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 only make a forecast one week in advance.

Performance of Last Week’s Forecast

(NOTE: The markets are experiencing tremendous upheaval from headlines out of Europe and possibilities for major interventions from central banks, which is extremely difficult to capture with 4-week or 13-week models.  An important caveat to the use of any model that forecasts out that far is that any game-changing event will cause significant deviations.)

Weekly Direction of the S&P 500

Correct:   13-week

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

 

Accuracy of the Weight-Adjusted Combination Models

Regular Weight-Adjusted Combination: 2.76 percent too pessimistic

Headline-Adjusted Combination: 1.88 percent too pessimistic

 

Accuracy of Individual Models

4-week Model:  8.22 percent too pessimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  0 out of 4 predictions

Notes: The four times it made a forecast, they were all very close to each other, but of course that was over 8 percent too pessimistic compared to the actual close.  In other words, the forecast thought it had this nailed all the way.  But investors may have been very happy about recent headlines.

 

13-week Model:  0.74 percent too optimistic

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

Notes: The model started off 1.0 percent too optimistic and improved slightly with each round to finish about 0.7 percent higher than the actual close.  It had this closing price pretty accurately forecast from the beginning.

 

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 ModelPositive effect of 7.6 percent

13-week ModelNegative effect of 0.3 percent

Notes: Given the recent superiority of the 13-week model, I would lean toward believing its estimate more, meaning that headlines may not really be all that much of a factor right now.  That would be welcome news, as it would signal that the recent gains in the market may be sustained – not a “sugar high” or something like that.  But then, the fact that the 4-week has the headline effect so incredibly high is still concerning to me and does affect the weighted-average I use for my Headline-Adjusted model.

 

Buy-Sell Simulation

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 $222

Cumulative Profit/Loss vs S&P 500 buy-and-hold:  Loss of $1,161 (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): 40 pct

Notes: The model incorrectly sold this week.  The system’s current streak stands at 3 losses (any weeks classified as a tie aren’t considered in streak).

 

Stock Market Forecast Summary for Upcoming Week

Here’s the breakdown:

Forecast Change in S&P 500 This Week (Jan 28, 2013 – Feb 1, 2013) 4-Week Model 13-Week Model Weighted Average
Standard down 2.06 pct down 1.32 pct down 1.60 pct
Headline Adjusted up 5.55 pct down 1.62 pct up 1.26 pct

The weighted average forecast for the two models says that on the close of February 1, 2013, the S&P 500 will be 1,478.92 – which translates to a 1.60 percent drop this week.  Adjusted for headlines, I would expect a level of 1,521.85 – which translates to a 1.26 percent rise this week.  Check out the Stock Market Forecast page for exact numbers and charts.

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EASY NOTE: I offer email newsletters documenting portfolio simulations that apply a concept with solid backtesting and intuitively sound principles.  Click here to learn more about the newsletters or sign up to receive them.  If they’re not outperforming the S&P 500 … they’re free!

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Evolution of the Forecast

Basic Concept: We’ve had several forecasts for next week’s close from the 13-week and 4-week models.  The evolution of the forecast could give us a sense for whether the forecasts are too high or too low.

4-week Model: The forecast has been fairly flat, so this forecast is probably where it would be if we ran another round.

13-week Model: The forecast has been fairly flat, so this forecast is probably where it would be if we ran another round.

Bottom Line of Forecast Evolution: The forecasts are probably about where they would be even if there were another round of forecasting.

You can see the “evolution” data on “Forecast Archive” section of the Stock Market Forecast page by clicking on the tabs at the bottom of the chart.

 

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