levels of DJIA for October 1928 through December 2008 (20 inaugurations), we find that... More...

January 8, 2009 - Update: GDP Growth and Stock Market Returns

In their Global Investment Returns Yearbook 2005, Dimson, Marsh and Staunton (authors of Triumph of the Optimists) find that corporate profits do not represent a constant share of Gross Domestic Product (GDP). A rapidly growing economy does not necessarily generate commensurate growth in corporate profits, dividends and hence returns to investors. Since 1900, low-growth economies have superior stock market performance. "Historically, buying into equity markets with a high GDP growth rate has given a return that is below the return of markets with a low GDP growth rate." They conclude that "there is no apparent relationship between equity returns and GDP growth." Can we verify this conclusion for the time series of U.S. GDP? Using quarterly seasonally adjusted nominal GDP data and corresponding S&P 500 index data for 1950-2008 (234 quarters), we find that: More...

January 7, 2009 - Update: Quarterly Aggregate Earnings Estimate Evolutions

Standard and Poor’s quarterly S&P 500 earnings estimates are key inputs to our Real Earnings Yield Model and our Reversion-to-Value Model of stock market behavior. Several readers have inquired or commented about the accuracy of earnings estimates. How accurate have they been? Since late 2005, we have tracked the evolving bottoms-up S&P 500 year-over-year quarterly operating earnings growth estimates for 2006-2009 at roughly biweekly intervals. During the early part of this period, we recorded the average of the publicly available Standard and Poor's and Reuters earnings estimates (generally similar). During the latter part, we recorded only the Standard and Poor's estimates. Using evolving earnings forecasts for 2006-2009, we find that: More...

January 6, 2009 - The January Barometer Over the Long Run

The conventional wisdom is: "As goes January, so goes the rest of the year." Does long-run data support this belief? To check, we turn to the very long run dataset of Robert Shiller, which offers monthly levels of the S&P Composite Stock Index since 1871. Using monthly closes for the S&P Composite Stock Index from January 1871 through December 2008 (138 years), we find that... More...

December 29, 2008 - The January Effect Over the Long Run

Does long term data support belief in exceptionally strong performance by U.S. stocks in aggregate during the month of January? To check, we turn to the very long run dataset of Robert Shiller, which offers monthly levels of the S&P Composite Stock Index since 1871. Using monthly closes for the S&P Composite Stock Index from January 1871 through November 2008 (nearly 138 years), we find that... More...

December 26, 2008 - "Sell in May" Over the Long Run

Does the conventional wisdom of "Sell in May" work over the long term? To check, we turn to the very long run dataset of Robert Shiller, which offers monthly levels of the S&P Composite Stock Index since 1871. We split the investing year into two half-years (seasons): November (October close) through April (April close), and May (April close) through October (October close). Using April and October closes for the S&P Composite Stock Index from 1871 through 2008 (276 seasons), we find that... More...

December 24, 2008 - Testing A Simple Index Covered Calls Strategy (Revised 12/26/08 Based on Reader Comments)

Does iteratively selling short-term, slightly out-of-the-money covered calls on a broad stock index position reliably outperform buying and holding the index? We can explore the answer to this question by applying assumptions about trading frictions to the CBOE S&P 500 BuyWrite Index (BXM), a benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. Using monthly (options expiration date) data for BXM and the S&P 500 index spanning 7/19/86 through 12/19/08 (270 months), we find that... More...

December 18, 2008 - Stock Market Earnings Yield and Inflation Over the Long Run

Does the assumption applied in the Real Earnings Yield Model of a reasonably stable relationship between the stock market earnings yield and the inflation rate hold for "ancient" data? To answer this question, we turn to the very long run dataset of Robert Shiller. Using monthly data for the S&P Composite Stock Index, aggregate earnings for the stocks in this index, the consumer price index and the long-term interest rate over the period January 1871 through March 2008 (1,647 months), we find that: More...

December 17, 2008 - Update: Do Investors Care About "the Way Things Are Going"?

Are broad measures of public sociopolitical sentiment relevant to investor behavior? Do they have predictive power for stock returns as potential indicators of exuberance and fear? To address these questions, we investigate the responses of the public during recurring Gallup polls to the question:

"In general, are you satisfied or dissatisfied with the way things are going in the United States at this time?"

We hypothesize that high (low) sociopolitical satisfaction results in investors more (less) likely to buy and less (more) likely to sell, thereby affecting aggregate stock prices and valuation measures such as the price-earnings ratio (P/E). Changes in sociopolitical satisfaction might therefore inform investment timing. Using Gallup polling results from PollingReport.com (roughly monthly from 1998 to the present), contemporaneous S&P 500 index data and 12-month trailing operating P/E data as calculated for our Reversion-to-Value Model, we find that: More...

December 5, 2008 - Kicking the Body of the Fed Model

As with many indicators, the Fed Model is presently so far out of multi-generational bounds that reversion seems hopeless. Is the body still warm, or ready for burial? Using the daily S&P 500 earnings yield (E/P) during 1/2/90-12/3/08, as calculated from the historical S&P 500 index and 12-month trailing Standard & Poor's earnings data, and contemporaneous daily 10-year Treasury note (T-note) yields, we find that... More...

November 21, 2008 - Different Paths to the Same (Disconcerting) Destination?

The Efficient Market Hypothesis (EMH) and the "Black Swan" Hypothesis (BSH) take very different paths to the same destination, as follows: More...

November 18, 2008 - Update: PPI and the Stock Market

In our Real Earnings Yield Model, we argue that inflation at the consumer level is fundamentally a wealth discount rate important in determining the value of equities to investors. Inflation at the producer level (derived from the Producer Price Index - PPI) is logically an advance indicator for inflation downstream at the consumer level (derived from the Consumer Price Index - CPI). Do investors therefore reliably react to changes in PPI as an indicator of the future wealth discount rate? Using monthly historical PPI data (for finished goods, seasonally adjusted) from the Bureau of Labor Statistics (BLS) and contemporaneous S&P 500 index data for the period January 1950 through September 2008 (705 months), we find that: More...

November 14, 2008– Update: Public Debt, Inflation and the Stock Market

When the U.S. government runs substantial deficits, some experts proclaim the dollar's inevitable inflationary debasement and bad times for stocks. Other experts say that deficits are no cause for alarm, because the United States can easily bear more debt. Politicians argue about reducing spending and/or increasing taxes to reduce the deficit. Does a large federal deficit (increase in public debt) spur inflation and, per the concept underlying our Real Earnings Yield Model, thus drive down stock prices? Using roughly annual (end of fiscal year) figures for the level of the U.S. public debt from the Bureau of the Public Debt and contemporaneous Dow Jones Industrial Average (DJIA) and inflation rate data over the period 1929-2008 (80 years), we find that: More...

November 11, 2008 - Update: VIX and Future Stock Market Returns

Experts and pundits often cite a very high (low) Chicago Board Options Exchange (CBOE) Volatility Index (VIX) as an indication of investor panic (complacency), and therefore of a pending U.S. stock market advance (decline). Is this conventional wisdom regarding VIX as a market reversal sentiment indicator accurate? To check, we relate the level of VIX to future stock market returns (using the S&P 500 index to represent the overall stock market) over horizons of 10, 21, 63 and 252 trading days. Because VIX tends to "stick" in high and low regimes over extended periods, we also relate the level of VIX relative to its 63-trading day moving average to future stock market returns. Using daily closes for VIX and for the S&P 500 index over the period January 1990 through October 2008, we find that: More...

November 6, 2008 - Update: The Lunar Cycle and Stock Returns

Does the lunar cycle affect the behavior of investors/traders, and thereby influence stock returns? In the August 2001 version of their paper entitled "Lunar Cycle Effects in Stock Returns" Ilia Dichev and Troy Janes conclude that: "returns in the 15 days around new moon dates are about double the returns in the 15 days around full moon dates. This pattern of returns is pervasive; we find it for all major U.S. stock indexes over the last 100 years and for nearly all major stock indexes of 24 other countries over the last 30 years." To refine this conclusion and test some recent data, we examine U.S. stock returns during intervals relative to the dates of new and full moons since 1990. When the date of a new or full moon falls on a non-trading day, we assign it to the nearest trading day. Using dates for new and full moons for January 1990 through October 2008 as listed by the U.S. Naval Observatory (233 full and 233 new moons) and daily closing prices for the S&P 500 index over the same period, we find that: More...

November 5, 2008 - Update: U.S. Stock Returns Around Dates of FFR Changes

How do stocks behave in the few days around announcements of a change in the Federal Funds Rate (FFR)? Does evidence support the conventional expectation that a cut (boost) precipitates an immediate positive (negative) reaction by equities? To investigate, we analyze the historical behavior of the S&P 500 index from five trading days before through five trading days after the announcement dates for a change in the FFR during 1/90-10/08 (45 decreases and 31 increases). Using daily closing levels of the index, we find that... More...

November 4, 2008 - Update: The Federal Funds Rate and the Stock Market

Media commentators and expert advisors generally focus on the Federal Funds Rate (FFR) as an indicator of stock market behavior. Does the overall U.S. stock market respond systematically to loosening and tightening of credit via cuts and boosts in FFR? To investigate, we compare the behaviors of FFR and the S&P 500 index over the period January 1990 through October 2008, encompassing 76 changes in FFR (45 cuts and 31 boosts). We find that... More...

November 3, 2008 - Swanzilla

A rare sighting...

More...

October 15, 2008 - Update: Any Investor Response to Presidential Polling Data?

Do presidential election polling data have any effect on stock returns? In other words, do investors act on the survey-indicated election prospects for the two major party candidates? Presumably, investors would tend to enter (exit) stocks if they thought the candidate with policies more (less) favorable for equity valuation were gaining ground. Using Gallup Daily polling data and contemporaneous daily closing levels of the S&P 500 index from June 6 (when the major party nominations solidified) through October 14 (91 trading days), we find that: More...

October 14, 2008 - Update: Gurus Explain Why They Were Wrong About the Stock Market

The top ten excuses, from the bottom... More...

October 10, 2008 - Converging Guru Accuracies

Do stock market gurus tend to anchor on bullish or bearish outlooks, regardless of market trends? If so, the distribution of their stock market forecasting accuracies should diverge when the market persists in one mode over a long period and converge when the market changes modes. The results at Guru Grades offer a limited way to test these suppositions. Based on trends in the 50 Guru Grades accuracy rates over the past year, we tentatively find that: More...

September 17, 2008 - Update: Real Earnings Yield Model Scenarios

For this sensitivity analysis of the short-term Real Earnings Yield (REY) model, we use the version based on core inflation rate because this version has been more accurate than that based on the total inflation rate in fitting the historical S&P 500 index over the past few years. We consider four S&P 500 operating earnings scenarios and two core inflation rate scenarios, with a tilt toward pessimistic inputs. Using projections through the third quarter of 2009, we find that... More...

September 16, 2008 - After S&P 500 Index 52-week Highs and Lows...

Following up on our blog entry of 9/15/08, we wonder whether the S&P 500 index exhibits unusual behavior in the week or two following 52-week highs and lows. That prior study of individual stocks suggests index outperformance after both extremes, but indexes sometimes behave differently from individual stocks. Using weekly closing data for the S&P 500 index over the period 1/6/50-9/12/08 (3,062 weeks), we find that: More...

September 11, 2008 - Bank Failures and Stock Returns

How does the rate of bank interventions by the Federal Deposit Insurance Corporation (FDIC) relate to U.S. stock returns? To check, we compare the percentage of banks with FDIC closing and assistance transactions with the annual change in the Dow Jones Industrial Average (DJIA). We exclude savings and loan institutions from the sample for comparability of long-run data. Using FDIC bank population and intervention data and contemporaneous DJIA data over the period 1934-2007 (74 years), we find that: More...

August 20, 2008 - Status of the Inflation Forecast Flyoff

The inflation rate forecast flyoff now incorporates 40 months of live testing for three granular (month-by-month or quarter-by-quarter) 12-month trailing consumer inflation rate forecasts, all freely available on the web: (1) the BMO Nesbitt Burns United States Economic Outlook; (2) our own simple extrapolation (CXO); and, (3) the Financial Trend Forecaster (FTF) Moore Inflation Predictor. The flyoff is for one-month-ahead accuracy only. Which model is winning? Using accumulated forecast and actual inflation data for 4/05-7/08, we find that: More...

August 18, 2008 - A Simple Test of Sector ETF Pair Trading

Do short-term relative mispricings of equity sectors offer a means to capture abnormal returns? To investigate, we measure the returns from trading potential "errors" in the relative price movements of a pair of sector exchange-traded funds (ETF) selected from the following:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

Using daily adjusted closing prices (incorporating dividends) for these ETFs during 12/22/9-8/15/08, we find that: More...

August 8, 2008 - Visualization of the Stock Market Across the Typical Presidential Term

Taking the same approach as used for the calendar year at Trading Calendar, what is the typical cumulative return profile for the U.S. stock market over the four-year presidential term? Using monthly closing levels of the S&P 500 index from December 1951 through July 2008 (13+ presidential terms), we find that: More...

July 31, 2008 - Trading the QQQQ-IWM Relationship?

In reaction to our blog entry of 7/29/08 on trading the relationship between natural gas and crude oil prices, a reader suggested that reversion in the relationship between PowerShares QQQ (QQQQ) and iShares Russell 2000 Index (IWM) may support short-term trading. To check, we consider: (1) the QQQQ-IWM ratio over the long term; (2) this ratio relative to its six-month moving average; and, (3) unusual daily divergences between these two exchange-traded funds. Using daily adjusted closing prices for QQQQ and IWM over the period 5/26/00 (the earliest available for IWM) through 7/29/08, we find that: More...

July 29, 2008 - Crude Oil and Natural Gas Prices Reliably Intertwined? (Revised 7/30/08 to Append Reader Comments)

Reader Henry Bee of Vancouver, Canada asks:

"You have probably heard of the historical 6:1 crude oil/natural gas price ratio. This relationship is said to be mean reverting based on the thermal equivalence of the two commodities. Does this ratio have any predictive power for the future prices of oil or natural gas? If there is no predictive power for this ratio, then it could mean that the thermal equivalence itself shifts over time. And hedge funds who are long natural gas right now are making a huge fundamental mistake."

If there are relationships, we hypothesize that a high (low) crude oil-natural gas price ratio should predict future changes in the prices of natural gas of crude oil to decrease (increase) the ratio. Using the monthly composite U.S. refiner cost of crude oil (nominal dollars per barrel) and the monthly U.S. wellhead natural gas price (nominal dollars per thousand cubic feet) for January 1976 through April 2008 (388 months), we find that... More...

July 15, 2008 - Martin Zweig's Four Percent Model Indicator

A reader inquired about the validity of Martin Zweig's Four Percent Model Indicator, which states:

"The Four Percent Model Indicator uses the...weekly close of the Value Line Index. A buy signal is generated when the index rises four percent or more from the previous week. Similarly, a sell signal is indicated when the index falls four percent or more from the previous week."

Does the rule really work? Using weekly closes of the Value Line Arithmetic Index over the period 5/4/84 (the earliest available) through 7/11/08, we find that: More...

June 25, 2008 - Update: Real Earnings Yield Model Scenarios

For this sensitivity analysis of the short-term Real Earnings Yield (REY) model, we use the version based on core inflation rate because this version has been more accurate than that based on the total inflation rate in fitting the historical S&P 500 index over the past few years. We consider four S&P 500 operating earnings scenarios and two core inflation rate scenarios, with a tilt toward pessimistic inputs. Using projections through the middle of 2009, we find that... More...

June 16, 2008 - Monthly Returns During Presidential Election Years

Do the emotions of presidential elections in the U.S. affect monthly stock returns, either elevating returns based on hope or suppressing them based on uncertainty? To check, we compare returns by calendar month for the Dow Jones Industrial Average (DJIA) during presidential election years to returns during non-election years. Using monthly adjusted closes for the DJIA over the period October 1928 through May 2008 (81+ years and 20+ presidential election years), we find that: More...

June 9, 2008 – Update: A Slinky (Short-term Reversion) Effect?

Do investors/traders tend to overdo it during buying and selling frenzies, coming to their senses shortly thereafter? In other words, does the broad U.S. stock market tend to revert after extreme short-term moves up or down? To check, we test for short-term reversion of the S&P 500 index after its sharpest declines and advances since the beginning of 1990, hoping to identify reasonably frequent trading opportunities. Using daily closes of the S&P 500 index over the period 1/2/90 through 6/6/08 (4647 trading days), we find that... More...

May 15, 2008 - Update: CPI and the Stock Market Over the Intermediate Term

In our Real Earnings Yield Model, we argue that inflation at the consumer level is fundamentally a wealth discount rate important in determining the value of equities to investors. Do investors therefore reliably react over the intermediate term to changes in CPI as a measure of the wealth discount rate? Using monthly historical CPI data (for all items, not seasonally adjusted) from the Bureau of Labor Statistics (BLS) and contemporaneous S&P 500 index data for the period January 1994 (the earliest for which release dates are available) through May 2008 (173 months), we find that: More...

May 14, 2008 - Update: Are Monthly CPI Announcements Tradable Events?

Does the stock market react reliably and exploitably to the monthly announcements of the change in the Consumer Price Index (CPI) by the Bureau of Labor Statistics? To check, we examine the typical behavior of stocks during the five trading days before and the five trading days after CPI release dates. Using non-seasonally adjusted total and core CPI data, associated release dates and contemporaneous daily S&P 500 index data for the period 1/94-4/08 (171 announcements), we find that... More...

May 13, 2008 - Beware the Favorite Investments of Stock Market Gurus?

Do the favorite equity investments of stock market newsletter gurus reliably outperform the market? One way to answer this question is a test of the performance of the favorite investments identified in the historical reports at NewsletterAdvisors.com published from 11/1/05 to 11/1/07. In each of these seven reports, a group of "top investment gurus reveal their favorite investment ideas." NewsletterAdvisors.com is published by Business Financial Publishing, "a diversified publisher of investment news, research, and analysis for individual investors through paid subscription newsletters, free e-letters, and regular special reports." Using historical price data from Yahoo!Finance for the sample of 70 favorite investments in in the seven reports and contemporaneous S&P Depository Receipts (SPY) performance data for benchmarking, we find that: More...

May 2, 2008 - Stock Returns During and Between Earnings Seasons

A reader requested an extension of the analysis in our blog entry of 4/9/08, which tests a strategy that goes long (short) the stock market from Wal-Mart's (Alcoa's) earnings release until Alcoa's (Wal-Mart's) earnings release. The proposed follow-up employs a larger sample and a strictly calendar-based definition of earnings season, as follows: go long (short) the market at the close at the end of the sixth full week (first full week) of each calendar quarter, representing the end (beginning) of earnings season. The hypothesis is that the broad stock market does well outside of the specified earnings season and poorly during the specified earnings season. Using weekly closes of the S&P 500 index (as a proxy for the broad stock market) since the beginning of 1950, we find that... More...

April 15, 2008 - Update: Extinction of the Predictive Power of Futures?

The zero-sum S&P 500 futures market involves three categories of players: commercial hedgers; non-commercial traders (large speculators); and, non-reportable traders (small or retail speculators) representative of the public. The Commodity Futures Trading Commission collects and publishes their aggregate positions (short, long and spread) for each asset in a weekly Commitment of Traders report. Are the behaviors of these groups in trading S&P 500 index futures reliable indicators of future stock market direction? If so, is this predictive power stable over time? Using the Historical Commitments of Traders Reports Futures and Options Combined available from CFTC and corresponding S&P 500 index data from late March 1995 (the earliest available for futures) through March 2008 (a total of 675 weeks), we find that: More...

April 9, 2008 - The (Alcoa/Wal-Mart) Earnings Season Trading Strategy

A reader asks:

"CNBC's Fast Money cited a 'seasonal' strategy noted in Barron's, as follows: Go long the market from Wal-Mart's (WMT) earnings release until Alcoa's (AA) earnings release and short the market from Alcoa's earnings release until Wal-Mart's earnings release (earnings season). Over last six years, the market has been up nicely during the former period and down an average 8% during the latter. Any testing on this?"

To test this proposition we assemble the earnings release dates for Wal-Mart and the earnings release dates for Alcoa since the beginning of 1997 (the earliest available from Alcoa's web site). We estimated the date for one missing Wal-Mart release. This sample of 45 quarters is nearly twice as large as that cited on Fast Money, potentially offering more reliable historical inference. Using these earnings release dates and daily closing S&P 500 index levels (as a proxy for the broad stock market) over the period 2/25/97 through 4/7/08, we find that... More...

March 14, 2008 - Do Copper Prices Lead the Broad Equity Market?

A reader inquired: "Do copper futures reliably lead the market, as some believe." The hypothesis is that demand for copper is a reliable leading indicator of economic activity and therefore aggregate equity prices. In lieu of a long-run set of copper futures data, we use monthly prices for copper base scrap (not seasonally adjusted) from the "Metal and Metal Products" group of the Producer Price Index components. This series extends back to 1957, allowing comparing across multiple economic expansions and contractions. Comparing the behavior of quarterly copper base scrap prices to quarterly levels of the S&P 500 index for 1957-2007, we find that... More...

March 13, 2008 - Real Earnings Yield Model Scenarios

A reader posed the following question:

"What would be the current S&P 500 index target according to your model if expected earnings were flat? Could you provide some scenario analysis based on your model relative to different expected earnings growth rates (+5%, 0%, -5%, -10%) and different realized inflation rates (1.5%, 2.5%, 3.5%)?"

For this analysis, we use the short-term version of the Real Earnings Yield (REY) model based on total inflation rate because the REY model generally outperforms the Reversion-to-Value model in fitting historical data and because we have better total than core inflation rate forecast error data. We consider four S&P 500 operating earnings scenarios and five total inflation rate scenarios, with focus on the most optimistic and pessimistic combinations. Using projections through the end of 2008, we find that... More...

March 12, 2008 - Do the Chemicals and Metals/Mining Industries Lead the Broad Equity Market?

A reader posed the following question:

"What does recent outperformance of gold and steel mining sector and agricultural sector mean for the stock market in general and is there any correlation with other sectors in the following 3 to 12 months as common wisdom on the business cycle would suggest?"

To enable a sample that is long enough to support inference, we use the chemicals industry to represent agriculture and the precious metals and mining industry to represent gold and steel mining. We use the Fidelity Select Chemicals (FSCHX) fund as a tradable proxy for the chemicals industry and the Vanguard Precious Metals and Mining (VGPMX) fund as a tradable proxy for the precious metals and mining industry. To keep the analysis manageable, we relate the performances of these two funds to that of the S&P 500 index (and not the performances of other industries). Using daily return data for the funds and the index from 7/15/87 (the earliest all three are available) through 3/7/08, we find that... More...

March 5, 2008 - Combining RSI and MACD in Search of Concentrated Abnormal Returns

In our blog entries of 3/3/08 and 3/4/08, we test the usefulness of the Relative Strength Index (RSI) and the Moving Average Convergence/Divergence (MACD), respectively, for anticipating abnormal returns of a broad market index as proxied by S&P Depository Receipts Trust (SPY). In this entry, we combine RSI and MACD signals from those prior analyses in search of more concentrated abnormal returns. Using those signals and daily dividend-adjusted SPY closing prices from 1/29/93 (the earliest available) through 2/29/08, we find that... More...

March 4, 2008 - A Simple Test of MACD Crossover as an Abnormal Returns Indicator

In this entry, we perform a simple test of the Moving Average Convergence/Divergence (MACD), as calculated using the Exponential Moving Average (EMA) template at StockCharts.com, on a tradable proxy for the S&P 500 index. MACD is the difference between the 26-day EMA price and the 12-day EMA price for an asset. A bullish (bearish) crossover occurs when MACD moves above (below) its 9-day EMA. To reduce the number of very short-term MACD trades, we filter out "close calls" by requiring MACD to reach a level 25% above or below its 9-day EMA before triggering a trade. Using daily dividend-adjusted closing prices for the S&P Depository Receipts Trust (SPY) from 1/29/93 (the earliest available) through 2/29/08, we find that... More...

March 3, 2008 - A Simple Test of RSI as an Abnormal Returns Indicator

Reader Dennis Page of Beverly Hills MI sent the following question:

"Jason Kelly from the Kelly Newsletter posted this remark in January 2008: 'A good way to judge trading opportunities on indexes is by watching their MACD and RSI scores. Both together, along with the price chart, give good indications as to whether the odds favor rising or falling from here.' Is this true?"

In this entry, we perform a simple test of the 14-day Relative Strength Index (RSI), as calculated by the template at StockCharts.com, on a tradable proxy for the S&P 500 index. Note that this indicator measures the strength of price for an asset relative to its own recent past, not relative to other assets. We use the conventional interpretation that values of RSI below 30 (above 70) indicate oversold (overbought) conditions ripe for reversion. Using daily dividend-adjusted closing prices for the S&P Depository Receipts Trust (SPY) from 1/29/93 (the earliest available) through 2/29/08, we find that... More...

February 5, 2008 - Does the Sunspot Cycle Predict Energy and Grain Prices?

After reviewing our blog entry of 1/29/08 that finds no evidence supporting Charles Nenner's belief in a relationship between sunspots and the stock market, reader Henry Bee of Vancouver, Canada asks:

"Sunspot activity does have a direct relationship to weather. Could one speculate on the natural gas market or the agriculture market using the sunspot cycles?"

Using monthly sunspot counts and monthly U.S. wheat prices for January 1950 through November 2007 (695 months) and monthly U.S. wellhead natural gas prices for January 1976 through November 2007 (383 months), we find that... More...

January 10, 2008 - Currency Exchange Rates and Stocks (a Carry Trade?)

A reader asks about the implications of the currency carry trade (with attractiveness indicated, for example, by the yen/euro exchange rate trend) for U.S. stock returns (as measured via the S&P 500 index). Specifically, does the yen/euro exchange rate trend predict the degree to which large players borrow yen to buy U.S. stocks? Using currency exchange rate data from the Federal Reserve Bank of New York and contemporaneous S&P 500 index data for 1999-2007, we find that... More...

January 8, 2008 - Update: The UBS/Gallup Measurement of American Investor Optimism

Does systematic measurement of the level of investor optimism provide a clue to the future direction of the stock market? Or, does investor sentiment merely respond to market ups and downs? UBS and Gallup conduct a monthly poll of American investors ("head of a household or a spouse in any household with total savings and investments of $10,000 or more") to assess their aggregate level of optimism. Polling takes place during the first half of each month, with results reported near the end of the month. Comparing historical UBS/Gallup investor optimism data to contemporaneous monthly S&P 500 index over the period February 1999 through December 2007, we find that... More...

December 13, 2007 - Does a Long-Term Moving Average Indicator Predict Big Days?

In reaction to our blog entry of 11/30/07, a reader offered the following observation and question:

"For many market observers, the 200-day moving average is the point of being in or out of the market. Does being above or below the 200-day moving average make a material difference with respect to missing the the best/worst 10, 20 or 100 days?"

To check, we return to the data set for our blog entry of 12/03/07, which identifies the 40 biggest up days (daily return > 3.50%) and the 40 biggest down days (daily return < -3.09%) for the S&P 500 index during January 1950 through November 2007. Calculating the 200-day moving average (MA) at the close for each day just before these 80 biggest up/down days, we find that: More...

December 3, 2007 - Trend Implications of Big Up and Down Days

In reaction to our blog entry of 11/30/07, a reader posed the following question:

"Do big up days tend to occur during down trends as counter-move rallies (meaning that big down days and big up days tend to cluster during downtrends)?"

To check for clustering, we compare the dates of big up and down days for U.S. stock market averages. To check whether these dates tend to occur during downtrends, we examine returns during the 63 trading days before and the 63 trading days after these dates. Using daily returns for the Dow Jones Industrial Average (DJIA) during October 1928 through November 2007 and the S&P 500 index during January 1950 through November 2007, we find that: More...

November 27, 2007 - Update: A Weighted Guru Groupthink

Suppose we take the current intermediate-term (notionally 3-9 month) stock market outlooks of the experts covered in Guru Grades and weight these outlooks according to current calculated guru forecast accuracies. Would the current accuracy-weighted aggregate opinion be bullish or bearish? Here's another update on weighting guru stock market outlooks. More...

November 6, 2007 - Growth Versus Value and the Yield Curve (Updated 11/7/07)

In our blog entry of 11/1/07, we examine the hypothesis that growth (value) stocks tend to do relatively better when interest rates are rising (falling). A reader inquires:

"Ken Fisher did a statistical study in his book, The Only Three Questions That Count: Investing by Knowing What Others Don't, which states that growth (value) is in favor when the yield curve flattens (steepens). Any truth to this?"

To test this hypothesis, we compare the performances of paired growth and value indexes/funds as the spread between the yields on the 10-year Treasury Note (T-note) and the 90-day Treasury Bill (T-bill) varies. Using monthly and quarterly adjusted (for dividends) return data for a pair of growth-value indexes and a pair of growth-value mutual funds, along with contemporaneous T-note and T-bill yield data, we find that: More...

November 1, 2007 - Growth Versus Value and Interest Rates

In his 2007 book The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing, expert Louis Navellier hypothesizes that growth (value) stocks tend to do relatively better when interest rates are rising (falling). Growth stocks benefit from the economic expansions associated with rising rates. Value stocks benefit from refinancing opportunities as interest rates fall. To test this hypothesis, we compare the performances of paired growth and value indexes/funds as interest rates, proxied by the 10-year Treasury Note (T-note) yield, vary. Using monthly and quarterly return data for a pair of growth-value indexes and a pair of growth-value mutual funds, along with contemporaneous T-note yield data, we find that: More...

October 26, 2007 - Best-of-Breed for Get-Rich-Quick Option Tips

The unreal deal, as found in the cyber-alleys off Wall Street... More...

October 5, 2007 - Are Monthly Non-farm Employment Announcements Tradable Events?

Does the stock market react reliably and exploitably to the monthly announcements of the change in non-farm employment based on Bureau of Labor Statistics surveys of employers? To check, we examine the typical behavior of stocks during the five trading days before and the five trading days after release dates. Using the unrevised non-farm employment releases and contemporaneous daily S&P 500 index data for the period 2/94-9/07 (164 announcements), we find that... More...

September 28, 2007 - Are Homebuilder Stocks Early Warning Indicators for Equities in General?

With reversal of the easy lending practices of 2003-2005, U.S. home sales and homebuilder stock prices have fallen dramatically (as frequently and loudly reported in the media). Does the behavior of homebuilder stocks portend doom for the overall equity market? To check, we first assemble a simple measure of the performance of homebuilder stocks as the equally-weighted average monthly return for the stocks of Centex, DR Horton, Hovnanian, KB Homes, Lennar, Ryland and Pulte, starting with Centex and Pulte in August 1985 and adding the others as they are listed. Comparing these returns with monthly returns for the S&P 500 index data for 8/85-9/07 (266 months), we find that: More...

September 17, 2007 - Crude Oil Price and Energy Sector ETF Returns

After reviewing our update of the relationship between crude oil price and overall stock market behavior, a reader requested a similar analysis of the relationship between crude oil price and an energy sector Exchange-Traded Fund (ETF) such as Energy Select Sector S&P Depository Receipts (XLE). The reader's hypothesis is that energy ETFs follow crude oil spot price fairly well. Comparing the weekly crude oil spot price for the U.S. with the weekly close for XLE for over the period 1/99-8/07, we find that... More...

September 13, 2007 - Update: Crude Oil Price and Stock Returns

Some market commentators cite the price of crude oil as an important indicator of future stock market behavior. Is expensive crude oil a sign of future inflation or a drag on aggregate corporate earnings, or is it a proxy for general economic strength? Does a local peak (valley) in the price of crude oil portend a falling (rising) overall stock market? Comparing the weekly crude oil spot price for the U.S. with the weekly level of the S&P 500 index for the period 1/97-8/07, we find that... More...

September 7, 2007 - Reader Question on the "Double 9-to-1 Up Day" Signal

Mark Hulbert's 9/5/07 column addresses the 9-to-1 up day event, a bullish technical signal publicized by Martin Zweig in a 1986 book. It occurs when at least 90% of daily NYSE volume belongs to advancing issues. When the signal occurs in multiples over short periods, as it has recently, prospects for equities are "quite bullish" according to Mark Hulbert. A reader comments and inquires:

"A statistician [David Aronson, author of Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals] confirms the significance of Zweig's original observation. I don't know whether he considered all possible confounding factors, such as low volume days, effect of externalities on the market, and others I can't think of. This analysis sounds like so much epidemiological research, finding associations but never proving causality. For example, in the decade of the 1980s, alternate papers found that coffee consumption (greater than three cups per day) is and is not associated with increased risk of cancer of the pancreas. How much credence do you place in Hulbert's article?"

Using S&P 500 index data for 1942-2006 (67 years), David Aronson finds an average return of about 5.2% in the 60 trading days after double 9-to-1 up days, significantly greater than the average return of about 1.1% during intervals of 60 trading days when there has not been such a signal. To follow up, we pose some questions to David Aronson and then consider strategies an investor might employ to exploit double 9-to-1 up day signals, as follows: More...

August 23, 2007 - Update: A Weighted Guru Groupthink

Suppose we take the current intermediate-term (notionally 3-9 month) stock market outlooks of the experts covered in Guru Grades and weight these outlooks according to current calculated guru forecast accuracies. Would the current accuracy-weighted aggregate opinion be bullish or bearish? Here's another update on weighting guru stock market outlooks. More...

August 22, 2007 - Stock Returns After T-bill Yield Shocks

Stock prices have recently fallen, and 13-week Treasury bill (T-bill) yields have plunged. We hypothesize that:

During a crisis, investors overreact in reallocating funds from risky assets (stocks) to safe ones (T-bills). Stock prices and T-bill yields consequently fall together. Once the crisis abates, investors correct their overreaction by moving funds back from T-bills to stocks. Stock prices and T-bill yields then rise together.

To test this model of investor behavior, we examine relationships between overall stock market returns and T-bill yield changes during and after dramatic declines in the T-bill yield for past and future intervals of 10, 21 and 63 trading days. Using daily closes for the S&P 500 index and T-bill yield from 1/4/60 through 8/20/07 (11,864 days when both traded), we find that: More...

August 17, 2007 - Update: Are Strong or Weak Daily Closes Predictive?

When the market close is strong (weak), does it indicate pent-up buying (selling) demand? Should a trader follow the trend of the close the next day, position for a reversal or look for a better indicator? To investigate, we compare the position of the daily close for a broad market index relative to same-day high and low to the next-day return for the index. We also compare the five-day and ten-day average relative closes to the index return for the next five and ten days, respectively. Using daily high, low and close levels of the S&P 500 index for the period 7/15/83 (the earliest without obvious errors available) through 8/15/07 (6077 trading days), we find that: More...

August 3, 2007 - Caught in Cash for an Entire Bull Market

But the market is just unsafe at any speed... More...

August 2, 2007 - Caught in the Too Fast Lane

But other people were forecasting even higher... More...

August 1, 2007 - Today's Forecast Risk Analysis

Predicting Risk analyzing stormy weather... More...

July 30, 2007 - The Trader of the Week

Taking a break... More...

July 19, 2007 - Update: Are Moving Average Crossovers/Crossunders Good Buy/Sell Signals?

Can investors beat the market by buying when a stock index crosses above a moving average and selling when it crosses below? In other words, do such crossovers and crossunders signal economically important market turning points? Using daily closes for the S&P 500 index for 1/2/90-7/17/07 (and 1/2/62-7/17/07 for one analysis), we find that: More...

July 13, 2007 - Short-term Relative VIX Level as a Trading Signal

Reader David Zaitzeff requested a test of the TradingMarkets 5% VIX rule, which states:

"Do not buy stocks (or the market) anytime the VIX is 5% below its moving average. Why? Because since 1989, the S&P 500 cash market has "lost" money on a net basis 5 days following the times the VIX has been 5% below its 10 day ma."

"Since 1989, whenever the VIX has been 5% or more above its 10 day ma, the S&P 500 has achieved returns which are better than 2 1/2 to 1 compared to the average weekly returns of all weeks."

David also asks whether one can improve the signal by using a 4% or 6% threshold rather than 5%, or by using a holding interval longer or shorter than five days. We first reproduce the results claimed by TradingMarkets, then investigate whether the signals are of economic value to traders, and finally test sensitivity of results to parameter changes. Using daily CBOE Volatility Index (VIX) and S&P 500 index data for 1/2/90-7/11/07 (4415 trading days), we find that: More...

July 5, 2007 - Bollinger Bands: Buy Low and Sell High?

Are Bollinger Bands valuable tools for discovering overbought/oversold conditions in the aggregate stock market? Can traders build trading strategies around them? To check, we analyze the historical behavior of three sets of Bollinger Bands around the 21-trading day (one month) simple moving average of the S&P 500 index. The three sets of bands correspond to 1.5, 2 and 2.5 standard deviations for the moving windows of analysis. When the daily price crosses above (below) the upper (lower) Bollinger Band, we designate that day a SELL (BUY) at the close, holding the position for the next 21 trading days. Using S&P 500 index daily closing levels for January 1950 through June 2007 (about 688 independent 21-trading day windows), we find that... More...

June 29, 2007 - Testing Engulfing Candlesticks

Reader David Zaitzeff inquired about the predictive powers of bullish and bearish engulfing candlesticks, which he defines as:

Bullish: A down day followed by an up day, with the latter having a higher intraday high and lower intraday low and closing in the top quarter of the daily range.

Bearish: An up day followed by a down day, with the latter having a higher intraday high and lower intraday low and closing in the bottom quarter of the daily range.

We test these signals on the S&P 500 index using average daily returns for each of the 20 trading days immediately after a signal. Using daily high, low and closing levels for the index from January 1962 (the earliest available with intraday data) through June 2007, we find that: More...

June 25, 2007 - Are Bad Weeks (Months) Followed by Bad or Good Ones?

Is a bad week or month in the stock market an indicator of further immediate deterioration, a sign of lost mojo? Using weekly and monthly S&P 500 index closing levels since 1950 (2,998 weeks and 689 months), we find that: More...

June 21, 2007 - The Effects of Inflation Rate Trend and Volatility on Stock Returns

A reader recently suggested that we might be able to improve the fit of the Real Earnings Yield (REY) Model by including a second order inflation effect. The model presently uses only a first order effect, the 12-month trailing inflation rate (either total inflation or core inflation) as derived from the 12-month change in the Consumer Price Index (CPI). We consider two second order effects:

1. The trend in monthly CPI changes (monthly inflation rate), as measured by the slope of changes over a few consecutive months, might influence investors/traders as an indicator of a future increase (positive slope) or decrease (negative slope) in the inflation rate. We hypothesize a negative correlation between this trend and future stock returns.
2. The volatility of monthly CPI changes, as measured by the standard deviation of changes over a few consecutive months, might give investors/traders a sense of increased (high volatility) or decreased (low volatility) future inflation risk. We hypothesize a negative relationship between this volatility and future stock returns.

Testing these effects with CPI data and monthly S&P 500 index closing levels for estimated or actual CPI release dates during January 1990 through June 2007 (210 months), we find that: More...

June 18, 2007 - Organizing Financial Markets Research

Both the academic community and practitioners generate large numbers of studies, formal and informal, analyzing and forecasting financial markets. In this blog, we offer an organization of financial markets research by topics such as The Value Premium and Buybacks and Secondaries. Are there other organizing principles that might convey a more fundamental understanding? Reflecting on the hundreds of studies we have reviewed and the limitations of this research with regard to practical application, here is another framework for thinking about financial markets research: More...

June 11, 2007 - Evaluating "Retail" Investment Managers

Readers recently requested evaluations of two different retail investment managers. Our reviews involve simply putting the information the firms make available on their web sites into the context of broad stock market research. Our findings for the two firms are similar, as follows: More...

June 7, 2007 - T-note Yield Shocks and Stock Returns

Reader David Zaitzeff notes that many experts are focused on the recent sharp rise in the 10-year Treasury note (T-note) yield, often asserting that such large positive yield shocks are bad for stocks. He asks what the historical data say about the relationship between short-term shocks in T-note yield and future stock returns. Using daily closing T-note yields and daily closing prices for the S&P 500 index since the beginning of 1990, we find that: More...

May 9, 2007 - Update: An Alternative (ISE) Put-Call Ratio Universe

In our blog entry of 5/8/07, we found that the Chicago Board Options Exchange (CBOE) daily total exchange put-call ratio is not a useful predictor of future stock market behavior. A reader proposed that the International Securities Exchange (ISE) put-call data is a more focused measure of investor sentiment. "The ISE Sentiment Index (ISEE) is designed to show how investors view stock prices. The ISEE only measures opening long customer transactions on ISE. Transactions made by market makers and firms are not included in ISEE because they are not considered representative of market sentiment due to the often specialized nature of those transactions. Customer transactions, meanwhile, are often thought to best represent market sentiment because customers, which include individual investors, often buy call and put options to express their sentiment toward a particular stock." Is this alternative put-call data a useful indicator of future stock market behavior? Using ISEE historical data and contemporaneous daily S&P 500 index closing levels from 10/1/02 (the earliest ISEE data available) through 5/4/07, we find that: More...

May 8, 2007 - Update: Does the CBOE Put-Call Ratio Really Work?

Many stock market experts cite the the ratio of the volume of put options to the volume of call options (the put-call ratio) as an important indicator of investor sentiment, with a low (high) value indicating excessive optimism (pessimism). They assert, therefore, that this ratio is a useful contrarian indicator for future stock market behavior. Is it? In this entry, we test the value of the Chicago Board Options Exchange (CBOE) daily total exchange put-call ratio (put/call) as an indicator of future stock market returns. Using put/call data and contemporaneous daily S&P 500 index closing levels from 9/27/95 (the earliest put/call data available) through 5/4/07, we conclude that: More...

April 27, 2007 - Update: A Weighted Guru Groupthink

Suppose we take the current intermediate-term (notionally 3-9 month) stock market outlooks of the experts covered in Guru Grades and weight these outlooks according to current calculated guru forecast accuracies. Would the current accuracy-weighted aggregate opinion be bullish or bearish? Here's another update on weighting guru stock market outlooks. More...

March 29, 2007 - Personal Consumption Expenditures and the Stock Market

A reader, citing the book Ahead of the Curve by Joseph Ellis, inquired about the hypothesis that consumer spending drives economic cycles and is therefore a leading indicator for the stock market. For example, Mr. Ellis presents a chart relating quarterly annualized change in Personal Consumption Expenditures (PCE) to quarterly change in the S&P 500 index and states: "Most bear markets begin...when the year-over-year rate of growth in consumer spending is peaking... This suggests that finding an effective discipline for forecasting (downturns in the rate of growth of) consumer spending is essential to reducing stock market exposure..." To test the power of PCE to predict stock market behavior, we examine the relationship between monthly PCE data (the most granular available) and monthly S&P 500 index data for January 1959 through January 2007, a total of 578 months. Incorporating a one-month lag in the release of PCE (for example, aligning January PCE data with February stock market data) to avoid look-ahead bias, we find that... More...

February 22, 2007 - Does Aggregate Technological Innovation Predict Stock Returns? (Updated 3/1/07)

If there is a surge in innovation in a given year, should we expect a surge in stock prices the next year or the year after? To explore this question, we consider the pace of U.S. utility (invention) patent applications as a very simple measure of innovation. Using the annual number of U.S. utility patent applications and the corresponding annual behavior of the S&P 500 index during 1963-2005 (43 years). We find that: More...

February 21, 2007 - Bear Claus

As the esteemed, erudite chorus of the downside constantly reminds us, Bear Claus: More...

February 8, 2007 - A Bear's Perspective on a Bull Market...

When the market trend challenges their beliefs, what do we hear from market "experts"? More...

February 7, 2007 - Update: Review of the Financial Forecast Center's Forecasts

About nine months ago, reader Wes Williams of Stafford TX inquired:

"The Financial Forecast Center (FFC) provides an S&P 500 forecast that disagrees with yours, projecting a much lower level for the fall. There is no accountability at their site for their past predictions. Does it fit into your web site's charter to track THEIR forecasts?"

Our charter is flexible. FFC's "forecasts are generated in-house using artificial intelligence. The forecast models are 100% quantitative and use a global, long-range economic dataset. Thus, the forecasts are very objective." FFC forecasts the average value by month for the S&P 500 index for the current month and the next five months, including fairly large error ranges for 50% and 90% confidence levels. Based on nine of these forecasts since May 2006, we conclude that... More...

January 26, 2007 - A Sign of All Times...

...is fear as a sales pitch. More...

January 24, 2007 - Update: A Weighted Guru Groupthink

Suppose we take the current intermediate-term (notionally 3-9 month) stock market outlooks of the experts covered in Guru Grades and weight these outlooks according to current calculated guru forecast accuracies. Would the current accuracy-weighted aggregate opinion be bullish or bearish? Here's an update on weighting guru stock market outlooks. More...

January 20, 2007 - Core vs. Total Inflation in the REY Model

How would the projection of the short-term version of the Real Earnings Yield (REY) model change if we used core inflation rather than total inflation as an input? In our blog entries of 7/6/06 and 12/15/06, we concluded that total inflation is a marginally better indicator for overall stock market movements than core inflation (more noticeably over the long term). We have since modified the model, so here we revisit the statistics for core versus total inflation and compare the REY Model outputs that they generate. We find that... More...

January 19, 2007 - Some Notes on Variability of Stock Market Returns (Updated 1/20/07)

How should the variability of stock market returns shape the outlooks of short-term traders and long-term investors? How strong is the tailwind of the general drift upward in stock prices? How powerful is the turbulence of variability? Does the tailwind ever overpower the turbulence? Using weekly adjusted closing data for the S&P 500 index during 1950-2006 (57 years), we find that... More...

January 3, 2007 - The Professor's Forecast for the Indefinite Future...

...looks something like this: More...

December 29, 2006 - Follow-up on Streak Reversals: Some Nasdaq Disorderly Conduct

In reaction to our blog entry of 12/26/06 presenting an out-of-sample test of S&P 500 index streak reversals during 2004-2006, two readers pose follow-up questions. David Zaitzeff, a futures broker at Peregrine Financial Group, Inc., asks that we perform a similar analysis on the Nasdaq Composite index. Dennis Page of Beverly Hills MI asks whether we can replicate the entire TradingMarkets.com streak reversal study of seven million backtested trades on individual stocks from 1/1/95 to 6/30/06. Our responses are: More...

December 26, 2006 - Out-of-Sample Test of Trading Streak Reversals

After reading the article "If a Stock Keeps Moving Higher, Should You Buy It or Sell It?", reader Dennis Page of Beverly Hills MI asks for a second opinion. In the article, TradingMarkets.com cited their past research, based on stock market index data from 1989-2003, finding that it is better to be a seller (buyer) after the market has been strong (weak) and has made multiple days of higher highs (lower lows). They also report results from their new research , based on seven million backtested trades from 1/1/95 to 6/30/06, that reaches the same conclusion with respect to individual stocks. They recommend that "...traders should look to build strategies around stocks that make at least five consecutive days of lower lows." However, they do not report the variability of their results, and they do not test the economic value of the recommended trading strategy. In this entry, using S&P 500 index data for 1/2/04-12/22/06, we perform an out-of-sample test of their original index "streak" research, including an analysis of economic value to traders. We conclude that: More...

December 15, 2006 - Shades of the Wealth Discount (Inflation) Rate

The wealth discount (inflation) rate is arguably a critical decision input for investors, as it is for our Real Earnings Yield (REY) Model. Investors ought to demand that their stock holdings earn profits at a rate somewhere above the inflation rate. Because of the current misbehavior of that model (and belatedly following up on some reader suggestions), we review here alternative measures of the inflation rate and test their performances with respect to the S&P 500 operating earnings yield (E/P) and the REY Model. Using monthly data for December 1989 through November 2006 (203 months), we find that... More...

December 7, 2006 - T-bill/T-note Yield Flattenings and Bear Markets

After reading our blog entry of 11/24/06 on the usefulness of the spread between the yield on the 10-year Treasury note (T-note) and the yield on the 90-day Treasury bill (T-bill) as a signal for future S&P 500 index returns, reader and newsletter editor Jack Schannep sent a longer-term analysis of the relationships between yield curve flattenings and recessions/bear markets. He concludes that a flattening or inverted yield curve points to a bear market and recession. To take a closer look, we examine here the relationships between onsets of yield curve flattenings/inversions, as indicated by the relationship between the T-bill yield and the T-note yield, and: (1) onsets of bear markets; and, (2) stock returns over the next 3, 6 and 12 months. We find that: More...

December 1, 2006 - Three Questions on Naked Short Selling

Is naked short selling a problem? The incentives for it seem direct and strong, while both regulation and enforcement against it seem weak. Just getting the facts about its extent is problematic. Here are three relevant questions: More...

November 24, 2006 - Signals from the T-note/T-bill Yield Spread?

A reader suggested:

"How about the T-bond yield minus T-bill yield as a stock market indicator? The wider the spread between these yields, the more likely we are to have significant economic and earnings growth. A narrow spread, or a negative spread, means increased possibility of slowdown or recession."

Since David's hypothesis involves changes in the economy, we consider the implications of this yield spread over periods of months rather than days or weeks. Specifically, is the spread between the yield on the 10-year Treasury note (T-note) and the yield on the 90-day Treasury bill (T-bill) predictive of future S&P 500 index returns over the next 63, 126 and 252 trading days (three, six and 12 months)? Using data over the period 1/1/90-11/20/06, we find that: More...

November 20, 2006 - If You Are in the Market for an Investment Advisor...

...you may be seeing something like this: More...

November 9, 2006 - Reader Question on the "Tired" Bull Market

A reader sent the following observation and question:

Your analysis gives John Hussman only a 42% stock market forecast accuracy grade. His recent analysis of the gains and durations of past bull markets indicates that it is somewhat late to expect much more gains from this bull market. Yet, both your models predict continued gains extrapolated to beyond 2007. Other than historic data that shows all bull markets eventually end, is there a duration after which it is not prudent to invest new money but to wait until the expected 10%+ correction? More...

October 25, 2006 - A Weighted Guru Group Market Outlook

Suppose we take the current intermediate-term (notionally 3-9 month) stock market outlooks of the experts covered in our Guru Grades section and weight these outlooks according to their current calculated forecast accuracies. Would the accuracy-weighted opinion be bullish or bearish? Here's a stab at weighting guru stock market outlooks. More...

September 14, 2006 - Reader Questions on Stock Price Impacts of Management Changes

Reader Aaron sent the following observation and questions:

I read today that Peter Dolan, the CEO of Bristol-Myers Squibb (BMY), left the company...BMY was up nearly 4% at the open. How many other times have CEOs of unprofitable/unloved publicly traded companies gotten sacked and the share price rises on the news? Could this be a market inefficiency that market makers and traders (i.e., hedge funds) exploit to the chagrin of individual and institutional investors (mutual funds)? Specifically: More...

August 28, 2006 - Follow-up on Media Coverage of Economic News

Our blog entry of 8/22/06 summarized investor-relevant conclusions of the October 2004 paper entitled "Is Newspaper Coverage of Economic Events Politically Biased?" by John Lott Jr. and Kevin Hassett of the American Enterprise Institute. These conclusions suggest that a pro-Democrat/anti-Republican bias in the mainstream media may affect the economic risk perception of some investors/potential investors, thereby affecting stock valuations. In response to this entry, a reader who prefers anonymity sent a note stating "This refutes the study" with a link to a Media Matters article that has a section entitled "AEI study on media bias flawed". We investigated as follows: More...

August 17, 2006 - Mad Money Response from Kevin Goldman of CNBC

In our blog entry of 8/15/06, we summarize a research paper examining the stock market's reaction to 246 initial buy recommendations made by Jim Cramer on Mad Money episodes between July 28, 2005 and October 14, 2005, as recorded by YourMoneyWatch.com. On 8/16/06, Kevin Goldman of CNBC, sent the following note: More...

July 27, 2006 - Reader Question: Are the Returns for IBD's New America Index for Real?

Reader Ed in Boston MA wrote to ask about Investor's Business Daily's (IBD) "New America" feature, which highlights a different company each day. Ed included a chart (not reproduced here due to concern about copyright) showing that the cumulative return for the IBD New America Index has trounced that of the S&P 500 index by over 160% since late 1998. He asked: "Is this for real?"

There is little publicly available information on IBD's New American Index. Using what we can find, we conclude that: More...

July 26, 2006 - Holding Court with Stock Market Gurus

Suppose investors/traders were to apply the same standards to a stock market guru that federal courts apply to an expert witness. What, if anything, would they find admissible? Using as a guide the 2003 paper by Jennifer Mnookin and Samuel Gross entitled "Expert Information and Expert Evidence: A Preliminary Taxonomy", we conclude that: More...

July 17, 2006 - Doom and the Stock Market

Is the proximity of apocalyptic doom good or bad for stocks? With geopolitical concerns in the forefront, we investigate in this entry the relationship between global doom and the U.S. stock market. There are not many direct quantitative measures of doom. One is the "Doomsday Clock" judgment, revised occasionally via the Bulletin of Atomic Scientists, which expresses the level of doom in terms of "minutes to midnight" for the human race as a metaphor for the danger of nuclear armageddon. Using the historical record for the Doomsday Clock since inception and corresponding monthly data for the Dow Jones Industrial Average (DJIA), we find that: More...

July 14, 2006 - Guru Stock Market Forecast Snapshot

What are the experts saying now about prospects for the overall stock market? Here is a snapshot from our Guru Grades database of the most recent (June/July) public predictions by 23 active experts. This group of experts comprises a range of forecasting styles (fundamental and technical). They say that: More...

June 20, 2006 - Earnings, Inflation and Stock Returns

Reader Wes Williams of Stafford TX conjectured that our Real Earnings Yield (REY) Model and Reversion-to-Value Model, both of which use actual and projected S&P earnings, might be improved using results from "Stock Returns, Aggregate Earnings Surprises, and Behavioral Finance" by Jonathan Lewellen, S. P. Kothari and Jerold Warner (LKW). He notes that this research finds that stock market returns are generally low when aggregate corporate earnings are highest, and that returns are greatest (28% annualized) when earnings decline by 10-15% from the same quarter in the previous year. More specifically... More...

June 14, 2006 - Training for the Investor/Trader Hurdles

As shown in the cartoon below, investors and traders face three hurdles on the track to success: (1) developing a workable strategy/methodology as a foundation for decision-making; (2) persistently performing the research needed to reconfirm/execute the strategy; and, (3) overcoming emotional temptations to ditch strategy and research by succumbing to fear or greed. More specifically... More...

June 2, 2006 - A Reader's Out-of-sample Test of Some Technical Trading Research

Reader Wes Williams of Stafford TX offered the following observations and recommendation:

I read your blog entry of 4/11/05 on "Technical Trading Thoroughly Tested", carefully read (and re-read) the 27-page paper of Hsu and Kuan and then wrote some TradeStation programs to translate their results into 2003-present for the Russell 2000 index.

The results were quite disappointing... More...

April 4, 2006 - An Analysis of NFI FTDs: Regulation SHO Fails to Deliver

An investor recently obtained from the Securities and Exchange Commission (SEC) via the Freedom of Information Act a daily record over an extended period of aggregate Fails-to-Deliver (FTDs) known to the agency for NovaStar Financial Inc. (NFI). FTDs occur when brokers do not match short sales with shares to borrow within a specified number of business days. NFI investor Millerd1 suggested that there should be relationships between the FTDs for NFI and its total short interest, stock trading volume and stock price. Here are three hypotheses to test: More...

March 30, 2006 - Who Reads Yahoo! Message Boards?

We get a varying flow of traffic from Yahoo! message boards, usually from boards of "Cramerized" stocks to either our review of Jim Cramer's market timing record or our evaluation of his stock picking ability. Who reads these stock boards? Using a sample of 212 unique Internet Protocol (IP) addresses for readers recently visiting from five different Yahoo! message boards, we find that: More...

February 28, 2006 - The Hedge Fund Public Relations Game Plan?

Is this how a savvy hedge fund manager plays the game? First, get cozy with other fund managers, financial market research firms and the financial media. Then "orchestrate" the attention paid to a company in which the manager's fund has taken a position? Here's a picture, with some links to relevant allegations and news/commentary... More...

February 13, 2006 - Finding Memes for Contrarian or Trend-following Plays

The Internet enables rapid flow and ebb of trading memes. Trend followers hope to ride a meme and get out before it fades. Contrarians take the other side in anticipation of the fade. Traditional tools for inferring memes include price-volume action and market sentiment. Do emerging information-filtering technologies present novel ways of discovering investing/trading memes from surges of news on the web? Building on ideas offered in the article "Finding Signals in the Noise" from Technology Review, we offer a few possible meme-detectors: More...

February 9, 2006 - Out-of-Sample Test for a Stock Market Model

In reviewing recent postings in the General Financial Markets category of the Social Science Research Network (SSRN), we found the April 2002 paper entitled "Solving the Price-Earnings Puzzle" by Carl Chiarella and Shenhuai Gao. In this paper, the authors investigate the interrelationships of stock prices (the S&P 500 index), earnings and interest rates (the Federal Funds Rate) during January 1979 to August 2001. They conclude that the stock index is proportional to aggregate earnings and inversely proportional to the interest rate. Their approach to modeling the S&P 500 index has some similarities to our Real Earnings Yield (REY) Model, but also some differences. In this entry we perform an out-of-sample test of their findings and compare the results to those of our REY Model, finding that: More...

January 10, 2006 - T-note Yield Conundrum Weakening the Fed Model?

The 10-year Treasury note (T-note) yield is a critical input to most versions of the Fed Model of the stock market. It's recent resistance to rising is also one aspect of Alan Greenspan's bond conundrum. Since mid-2004, the Federal Reserve Board has raised the Federal Funds Rate more than a dozen times. Budget and trade deficits have continued to grow, suggesting inflationary pressures that may force additional rate hikes in the future. The T-note yield has gone nowhere. Is its misbehavior a random fluctuation? Do T-note buyers perceive deflation? Are expanding foreign holdings of dollars seeking save haven? Using annual (1962-2005) and monthly (1992-2005) data on the T-note yield, the 90-day Treasury bill (T-bill) yield, the inflation rate and the trade deficit, we find that: More...

December 12, 2005 - The After-January Effect?

In case you are sick of hearing about the January effect... More...

December 9, 2005 - Reader Contribution to Trading Calendar Analysis

Reader Aongus in Narberth PA has done some serious number crunching to extend our Trading Calendar analysis, constructing year-to-date average and median performances for the S&P 500 index over 1976-2004, the NASDAQ 100 index over 1986-2004 and the Russell 2000 index over 1988-2004. Aongus has also agreed to share the results here. How do these indices tend to trend over the calendar year for these periods? More...

October 6, 2005 - Understating P/E?

After reviewing our recent blog entry updating the behavior of S&P 500 price-earnings ratio (P/E) over the past 17 years, reader Charles in Summit NJ noted the following point of view:

Jeremy Grantham (and John Hussman) would argue that the current P/E is calculated from peak profit margins. If profit margins are normalized over the last 10 years, the P/E is much, much higher. What do you think?

The chain of logic these two experts offer is as follows: More...

August 5, 2005 - What Happens to Stocks Going on the Regulation SHO Threshold List?

In yesterday's entry, we found that it may be worthwhile picking through the stocks leaving the Regulation SHO threshold security lists for equities ready to rebound after being over-shorted. In this entry, we take a look at stocks going on the NASDAQ threshold list during June 2005. Does going on the list inhibit further short sales because (more than) all available shares have already been borrowed, allowing price to drift upward? Does it indicate that shorting has been overdone? Or, does appearance on the list scare off potential buyers, driving price lower? Let's check: More...

August 4, 2005 - Could Failures Point to Success?

The Regulation SHO threshold security lists for the NASDAQ and NYSE flag those stocks for which a significant percentage of short sales are not balanced by borrowed shares. Our blog entry of August 2, in summarizing recent academic research on short selling, states that: "Appearance on the Regulation SHO threshold list suppresses subsequent short selling, but it does not significantly affect future returns for stocks priced $5.00 and above. However, stocks on the threshold list priced below $5.00 do have significantly lower future returns." But what happens to returns when stocks come off the threshold list? Does coming off the list release pent-up shorting demand, driving price down? Or, does it indicate that shorting has been overdone, with prices subsequently drifting up? Let's check: More...

May 19, 2005 - "Predicting" the Past with Investor Sentiment

Following one of the many links routinely offered at The Kirk Report, we visited the "Current Investor Sentiment" page at Lowrisk.com. Jeff Walker invites visitors to this page to express their market sentiment by predicting the direction of the Dow Jones Industrial Average (DJIA) over the next few weeks. He also generously offers weekly historical results of this ongoing poll back to May 1997. How well does this measure of investor sentiment predict the actual behavior of the DJIA? More...

April 24, 2005 - The (Stock Market) Modeling Life

If your crystal ball has not been working so well... More...

April 18, 2005 - An Engine Driving the Market to a Lower P/E?

What if the rapid growth of hedge funds is moving money from managers who cannot sell short (at mutual funds) to managers who can not only sell short but also do it with leverage. Might this shift drive the market downward to lower and lower price/earnings ratios (P/E)? More...

April 4, 2005 - Easy Trader

It is very easy to: (1) set up an account with an online, discount broker; (2) get margin and option-trading privileges; (3) read about hot stocks and funds on the web; and, (4) start trading. Is this process too easy for the average investor? For some research guidance on being a truly independent investor/trader... More...

April 1, 2005 - Disagree with Me? Idiot! Liar! Basher! Pumper!

Thinking about stock message boards... More...

March 29, 2005 - How's Your Mutual Fund Doing?

In case your mutual fund's got you down... More...

March 24, 2005 - Feeling Pushed Around? Are Your $ in Jeopardy?

In case the market's got you down... More...