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FT100 yield 5.17% = 44% cash reserve indicated under New iBox Ladder
Following on from a short rate minus dividend yield relative valuation measure that Tom presented and discussed the other day http://investorshub.advfn.com/boards/read_msg.aspx?message_id=36950940 I've extended the iBox above to include a UK version of that measure.
At the same time I've updated the iBox to present a dividend yield based Ladder rather than the FT100 price Ladder used previously. The Dividend Yield ladder is more universal as for instance in the US where yields are typically lower (due to taxation) that same Ladder might be adapted by perhaps subtracting 2 from each of the yield levels (shifting the yield ladder downwards). This new Ladder raises the current indicated cash reserves compared to that of the previous method, but does so in a manner that reasonably aligns with the current vWave indicated cash reserve.
The Relative Valuation this week shows that the down-run that started in November 2008 has taken a breather. As a result the 200 day moving average is starting to catch the current price level - which arises out of the moving average effect where older higher values drop out of the set and are replaced with lower values.
Having the current price encounter or cross the 200 day moving average is taken by some to be a potential turning point. In other cases another down-leg run can resume after what technical analayst's call "consolidation". Generally it just means that after a period of relatively low volatility (sideways price movement) another sharp rise or fall is potentially likely (increase in volatility) as lots of trades 'read into' a particular pattern.
Over the short term the change in indicated cash reserve from 20% under the previous method to the 44% as indicated by this new Ladder will prove to either have been a good or bad choice, depending on which way the next price jump occurs. In consideration of vWave also showing rising cash reserves it seems timing that switch to now is a reasonable action to take.
Clive.
FT100 3968, 19.2% cash reserve indicated
FT100 3925, 19.2% cash reserve indicated
FT100 3955, 20.2% cash reserve indicated
FT100 3900, 19.2% cash reserve indicated
FT100 3805, 17.17% cash reserve indicated
FT100 3712, 16.16% cash reserve indicated
BoE down to 0.5%
FT100 3512, 12% cash reserve indicated
Presently FT100 dividend yield = 5.95%, Cover 2.4, PE 7.02
BoE = 1%
Hi Tom
I ended up using the Value Line "Median Estimated Dividend Yield of all dividend paying stocks under review." I then subtracted it from the prevailing 13 Week Treasury rate for each week.
http://www.indexarb.com/dividendAnalysis.html
"The fair value premium equals the interest earned on the spot index minus dividends earned by the stocks that comprise the index. The relevant time period is from the current date until the future's expiration."
Agrees with the short rate - dividends indicating a discount (or premium) to fair value.
Best regards.
Clive.
RE: RV graph changes
As there is now sufficient historical data available within the database I've adjusted the iBox Relative Valuation graph to be self steering. The top and bottom (white) lines are henceforth now determined from the historical data contained within the database and are each set to around the top and bottom 10% across all individual historical values.
RE: Dividend Yield based relative price measure
Over the last couple of days I've taken the standard deviation based yield measures quite a bit further.
Pretty heavy going to describe here, but clearly there is a bias towards larger downside price moves (high yields) than normal form would suggest. There are a few possible reasons for this, one of which is as a consequence of how a 50% decline requires a 100% subsequent gain to get back to break-even.
Adjusting for that down 50 up 100 type effect indicates a much more normal distribution. Which in turn means that I can measure how far adrift from normal distributions things are at any one time.
For example preliminary observations are that we are overdue for at least one year of a 1% higher yield than that of the present yield level (which perhaps suggests that lower lows have yet to occur), but not particularly excessively lower price levels.
Of course non-normal deviations can occur and prolong over extended periods of time, however my next intent is to scan across a range of such potentials and perhaps use the overall average as an indicator.
If this works out then potentially this could both indicate the more likely price direction and durations at or around a particular price level in order to rebalance or remain within normal form distributions. Deviations from that might further indicate just how far the elastic band effect has been stretched (or otherwise).
It could also serve to identify relatively low and high price levels and be used as a forward investment return estimator (form of VLAP type measure).
Something to occupy myself with during these cool, dark (buy getting lighter) evenings.
Hi Tom
For my yearly based (1946 to 2008) values :-
Average 2.61
Min -2.49
Max 8.9
Stdev 2.549
1.28 stdev (e.g. from table http://www.statsoft.com/textbook/sttable.html = 80% of the distribution) = 2.549 * 1.28 = 3.262
Average -1.2 stdev = -0.651
Average +1.2 stdev = 5.8751
Current -5.3
So my average of 2.61 is a bit higher than your 1.88 average.
Similarly my 80% boundaries (1.28 stdev) shows top 10% of around 5.87% vs your 3.8 and my lower 10% of -0.65 vs your -0.85
Whilst different the two seem reasonably close generally. And the current -5.3 (your -3.17) certainly is very deeply into the bottom 10%. At over 3 standard deviations down from the average it's in excess of 99.7%
A Black Swan (6 sigma) event would require a 12.6% I-MD value.
Best. Clive.
Hi Clive, Re: average of Interest Rate minus Median Dividend....
I checked on the data I have and since the beginning of 1995, the average of the I-MD = +1.88. It's currently showing -3.17.
The top 10% of the data starts at +3.8 and the bottom 10% is below -0.85. So, at this point the minus 3.17 reading is quite deep into the bottom 10% of the database. In 2000 we had a long string of >3.8 indicating severe bearishness but we did not get to the 90th Percentile since then. Before that there was a period of bearishness in April of 1998.
No bullish signals (bottom 10th percentile) were seen until November of 2002 but the bullishness stayed until the end of October of 2003. Bullishness returned once again at the end of September of 2008 as a consistent signal and it has remained so consistently ever since.
Interesting stuff.
Best regards, Tom
If you mentally update to the present date the dividend yield graph I posted earlier to reflect the more recent 5.25% yield (7.8 PE), then on the basis that we entered a Bear in 2000 we might be at or near the 'fair' Bear price level.
In simple terms Governments have or are taking bad debts off banks hands - without that action new comer banks could come in (debt free) and wipe the floor with the older banks that carried heavy debt liabilities.
Gov's borrow to cover the bad debts and will likely finance those borrowings via a combination of inflation (printing more money) and higher taxation.
So as companies make profits, instead of stock prices rising more likely interest rates will be raised, which lowers the price investors are prepared to pay for stocks - keeping average stock prices somewhat level. Bond yields will rise (bond prices decline).
Over time there will be over and under cooked periods, possibly with average stock yields hitting highs of 8% and/or bond coupons hitting 10%+, so likely they'll be some sizeable AIM buying (and selling) opportunities along the way.
Whilst the UK's PE of 7.8 currently reflects price declines, the US SP 500 PE (29) has risen in reflection of earnings declining faster than stock prices. This is perhaps suggestive that the US is in a better condition than the UK and that US expectations are more towards earnings declines being a temporary down blip whilst UK expectations are that earnings declines are down for a more extended period of time (UKP declining more than the USD).
The US has typically grown capital more and paid less dividends than the UK. That looks set to continue in the forward direction. Obama is a bit of a Tony Blair reflection and whilst we've had the bulk of politically leftward type social spend and are now starting to head back to the political right, the US is more geared towards a leftward shift.
The relatively lower UKP however will help towards a faster recovery for the UK than might otherwise have been the case.
From a UK investors perspective perhaps consider adding to international USD based holdings as a currency play.
A combination of ISF.L (FT100), IUKD.L (FT350 high yield) presently provides around a 6% income - with perhaps flat capital growth (but some AIM price volatility capture benefits), add DOW to that and you'll have around 5% total income (assuming three equal parts) and some growth/currency diversification added in. Individually AIM'ing the UK side to 50/50 stock cash settings should cover you sufficiently for the mid term. From a longer term perspective the additional buys that would appear likely should cost average you in in a manner that will serve you well over the longer term.
For existing AIM's that are light in cash, well we just bought in at relatively higher prices and should continue on as-is.
Hi Tom
If anything, the low levels around the earlier part of
maybe a reflection of "we've had the good times and run up big debts - now it's low benefits for a while until we repay those debts".
The earlier part of that chart had incomes from cash and stock both at around 5%.
Here's a historical AIM reference for such a sideways ranging type period which show capital benefits (losses) only. Add on 4 or 5% income and total benefits are 3-4% for B&H versus perhaps 6 or 7% for AIM'ers.
and a table from crestmont research
which I transformed a couple of years or so again for my personal reference into
and a couple of other references which both show a sideways/bear having started in around 2000
I hope you're right with the VL based predictions Tom. Personally I'm less confident and trying to be a good scout by being prepared for alternative scenario's (geared towards a period of sideways trading action with low capital gains, mainly income only under buy and hold conditions but likely improved upon under AIM via some stock price volatility capture benefits).
President Obama, PM Brown et al could be playing a counter to that of King Canute, trying to keep the high surf waves rolling and party going by throwing $Trillions when the tide is rolling out.
One good element is that if a Bear did start in 2000 and my predictions of a end date of 2014/15 in the 4th image above turn out to be correct, then for many from the current date the Bear will seem a lot shorter than might otherwise have been the case.
As might reasonably be expected, when you don't mess with the taxation of dividends, then over the longer term you typically see a more consistent correlation between stock prices and dividend values (this chart uses dividend yield * index = dividend value).
On the basis that dividend values rise in proportion to stock prices, but with dividend values tending to be somewhat smoothed with companies being under pressure to maintain/grow dividends (borrowing during the bad times to maintain dividends and then repaying those debts during better times), then dividend yield becomes a good proxy for relative stock price.
Hi Tom
I've run a similar test but using yearly yield values and subtracted the dividend yield from Gross Building Society rates (cash-deposit)
Can't see much particularly noteworthy leaping out from that.
It appears the UK has been more generously paid for its common stock investment risk than has the U.S. over much of time.
On a total returns basis the two markets tend to compare reasonably well. The Dow for example gains more in capital than the FT100, but the FT100 generally pays a higher dividend yield. I've put that down to the US's choice to unfavourably tax dividends in the more recent past resulting in a greater proportion of retained earnings.
Best regards.
Clive.
Hi Clive, I've been fiddling with this for a few days and decided a rational view of dividend yield was to compare it to the current short term interest rate (I used the 13 week Treasury rate). My thought was that dividend yield would need to be a compelling argument to assume risk against an essentially "risk free" investment in a money market fund that was based in short term government paper.
As we know, people invest in stocks not just for the dividend but for the total return they might achieve from both the yield and the price appreciation over time. Even so, it seemed an interesting idea to measure the two together. What was apparent was the short term interest rate has been higher than the yield most of the time. So, people were truly "banking" on price appreciation if they were investing in stocks.
I ended up using the Value Line "Median Estimated Dividend Yield of all dividend paying stocks under review." I then subtracted it from the prevailing 13 Week Treasury rate for each week. I then graphed the results against the S&P 500. I used the period of 1998 through the current date.
When interest rates are very low compared to median stock dividends we see the chart go "negative" - a very bullish sign. Low yield with high interest rates would be a compelling argument to be holding short term treasuries in place of common stocks.
Unfortunately I don't have data going back a lot further. This is a reasonable sample, however.
I note that the peak interest rate on your graph for around 1994 is the same peak seen in the U.S. In December of 1994 the median Value Line yield was at 7.8%. Today it is sitting at 3.5% and back in 2007 it was regularly only 1.6%. It appears the UK has been more generously paid for its common stock investment risk than has the U.S. over much of time.
Best regards, Tom
Hi Tom.
I'd certainly be interested in the VL dividend history.
Would be nice to see if it confirms my own UK longer term historical yield observations
The first chart shows year end UK dividend yield levels from 1869. The chart is formatted downwards as that provides a better indicator of how yields fluctuate with stock prices over time. Low yields = high prices, high yields = low prices.
The second chart shows periods where the yield was at or above the long term average which is considered as a buy opportunity.
The third chart shows the intervals between above average based buy opportunities. As this graph is based on year-end dividend yield values alone potentially more buy opportunities could have been identified had the range of year high/low yield levels been used instead (currently I don't have such data available).
Of particular note is how generally buy opportunities often cluster (remain available for a period of time). I've pre-empted 2009 being a above average yield year in view of current yields already breaching that yield level.
Generally buying at or around the 4.85% long term average yield will encounter a 6.4% stock price capital appreciation benefit coupled with that 4.85% yield (combined benefit of 11.25%)
Where stock is bought at high yield time-points and sold at low yield time-points then generally there are tail-wind beneficial effects that uplift both the capital growth and dividend income.
Where stock is bought at low yield time-points and sold at high yield time-points then generally there are swim-against-the-tide type effects that drag down both capital growth and dividend income.
Whilst average yield to average yield based investment time periods have average total returns (capital growth + dividend income) of around 11.25% p.a. average, high to low yield buy/sell time point timing can generate total investment returns of 15% to 20% p.a., whilst low to high yield buy/sell time point timing can drag down total investment returns to 3% to 6% p.a. levels.
Given the second chart, my guess is that the present buy opportunities do not need to be hastly taken as further subsequent possibly even better opportunities may arise. Which is perhaps indicative that we are firmly within a sideways trading range perhaps for the next 3 to 5 years. That however somewhat conflicts with the VL charts and details you posted on both the AIM-Users board and the SignalPoint blog/website.
Best regards.
Clive.
Hi Tom.
How secure is your backup arrangement against protection from a younger member of the family ?!!!
Main HD trashed, so he used the SPARE PC's HD as a replacement (the one I kept backups on). He installed op system, which involved reformatting etc.
I came home and - Ahhhhh!!! - Oh well, no problem, I'll just restore from the DVD that I also keep (less frequent) off-site backups on - only to find it COULDN'T BE READ.
Fortunately I did have some older backups that helped with the restoration, but they were pretty old. The rest has been a hard slog to get back to somewhere close to the setup and data record that I previously had.
Best regards.
Clive.
Hi Clive, Re: Peaks and Troughs.........................
Maybe we can coin a new phrase relative to Mountain Goats and Pigs!
We could include some catch phrase like it's "Baaaaaad" to be buying
with the Mountain Goats.
Unfortunately, this is exactly what we're seeing happen in the real
world with each cycle. The herds of goats charge the mountain to
eat where the grass is the most sparse. Then when disappointed, they
return to fertilize the valleys.
I have many years of Dividend history for hte Value Line 1700 group.
I'll package it up in spreadsheet form and email it to you along
with the VL estimated P/E and a market index or so. It tells
exactly the same story you describe. Yields high, relative
prices low. Yields low, relative prices high.
We've been wallowing here in the troughs for some time now. Earnings
reports (for companies smart enough to actually have earnings) are
coming in at reasonable levels. However, if a company missed
"guidance"
by even one penny out of twenty, the stock is crucified. Strange
mentality. Companies with losses, however, get speculated because
they might return to earning money. Again, strange mentality.
Norman Fosback's tome of investing still provides lots of insight
to investor mentality just in the title: "Stock Market Logic."
Obviously an oxymoron!!!
Best regards, Tom
Hi Clive, Re: Backups........................
I've used Norton's "Ghost" software for some years now with success. I have a second hard drive installed in the box and "Ghost" the C drive to the second one on a weekly basis. All programs so copied will run, but might need re-registering and any passwords re-inititated. Data is immediately accessible.
Other than my own errors (trying to "Ghost" one last time, a drive that was starting to show failure mode) it's worked quite well and saved hours upon hours of re-installation and file conversion from "backup" format to useable.
There's probably a newer, more efficient way to do this today, but this method has worked well.
Best regards, Tom
If you measure the long term (80 to 130 years) Dow price levels and annualise the capital gains over all possible periods of 5 years or more then you’ll see an average overall figure of around 6.5% p.a. Add on 3.5% average dividends and total investment returns average out to around a 10% compound rate. Over 20 years that amounts to a 3.52 gain factor when based on capital gains only, or around 6.73 gain factor when dividends are reinvested.
Buying into stocks when yields are relatively low – perhaps 2%, is akin to buying a $100,000 house at 75% premium ($175,000) during a boom period. Similarly buying into stock when yields are 5.5% is akin to buying a $100,000 house at 36% discount ($63,000) during a depression.
If you buy at the peak and sell at the trough then you have a 63 / 175 = 0.36 factor working against you – you’d be swimming against a very strong tide.
Buy and the trough and sell at the peak and you have a 175 / 63 = 2.7 factor working for you - sailing along with a very strong tail wind.
Over a 20 year investment period, an investor who bought and sold at average price levels might anticipate a 10% p.a. compounded average.
An investor who bought at a peak and sold 20 years later at a trough might anticipate a 3.52 * 0.36 = 1.27 capital gain factor, or around 1.2% compounded capital gain p.a. supplemented with a 2% dividend (3.2% p.a. total benefit).
An investor who bought at a trough when yields were perhaps 6% and sold at a peak when yields were 2% might anticipate 3.52 * 2.7 = 9.5 gain factor or around 11.9% p.a. compounded average supplemented with the 5.5% dividend income = 17.4% p.a. total benefit.
With recent FT All Share yields in excess of 5.12% the indications are that relative to the longer term we are much closer to a trough buying opportunity than we have been for a considerable number of years. Investments added now may provide total investment returns in excess of 15%+ p.a. over the long term if later sold in perhaps 20 years time at a peak price level (when yields are around 2%).
Over the longer haul typically dividend values grow in line with gains in stock capital values. So you might buy an Index fund that pays perhaps 5% or more yield and simply forget about the investment. Likely the stocks will grow both their capital value and dividend payouts at a good rate.
The worse you could do at the present time is sell stock, as then you’d be selling at a trough after having bought at a peak. It is likely far better to be adding new funds into the market at the present time instead.
Not to say that stock prices might decline further, but if they do then having bought and forgot you can ignore such paper values and come back in 5 or 10 years time to review where your investment stands at that time, and likely you'll be satisfied with the results.
Taken a while to recover the data and graph, but the RV (IBox) is now up to date.
Always check that your PC backup's actually restore !!!
Hi Clive,
I like your web page here. Well done, Ken
26.26% indicated cash reserve (FT100 4324)
27% indicated cash reserve (FT100 4367)
Sorry - no RV graph update this week (PC crash rebuild in progress).
23% indicated cash reserve (FT100 4122)
23.25% indicated cash reserve (FT100 4152)
21% indicated cash reserve (FT100 4005)
Hi Clive,
Spreadsheet to match this example is ready. Drop me an e-mail as I've lost your e-mail address. Nothing better than a real world example. ;)
Tim
Representative Example...
Using the MSCI U.K. index, in a weekly time frame, my estimate of phi cubed works well here for both bull/bear markets. I reckon that about 13-15 ladder rungs would be required and in extraordinary times, say 18 to extend the "bumpers" out for black/white swan events.
Smaller fractals could be captured using smaller time frame charts, but a once a week approach would likely do well. When the trend shifts back up, then the ladder is "rescaled" to accommodate it, thus it is totally dynamic to whatever the consensus is to valuations or supply/demand.
Hi Clive, Re "Level Shares"...
OK, I'd like to do my buying/selling around the major levels as the probabilities of hitting those targets are great and giving up captured gains or conversely picking up greater bargains would be the motivation for me personally.
I'm thinking about the calculator/spreadsheet. It's crystallizing in my head with your formula. ;)
BTW, Birinyi & Assoc. has just come out with the S&P 500 trailing P/E, 19.19 & 12 month forward est. of 11.60. I suspect the forward est. will continue to shrink from what I've been reading today. Our Dow Jones media is pitching heavily to retail investors to pick up the slack left by the distribution of institutional investors. Always good to see the media getting desperate! I suspect we'll be seeing single digit P/E's someday.
Best, Tim
One's personally preference then is to fine tune to those natural levels or just divide the rungs by percentage or fixed steps. I just prefer the former and you may prefer the latter
Another option to the Level Cost style I outlined over on the AIM-USERS board (which is more suited to linear/fixed step) is to use what Don Carlson calls Level Shares which I suspect you'd find to be better under proportional step Laddering.
Assume start stock price is $2.50 and we identify trade price levels of
Price #
Level Shares
$10 1000
$5 1000
$2.5 1000
$1.25 1000
$0.625 1000
Hi Clive,
Thanks for your chart of the FTSE; I'm still looking for the right index symbol for my charting program for that index as I'm thinking more and more into utilizing int'l markets as I believe they will recover quicker than the U.S. when all the deleveraging is finished. I'll look for the U.S. equivalent ETF as a proxy.
I have no problem sharing the calculator/spreadsheet once developed. You've shared your's here and the ladder method and that was my inspiration for the tweak. The chart you've posted is indeed too "busy" and that's why I suggested having ladder rungs at major expansion/retracement levels otherwise too much trading costs begin to reduce returns.
As to the time spent, it takes me very little time to draw up the projections on a chart. Roughly about 5 minutes/tradeable. This is after lots of experience in doing it and having a very good grasp on the ratios that might come up as major levels. That said, anyone can learn it and when mastered it will be a short process.
I'm glad you added the ATR as it's nice to see the volatility in price ranges over the time span you've posted. Bespoke did a great chart on 10 week price change for the S&P 500 from 1929 to the present:
http://bespokeinvest.typepad.com/bespoke/2008/11/50-day-average-daily-sp-500-change-at-326.html
It really hi-lites the severity of our current economic malaise. I think most folks haven't grasped the scope of the problems. BTW, always use arithmetic scaling when making projection charts. That's a must...
"I opine that stocks price moves are to a large extent random, but equally are bounded with certain limits of mass greed/mass fear. Structuring your Ladder boundaries to historic levels of fear/greed, perhaps as depicted by dividend yield (or some other time independent measure) will help ensure that your ladder remains active across time, rather than encountering periods of prices being outside of the ladders range."
Yes, intraday and daily prices changes are for the most part random driven by news events, earnings reports, etc, but over a longer time frame the trend of the market reveals the collective mind either up, flat, or down until the concensus view changes. That's why in looking at charts, their are patterns that might complete or might not. What's driving the market is order flow from larger groups that either put on or take off positions and their doing so may have no correlation with anything technical or fundamental. It's just the normal random nature of the market in short time periods from the order flow.
The ladder as I envision it, will reflect the historical ranges, but with "bumpers" at the extremes to allow for worst/best case black swan events. Since we know markets overshoot both ways, that has to be built into the modeling. Fortunately, those overshoots also have a math component to them and can be built in to the ladder.
Since the ladder and the expansion/retracement levels are likely targets, not predictors, with the ranges built on natural ratios, they will not change unless human behaviours change and if that happens, then it can be rescaled to the new parameters. One's personally preference then is to fine tune to those natural levels or just divide the rungs by percentage or fixed steps. I just prefer the former and you may prefer the latter. ;)
Best regards, Tim
Hi Tim
Also, devising a spreadsheet, or simple calculator, that is a template rather than a fixed design so individual levels can be inputted with specific levels of cash as the output. As I've shown on your board, each tradeable moves along to a slightly different "beat."
One could further subdivide the levels, but that would end up with too much trading. The major levels are the ones to be concerned about and moving past them up or down is the way to view it I think.
I'd like to see that spreadsheet/calculator once your done if you don't mind sharing.
I can see the appeal of using manually defined ladder price levels as our minds are pattern recognition based. However I believe that the additional time/effort spent looking and setting manual levels over that of more simple fixed levels does not provide sufficient additional (if any) benefit to warrant that time/effort.
Here's an auto generated chart showing some support/resistance lines for the UK's FT100 1984 to present.
Use a log scaling and you'll get another different set of S/R lines.
Market prices are the collective average of everyone with an interest in either buying or selling. That collective average changes over time. Yes the more people that follow one particular indicator the greater the chance of that indicator being reflective of actuals, but in times such as more recent when uncertainty/potential (greed/fear) predominate then volatility will be high as the collective do not know where to price stocks. Once a more common agreement forms, then volatility will decline.
If you have price appreciation, price volatility capture and downside loss limitation components separated out (B&H, Ladder, MF) then I would suggest that instead it might be better to expend time/effort looking into over/under weighting which style you might predict as the better/worse going forward. Alternatively you might just react to what actually occurs and periodically rebalance the three back to near equal proportions.
Simple time diversified price levels is likely to fair as well as attempts to trade to support/resistance lines at the Ladder level. Periodic rebalancing to equal weightings across the B&H, Ladder, MF styles is likely to fair as well as attempts to predict which style might provide the better return over the short/mid term.
I opine that stocks price moves are to a large extent random, but equally are bounded with certain limits of mass greed/mass fear. Structuring your Ladder boundaries to historic levels of fear/greed, perhaps as depicted by dividend yield (or some other time independent measure) will help ensure that your ladder remains active across time, rather than encountering periods of prices being outside of the ladders range.
Best regards. Clive.
Hi Clive; Spot of Bother....
Looks like you gentlemen have a larger problem on your hands than your American cousins. ;)
Your markets move to a slightly different drummer than the U.S. but the proportionality remains. Enjoy!
Best, Tim
24% indicated cash reserve (FT100 4182)
Hi Tom.
I did allow a few days lag, a week would have been a better choice.
So next weeks prediction is -37.5% (hedging between -35% and -40% vWave :)
Best regards. Clive.
Hi Clive, Sometimes it's a bit hard to anticipate what Value Line will be reporting. Their reports tend to lag "real time" by a week or two.
Nice job on your guess, however!!
Best regards, Tom
My prediction of vWave of -20 (up from -60 the previous week), turned out to be wrong (but not that far off) as the actual was -30%
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=33450060
:(
30% indicated cash reserve (FT100 4531)
I'm also trying out a vWave predictor for next weeks value which is showing -20% :)
Hi Tom, Re: Relative Valuation..............
Thanks for the chart and explanation of the 2 factors. Yes, I agree with you as to the observation of the "flat" ranges for extended lengths of time. That would be normal for the 2 inputs on your chart. Adding additional inputs would most likely present a different picture in the final result.
P/E ratios can be forecasted somewhat based on other economic factors. I'm sure the wiz kids on Wall street have worked this all out in their computer modeling for the market makers in order to derive stock prices.
As I posted earlier, my forecast for the market is more conservative than the TV pundits and Masters of the Universe. ;) Considering the P/E at the market low, a nice countertrend rally that's developing has potential for some nice gains, but I don't expect a new bull run from here; rather the grinding sideways market for a longer period of time. If that doesn't occur, then I'll be pleasantly surprised!
We won't know the likely outcome for awhile until other factors become more apparent that will ultimately influence the P/E ratios, hence the sideways markets. In the fullness of time, we'll have the answers.
Best regards and Happy Halloween!
Tim
Hi Tim, Re: Relative Valuation..............
Here's an older graphic of Relative Valuation...
While this chart only goes back to 2005, you can see that the P/E remained rather flat through much of the first part. It was the continuing upward pressure the Treasury Rate added to the sum that pushed it over into the bearish zone.
P/Es have been contracting for quite a while now. Interest rates have been falling for much of the last 12 months, too. The combination has reversed the RV from quite high risk to quite low. Of course this all assumes the P/E holds up going into a rough patch in the economy.
With interest rates now nearing the 1% mark, if we assume the middle of the Neutral zone to be about 21, then P/Es can rise to 20 before we've even started to recognize any stress. Now, P/E can rise two ways:
1) Earnings can drop off dramatically while stock prices stay the same.
2) Stock prices could rise dramatically while earnings remain the same.
Which of these two are more likely to play out? That's anybody's toss of a coin. However, it's likely that a bit of both will be in there when the final analysis is done. If earnings remain flat and P/E rose to 20, that would mean about a 66% rise in stock prices on average! That would put the S&P 500 back around 1400+. Well, that's why I think it will be a combination.
Hope this helps clarify how the RV works and the relationship of the short Treasury rate and P/E. In the past we've had interest rates of 12% and a P/E of 9 and it still adds up to about 20 so is a "neutral" market. We've also had P/E of 20 and nterest rates of 1% - also adding up to a neutral market. So, history shows that when interest rates are high, P/E's usually head lower and visa versa. Negative correlation. It's also true that the market will ignore rising interest rates for a long time before they realize the situation.
In 2002-03 at the market bottom, the sum was well below the "bullish" threshold. It is again right now.
Best regards, Tom
Hi Clive, RE Sanjoy
Thanks; from my first quick glance it looks like he's using all the right indicators in his analysis.
Regards,
Tim
Hi Tim
You might find Sanjoy's webpages located at http://www.predictableinvesting.com to be of interest.
Regards. Clive.
Yield Curve, the FED (BOE) & P/E's
Changes in short-term interest rates by the Fed (or the BOE), on their own, have minimal impact on stock market P/Es...unless the Fed is unsuccessful in controlling inflation or preventing deflation. Increases in short-term rates are intended to contain inflation, the driver of P/Es and long-term interest rates, at levels of price stability. Decreases in short-term rates, often to stimulate the economy, must be done in a way that does not cause inflation or foster inflation expectations.
The implication of an average yield curve spread of approximately 100 basis points (1%) is that the interest rate that relates to inflation expectations, the long-term rate, is likely to stay relatively low. When the spread exceeds 1%, the implication is a risk of potentially higher inflation and
lower P/Es. Spreads below 1% imply tighter monetary policy and efforts to control inflation risks (yet this also creates the risk of deflationary conditions and lower P/Es).
The spread refered to above applies to all points along the yield curve similar to a percentage band above and below the moving average.
Hi Clive, RE: I-Box
Thanks for your reply and explanation with links! Now I know what's inside the I Box and how your ladder works. IMHO, you're on the right track with your modeling protocol. I don't think the V-wave is the best guide to use for the AIM cash reserve as it leaves out some components of stock returns.
Those components are: P/E ratios, dividend yield, earnings growth, bond market credit spreads (stocks vs bonds), inflation/deflation, and volatility. As you develop the I-Box you may want to consider the additional inputs.
I'm very much a "chart" person, as I like the visual presentation of data vs tables or spreadsheets. I've been a technical analyst for 4 years with much study into market cycles and proportionality. I think the I Box P/E or composite graphs likely follow the natural order of things re proportionality, thus secular cycles can be isolated from the trends.
Well, I can see I have my work cut out for me in developing the database for the P/E ratios. Since as you note, I wave has been taken private, the historical data will need to be done afresh whether using V/L or another indexing scheme.
Best regards and good luck with the I-Box. I'll be closely monitoring it as you display it. The ladder is an outstanding idea to make the cash reserve relative to the divd yield metric. Congratulations, you've pushed the envelope out in incorporating that into the I-Box!
Tim
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