Blog - Investing Notes

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.

Here is the process we follow:

• Applying some judgment, we identify 24 gurus with current intermediate-term outlooks.
• We assign +1, 0 or -1 to each of these 24 gurus for bullish, neutral and bearish outlooks, respectively.
• We weight each guru's outlook by the factor [Guru's Accuracy - 50%]. If a guru's accuracy is above (below) 50%, the weighting factor is positive (negative). For example, a guru with a poor forecast accuracy of 36% would have a weighting factor of 36% - 50% = -14%. If that guru is bullish (bearish), his contribution to the overall outlook is negative (positive).
• We sum all of the weighted guru outlooks.
• We normalize the result such that the maximum (minimum) possible overall outlook is 100% (-100%).

The output of these calculations is +31%, with a contribution of +41% from gurus with historical accuracies greater than 50% and -10% from gurus with historical accuracies less than 50%. (Both segments are net bullish, but the historically more accurate group is more bullish.)

For comparison, we weight the 24 gurus equally and find a net +21% outlook, somewhat lower than the accuracy-weighted outlook.

In summary, the gurus with historical stock market forecasting accuracies greater than 50% are net bullish, and quite a bit more bullish than those with historical accuracies less than 50%.

We will revisit these calculations occasionally to test the output as a stock market indicator.

For other research on sentiment indicators, see Blog Synthesis: Sentimental Journey.