Stock Market Forecast Update
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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 sure each model is – that is, using the “standard error” 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. But 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
Incorrect: 4-week / 13-week / Weight-Adjusted Combo / Headline-Adjusted
Accuracy of the Weight-Adjusted Combination Models
Regular Weight-Adjusted Combination: 8.15 percent too pessimistic
Headline-Adjusted Combination: 3.00 percent too pessimistic
Accuracy of Individual Models
4-week Model: 6.20 percent too pessimistic
Correct Prediction of S&P 500 Direction thru Last Week’s Close: 1 out of 4 predictions
Notes: All four times it made a forecast, it was too pessimistic (by 6.20 to 6.22 percent), so it thought it had this nailed from the beginning. It got the direction from that point through the forecast date correct on 1 out of 4 tries.
13-week Model: 9.97 percent too pessimistic
Correct Prediction of S&P 500 Direction thru Last Week’s Close: 0 out of 13 predictions
Notes: The model was always between 10.0 and 11.1 percent too pessimistic, but it did improve gradually over time – never got anywhere close to the right answer though. It got the direction wrong on every attempt.
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 5.8 percent (up 4.3 percent from last week)
13-week Model: Positive effect of 11.5 percent (up 2.8 percent from last week)
Notes: The headline effect went up an average of about 3.6 percent from last week, so headlines are artificially elevating the market by about 8.7 percent (average of the two models).
The simulated weekly trade using the weighted average of the two primary models can be found on the “Buy-Sell Simulation” tab of the spreadsheet
Weekly Profit/Loss vs S&P 500 buy-and-hold: Loss of $420
Cumulative Profit/Loss vs S&P 500 buy-and-hold: Loss of $3,027 (initial $10,000 investment, excluding costs of trading)
Wins and Losses vs S&P 500 buy-and-hold (Win = $50 gain or more, Loss = $50 loss or worse, Tie = Anything in between): 37 pct
Notes: The model incorrectly sold for the week. The system’s current streak stands at 4 losses (any weeks classified as a tie aren’t considered in streak).
Stock Market Forecast Summary for Upcoming Week
Here’s the breakdown: