Stock Market Forecast Update

I have updated my Stock Market Forecast page with the latest systems I’m testing.  You can read the explanation there in detail.  The quick summary is that I’m doing two primary models (4-week and 13-week), both using a linear regression model (a statistical way of finding a straight-line relationship between a set of variables and a calculated outcome) that involves four different technical analysis data points.

I graph the stock market forecast for each model over the coming 4-week or 13-week period.

Lastly, I will issue two weighted combination forecasts each week in my update post, each of which makes only one “official” forecast for the record book.  One represents a weighted average between where the two models think the S&P 500 will close this upcoming week.  The weights are based on how well each model explains the ups and downs of the S&P 500 – that is, using the “r-squared” for the regression analysis.  The other is a “Headline Adjusted” model, which tries to account for the fact that extreme and unforeseen events can throw off the models.  So, I remove data that seems affected by such effects and keep the more pure data.  This model will also make only one forecast, one week in advance.

Performance of Last Week’s Forecast

Weekly Direction of the S&P 500

Correct:   None

Incorrect:   4-week   /   13-week   /   Weight-Adjusted Combo   /   Headline-Adjusted

 

Accuracy of the Weight-Adjusted Combination Models

Regular Weight-Adjusted Combination: 0.96 percent too pessimistic

Headline-Adjusted Combination: 0.95 percent too pessimistic

 

Accuracy of Individual Models

4-week Model:  1.51 percent too pessimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  3 out of 4 predictions

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13-week Model:  0.82 percent too pessimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  12 out of 13 predictions

 

Estimated Effect of Headlines on Current Market Value

NOTE: This is based on a calculation I do after running the current week’s headline-adjusted forecasts.

4-week Model: Positive effect of 2.1 percent   (up 3.8 percent from last week)

13-week Model: Positive effect of 0.7 percent   (up 0.3 percent from last week)

Notes: The headline effect went up an average of 2.1 percent from last week, so headlines are artificially elevating the markets by about 1.4 percent right now.

 

Stock Market Forecast Summary for Upcoming Week

Here’s the breakdown:

continue reading…

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Stock Market Technical Analysis – Tech It Easy (thru August 29, 2014)

Stock market technical analysis is all you need to know, complete hogwash or somewhere in between.  It depends on who you ask.  If you find it interesting, you’ll probably like reading this weekly feature.

NOTE: You may be reading an outdated article.  Please visit my latest stock market technical analysis summary of the S&P 500 for more.

I used to have screenshots of the various stock market technical analysis assessments I present below, as well as a bit more analysis for each one. In order to save time, I will not be doing the screenshots and will abbreviate some of the text for each analysis as well. The last time I did a comprehensive analysis can be foundhere, in case you want to see what it looked like.

The next few paragraphs are my standard intro to stock market technical analysis – you can skip down to the table (or click “continue reading”) if you read this feature regularly: 

Many people who trade in the markets believe that there are patterns that can generally lead to profitable trades.  By analyzing stock charts that show the change in price along with the volume (how many shares were traded), “technical analysts” believe they have an edge and can time their trades profitably.  There is significant controversy over this subject, however.  Others say that, unless you have some information that no one else does, basically you can never beat “the market” because everything is already baked into the current price of a stock.

Nevertheless, supporters of stock market technical analysis are everywhere, and the tools for their trade can be found throughout bookstores and the Internet.  I like to follow some websites that do some of the work automatically and provide a snapshot opinion of whether a particular stock is considered “bullish” (going to go up in price), “bearish” (going to go down in price) or “neutral” (stay about the same price).

For simplicity, I’d like to start by showing you a snapshot of what several stock market technical analysis websites suggest about the exchange traded fund (ETF) with the ticker symbol of SPY.  This fund is supposed to go up and down the same as the S&P 500 index does.  And many people consider the S&P 500 index (a measure of the price of the 500 largest companies that trade in the U.S.) to be an accurate gauge of where “the market” stands.

For each of the sources below, where I have a choice, I will use a measure that attempts to predict the future direction of SPY or S&P 500 in the next 3 months.

S&P 500 Technical Analysis Summary

Source: Barchart.com   |  BULLISH

Quick ‘n Easy

Barchart.com uses three analyses to predict the direction of SPY over the next three months or so.  Looking at the average value and strength of these three signals, we can conclude that BarChart.com thinks that the price of SPY will rise over the next three months.

Easy Notes: BarChart.com says that the price of SPY will probably rise over the next three months.  This is the 15th consecutive “bullish” assessment after 10 consecutive weeks at a “neutral” rating.  All of three signals are at “buy,” and only one is a weak signal.  Unfortunately, two of three signals are headed in the wrong direction (the right direction would mean “buy” signals are strengthening and “sell” signals are weakening).  Overall, this is clearly a bullish assessment.

continue reading…

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Personal Income Levels – Easy Trends (thru July 2014)

Let’s talk about personal income levels, its importance and the current trends.  I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis.  Please visit my latest personal income levels trend analysis for more info.

Quick ‘n Easy

Personal income levels are important for the health of the economy.  When people have more income, they spend more, which helps business grow and employ more people … a prosperous circle of event.  The group that officially decides whether the economy is growing or shrinking looks at something called “real personal income less transfer payments.”  That basically means they take all the income people make and subtract money they get without doing any work, like government benefits.  The “real” refers to the fact that this statistic is adjusted for inflation.

Here’s a ten-year chart of the personal income levels (without transfer payments and adjusted for inflation) from the Federal Reserve Bank of St. Louis:

Personal Income Levels - Real Personal Income Less Transfer Payments - July 2014 - FRED

Source: StLouisFed.org

Personal Income Levels Trends and Projections

Below, I will discuss whether industrial production is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.  I usually start my analysis from three years ago. continue reading…

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Residential Investment – Easy Trends (Q2 2014 – Second Estimate)

Residential investment is one of the best leading indicators for the general economy, meaning that what happens to residential investment typically ends up happening to the general economy a few months later.  I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for residential investment and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis.  Please visit my latest residential investment trends analysis for more info.

Quick ‘n Easy

Residential investment refers to money that people spend on buying homes (either to live in or to rent out), home improvements and money people make on the sale of homes.  There is also some inclusion of equipment that come with many homes.  We care about how much private residential investment is taking place because it is a great leading indicator for what will happen to the general economy several months down the line.

The Bureau of Economic Analysis (BEA), the same group that publishes the GDP for every quarter, defines “residential fixed investment” as the following:

Consists of purchases of private residential structures and residential equipment that is owned by landlords and rented to tenants.  Investment in residential structures consists of new construction of permanent-site single-family and multi-family units, improvements (additions, alterations, and major structural replacements) to housing units, expenditures on manufactured homes, brokers’commissions on the sale of residential property, and net purchases of used structures from government agencies. Residential structures also include some types of equipment that are built into residential structures, such as heating and air-conditioning equipment.

In other words, residential investment refers to money that people spend on buying homes (either to live in or to rent out), home improvements and money people make on the sale of homes.  There is also some inclusion of equipment that come with many homes.

Why do we care about residential investment?  It just so happens to be a fantastic leading indicator, which means that whatever happens to this indicator generally happens to the general economy several months down the road.  One more thing – we care most about private residential fixed investment, not so much what the government spends.  That’s what shows us the real trend in the economy.

Here’s a historical chart of private residential fixed investment over the last five years provided by the Federal Reserve Bank of St. Louis:

Residential Investment - Real Private Residential Fixed Investment - Q2 2014 Second Estimate - FRED

Source: StLouisFed.org

Residential Investment Trends and Projections

Below, I will discuss whether residential investment is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.  I usually start my analysis from three years ago. continue reading…

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Initial Weekly Unemployment Claims (4-Week Moving Average) thru Week Ending August 23, 2014 – Easy Trends

In this article, I’ll do an “Easy Trends” analysis of the initial weekly unemployment claims data.  “Easy Trends” is a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis.  Please visit my latest unemployment claims trend analysis for more info.

Quick ‘n Easy

By tracking the number of people who are filing for unemployment benefits for the first time each week, we get a quick insight into the latest status of the economy’s health.  Fewer claims equals more jobs, which equals more income, which usually equals more consumer spending (70% of the economy!) that supports company profits, which in turn can lead to more hiring.

Quick Version of Easy Trends Analysis

For the Initial Weekly Unemployment Claims series, I will be doing only a brief update as long as the level of claims is nice and low (below 350,000) and there isn’t a confirmed upward trend (which is undesirable of course). I will only call out a few specific statistics that I like to track. I’ll be tracking the trends, but it takes a lot of time to do the post, so I won’t do a post with the full analysis unless there is any cause for concern. Bottom Line: If you’re seeing my “quick version” of this analysis – don’t be worried about weekly jobless claims!

4-week moving average of weekly initial unemployment claims: 299,750   (good – we want this number to be below 350,000)

4-week moving average of weekly initial unemployment claims as a percent of the total size of the nation’s workforce: 0.19 percent   (good)

Current Trend: Confirmed downward trend of about 2,000 fewer claims per month   (good – but two latest readings were both too high to include in trend)

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GDP (Real Gross Domestic Product) – Easy Trends (Second Estimate Q2 2014)

GDP (or Real Gross Domestic Product) is the accepted measure of overall economic activity, so we should care which way it’s trending.  I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for real GDP and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis.  Please visit my latest GDP trends analysis for more info.

Quick ‘n Easy

Real GDP is simply the broadest and most widely accepted measure of economic activity.  Even though there are specific details of it that many dispute, you can typically be assured that if this number is increasing consistently, things are going well in the economy.

You can read my Easy Intro to GDP for more information on what the Gross Domestic Product represents.  Suffice it to say, it’s a broad measure of economic activity.  If this number is growing, it is generally a good sign.  We probably want to see levels up in the 3 to 3.5 percent annual growth range for signs of an economy that’s growing at a healthy pace.  When the unemployment rate is too high, however, you need to have even more growth than that to put a dent in the unemployment figure.

Here’s a historical chart of real GDP annualized growth rate for each quarter from Doug Short, including lines that show the historical average growth rate and the “best fit” line:

Real GDP Q2 2014 Second Estimate - Doug Short

Courtesy: AdvisorPerspectives.com/Dshort/

GDP Trends and Projections

Below, I will discuss whether real GDP (real gross domestic product) is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.  I typically start my analysis from three years ago. continue reading…

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