Birchtree,
Some Bullish comments from Bill. As you know Bill has written guest commentary for Henry. Henry recommends him for those who want to learn more about picking stocks and evaluating companies. Bill has been writing a regular guest commentary for Henry since June 2005. In my opinion you should have Bill's link under your favorites.
Saturday, February 17th, 2007 at 9:16 am
Predictive Model Output - Feb 16, 2007
By Bill
My vote to the Blogger Sentiment Poll by TickerSense is “bullish.”
This market has given us at least eight good, low-risk opportunities to get in on the action. The first was the “W” bottom in the summer, where the “buy” was the right side of the “W” closing above the high of the middle. The third good entry point was the retracement to the breakout over the May 2006 high, which took place in early October. The second entry point, and the fourth through eighth entry points, have been the violations of the 26 ema with subsequent bounces off of it.
This bull is rested, not stretched. Note the six-week consolidation period where the market basically went nowhere. Many people tend to be misled by arbitrary calendar events, since the S&P 500 closed up each calendar month since June 2006, but when you look at month-long periods over that time, you get a different story. The period from Dec 15 2006 to Jan 29 2007 was a six-week period with losses for the markets, but apparently the arbitrariness of the calendar month-end hides this consolidation period from the conventional analyst.
I would consider any price action near the 26 ema to be a low-risk buying opportunity, because the obvious stop loss – a close 10 points or so below the 26 ema - is so close to the entry. With a stop loss clearly marked and only about 0.7% below the entry, it would allow me to put on a position of decent size while still keeping my risk level low.
The monthly model output for potential moved back down to the 3rd decile with last week’s strong action. The model tends to look for depressed gains when the index is very close to a significant high. This is indicative of average returns for the next month, about one-half or three-fourths of a percentage gain 21 sessions from now. The potential model provides a measurement of the odds for a 5% or greater correction from the last close, over the next 21 sessions. The 3rd decile of potential puts the correction odds at about 7.7%, and such corrections actually happen 7.4% of the time.
The monthly model for safety is better at predicting corrections during a month, but not as good at predicting returns at the end of a month. Monthly safety has generally been in the 8th or 9th decile since the 20th of November, with three closes in the 7th decile, but it’s been in the 8th decile for 38 of the last 41 closes. This puts the odds of a 5% or higher correction from closing, during the next 21 sessions, at about 1.4%.
The combination of the two monthly models makes me bullish on the direction of the S&P 500 index.
The annual model puts potential return in the 9th decile, up from the 8th, and puts safety in the 5th decile. 9th decile potential implies average and median returns of 15% and 17%, with 90% odds of finishing the year above where it’s at today. The potential model places the odds of a 10% correction from this point, over the next year, at about 4%.
However, the potential model doesn’t do as good a job at predicting corrections as the safety model does. The safety model is in the 5th decile for the next year, placing the odds of a 10% or more correction at about 11%, and such corrections occur, on average, 13% of the time. Note this is the odds calculation for a 10% correction from Friday’s close, not from the previous intraday high.
Note: I’m working on some improvements to the models by adding some of the longer-term indicators that I’ve been playing with. Essentially the process will be identical but it looks like a slight increase in accuracy. This is still in development.
Summarizing: This chart has been incredibly friendly, giving market participants over a half-dozen good, low-risk chances to buy into a bull market. The models have been consistently bullish, showing low-mid positive returns and high stability on a monthly basis, and great long-term potential on an annual basis. Smoke ‘em if you got ‘em!
http://billakanodoodahs.com/
