The Market Timing Model is a series of short term sentiment indicators, market value measures and economic indicators that aims to show investors whether it is a good time to buy, hold or sell stocks.
These measures have been carefully chosen due to the fact that they have strong correlation with the overall stock market. In other words, they have shown themselves to have predictive power when it comes to the future of equity prices. They tend to work as a “circuit breaker” in times of significant market distress, like we experienced this week, and to help you to identify when we are potentially close to the bottom.
We are going to review the performance of the Market Timing Model so far in 2020, then break the model down into its individual component parts. This article covers the Market Value indicators in detail:
- Short term sentiment indicators (See here)
- Market value indicators
- Economic indicators
In this three part series we go in-depth to reveal what is really happening with sentiment, the market, and the wider economy.
Market Timing Model Performance in 2020
We released an article on 19th January 2020 that suggested there was caution ahead for stocks, based on the measures in the Market Timing Model. Over the course of February market fundamentals have deteriorated and there has been a peak-to-trough fall of 19.6% in the S&P 500 index, and a blistering 27.6% fall for the FTSE All-share index in Britain.
We are in the throes of a global crisis that is clearly being felt in risk assets like stocks around the world.
In order to effectively track the Market Timing Model and to show its predictive power we’ve created a baseline measure. For US stocks the best measure is the S&P 500 Total Return Index, which shows the total return of the S&P 500 index including dividends and income that is re-invested. The Market Timing Model is then compared against that index as a benchmark below:
(The S&P 500 index = blue, the Market Timing Model = orange)
(The S&P 500 index = blue, the Market Timing Model = orange)
The first graph shows you the total return of the S&P 500 index since 1988. We intend to use this as a benchmark that gives investors a wide view of the market and how it has performed since 1988, including dividends and income re-invested.
The second graph shows the S&P 500 TR performance 2019-2020 YTD, including the “Sell” call on 20th January 2020. If you sold stocks on that date you can see the Market Timing Model has out-performed the S&P 500 Total Return index by 17.7% YTD.
What we are going to talk you through is specifically how Frugal Investors are using data, numbers and fact to figure out the optimal time to buy stocks. If you’re invested now, well, you’ve got to start building a head of cash and waiting for the optimal moment to invest.
The Market Timing Model – Market Value Indicators
The sentiment indicators – unsurprisingly – are very bearish and nearly all point to red at the moment. What’s interesting about that, though, is they were flashing red before the crash on 24th February. The market has been sending worrying signals since 19th January 2020.
Without further ado let’s review the model’s market value indicators in full:
At the moment the sentiment indicator is sitting at -9 as of 14th March
2020 and suggests a Strong Sell. There are nine indicators that look at household equity
allocation, the so-called Buffett measure (market cap to GDP), US 30 year
treasury yields and a few other measures.
At the moment we need to see tangible improvements in these measures, which are not currently evidenced at the close of this week. In essence you have to wait for everything to fall, stop falling and consolidate in this sort of market before even thinking about buying. These market indicators should help you to do just that.
Here is an overview of some of the key measures of market value and what they say about the future direction for stocks in the short and medium term:
Look in the far right column – red indicates that the measure suggests a sell, green indicates a buy. In summary the market indicators mostly continue to point to a Bearish/Sell position. Household equity allocation is historically high and the forward earnings multiples haven’t come down enough. The market cap to GDP ratio has corrected from 154% down to 133% but it is still high, particularly in the US. The 30 year treasury yield has risen but it is still remarkably low. Bond markets (the last three indicators) are in distress.
This doesn’t mean you need to sell all of your stocks. Instead, it suggests, rather than putting any new money on the table you should wait to see what happens.
For a detailed analysis of the Market Timing Model and for free access to the tool below, please sign up to our newsletter and register for the website. You will receive access to the full model and the underlying analysis on a weekly basis.
At the moment the Market Timing Model is a free service and we intend to continue to run it throughout this financial crisis until such a time that we find the market bottom.
