This top market timer says stocks’ ‘Trump bump’ won’t last much longer By Mark Hulbert
* December 9, 2016
S&P 500 in six months will be trading where it is now
Sam Eisenstadt prefaces his latest six-month stock market forecast with a plea: Don’t blame him — blame his computer.
He’s referring to his complex econometric model that, on a monthly basis since the 1950s, has generated six-month forecasts for the S&P 500 SPX, +0.24% It has a better long-term track record than any other market-timing model of which I am aware.
His model’s latest projection is that, at the end of this coming May, the S&P 500 will be trading at 2,230. That’s around 1% lower, essentially flat, from Thursday’s close.
Eisenstadt is the former research director at Value Line Inc. He retired in 2009 after 63 years at that firm, but continues independently to update and refine his model that generates six-month forecasts for the broad market. The model includes all factors that he has found over the long term to have any ability to project the market’s subsequent six-month return.
To put his latest forecast into perspective, and to appreciate its accuracy, consider his model’s six-month projection this past May 31: It pegged the S&P 500 at the end of November at 2,200.
The S&P’s actual closing level on Nov. 30 was 2,198.81.
That is as close to perfection as you’ll ever see in the real world.
To be sure, Eisenstadt’s model isn’t always this accurate, as is clear from the chart above. But from a statistical point of view it’s been impressive.
Consider a statistic known as the r-squared, which measures the degree to which one data series predicts or explains another. If the first series perfectly predicted the second, the r-squared would be 1.0; if the first series had absolutely no predictive ability the r-squared would be zero.
For the data plotted in the accompanying chart the r-squared is 0.31, which is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine. Though you might be disappointed that this r-squared isn’t higher, understand that most of the models which get attention on Wall Street and in the financial press have r-squareds that are far lower — if they’re not actually zero.
What are the factors driving Eisenstadt’s current forecast? In an interview, he said that the largest factor by far is the recent increase in interest rates. He added that he finds it surprising that most investors don’t seem to be paying attention or to care about this increase, given how obsessed they were not that long ago with the interest rate outlook.
Based on his rigorous research of six decades’ worth of market dynamics, Eisenstadt is betting that his model will get the last laugh.
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