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

Correct:   13-week   /   Weight-Adjusted Combo

Incorrect:   4-week   /   Headline-Adjusted

 

Accuracy of the Weight-Adjusted Combination Models

Regular Weight-Adjusted Combination: 3.36 percent too pessimistic

Headline-Adjusted Combination: 3.04 percent too optimistic

 

Accuracy of Individual Models

4-week Model:  1.35 percent too optimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  2 out of 4 predictions

Notes: All four times it made a forecast, it was too optimistic (by 1.2 to 1.4 percent).  It got the direction from that point through the forecast date correct only on its first two attempts.

 

13-week Model:  4.56 percent too pessimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  5 out of 13 predictions

Notes: The model started out about 6.7 percent too pessimistic but improved gradually over time, although it never got anywhere close to the right answer.  It got the direction right only on its final 5 attempts.

 

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 ModelNegative effect of  2.4 percent   (down 2.1 percent from last week)

13-week Model: Positive effect of 5.3 percent   (down 2.7 percent from last week)

Notes: The headline effect went down an average of about 2.4 percent from last week, so headlines are artificially elevating the market by about 1.5 percent (equally-weighted average of the two models).  Note: This may not be the same as the difference between the “weighted combo” and “headline-adjusted” forecasts because those forecasts are weighted according to the accuracy of each 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:  Gain of $208

Cumulative Profit/Loss vs S&P 500 buy-and-hold:  Loss of $2,543 (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 for the week.  The system’s current streak stands at 1 win (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 (June 17 – June 21, 2013) 4-Week Model 13-Week Model Weighted Average
Standard up 0.01 pct down 4.67 pct down 3.63 pct
Headline Adjusted down 2.37 pct up 0.67 pct down 0.08 pct

The weighted average forecast for the two models says that on the close of June 21, 2013, the S&P 500 will be 1,567.64 – which translates to a 3.63 percent drop this week.  Adjusted for headlines, I would expect a level of 1,625.38 – which translates to a 0.08 percent drop 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 flat over the four-week period, so this forecast probably wouldn’t change if we had another round of forecasting.

13-week Model: The forecast has been slowly rising since about 12 weeks ago, so this forecast might be several points higher if we had another round of forecasting.

Bottom Line of Forecast Evolution: The evolution of the forecasts suggests there could be a slightly more optimistic forecast (about 1-2 points) if we had 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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