Annual Forecast Model - 2009
Mark Leibovit
July 13, 2009
Folks, this is my mid-year VR Forecaster Report. For those of you who have followed my reports over the years you know that I do not change the Annual Forecast Models, but I do update commentary as I am now doing here in July and, beyond that, as needed. You will be informed by email should any new updates are posted.
Updated commentary for July 13, 2009 is in bold!
A picture is worth a 1000 words, so I will try and keep my commentary brief. But, first, some background for new subscribers.
Thank you once again for subscribing to The VR Forecaster (Annual Forecast Model) - published annually since 1982. It is, in fact, the success of 1987 Model that set the stage for all future reports. The rudimentary chart of the 1987 Model (below) which was published in January warned of some significant volatility for the October ahead and in my January commentary I stated:
"What does 1987 hold in store? Well, if a picture is worth a thousand words, this one should be clear: We're going up! But watch out for that nasty step scheduled around early October."
Well, we all know that 'nasty step' was the 1987 Crash and the rest is history. The financial press provided me with some recognition at that time. I recall while on the Wall Street with Louis Rukeyser program in September, 1987 stating that something was coming by the third week of October, though I was cautiously bullish up until that time. Of course, early October saw a sharp reversal to the downside with a one-day 90 point decline which was huge for 1987. That changed everything and the Annual Forecast Model was now very much in sync.
1987 Chart
For years, the various 'Bellwether' rules and axioms for predicting the future course of the stock market have been freely bandied about and in most stances were regarded as nothing more than curiosities without any real or practical application. Students of these bellwether indicators, however, take them more seriously and usually have statistics backing them up when presenting their conclusions. Examples of such bellwether applications include the Super Bowl Indicator, the General Motors Bellwether Theory, the Hemline Indicator and, of course, the January Barometer.
The January Barometer was first made notable by Yale Hirsch, authoring the fascinating Stock Traders Almanac. Yale, by the way, was kind enough to dedicate his 1987 edition of this almanac to me and three other technical analysts calling us the 'new prognosticators'. That was a great personal honor for me, especially since the Stock Traders Almanac was the first book I ever read back in college regarding the stock market.
Devised by Yale Hirsch in 1972, the January Barometer states that as the S&P 500 goes in January, so goes the year. The indicator has registered only five major errors since 1950 for a 91.4% accuracy ratio. Vietnam affected 1966 and 1968; 1982 saw the start of a major bull market in August; two January rate cuts and 9/11 affected 2001; and the anticipation of military action in Iraq held down the market in January, 2003. For the month, the Dow was off 8.84%, the S&P 500 was off 8.57%, and the Nasdaq Composite was off 6.38%. Those that follow the January barometer know that this is not a good sign for the balance of 2009.
The General Motors Bellwether Theory based on the notion that the performance of U.S. automaker General Motors (GM) is a pre-cursor to the performance of the U.S. economy and stock market. The GM Indicator relies on the assumption that when people are confident and making money one of the first things they would do is buy a new car.
There is still some talk behind this strategy as there is a correlation between auto sales and the overall economic standing of individuals. But this theory had more weight in the 1970s-80s when GM was by far the largest carmaker in North America. Since then GM's importance to the U.S. economy has declined due to greater competition. During the financial crisis of 2007/2008, GM saw sales decline due to a decrease in demand for their "less" fuel efficient vehicles, and a decrease in available funds for financing due to credit restrictions. Their stock price dropped over 70% compared with a general market decline of around 30%. Although a correlation exists, the overall market and economy relies less on the performance of one automaker than it did in the 1970s.
The Hemline Indicator (also known as the "bull markets and bare knees" indicator) looks to the length of women's dresses and skirts to determine market sentiment. The shorter the skirts -- or the higher the hemline -- the better the market. Long skirts and dresses bring bearish times. The hemline indicator has been historically accurate since the late 19th century, when long skirts and bearish markets were the norm. Then, during the roaring '20s, the stock market soared while women's knees were bare. Women's fashion in October 1987 shifted from the once-popular miniskirt to longer ones. And notably, the market then crashed. I have no ideas where hemlines are at this writing. If you know, please email me at mark.vrtrader@gmail.com.
There is a new twist on the old idea: According to the Bespoke Investment Group's in the 15 different years (over the last 30 years) an American appeared on the cover of the Sports Illustrated "Swimsuit Issue," the average performance of the S&P 500 gained 13.9 percent with 13 positive years (87 percent). The other 15 years when no American took the cover spot, the S&P 500 had an average gain of only 7.2 percent with 11 positive years (73 percent). The issue hit newsstands yesterday with Marisa Miller as its cover model. Marisa Miller (born August 6, 1978) is an American model best known for her appearances in the Sports Illustrated Swimsuit Issues, and her work for lingerie retailer Victoria's Secret.
According to the Super Bowl Indicator (SBI), a triumphant team from the old American Football League (now the American Football Conference, or AFC) foreshadows a down market, but a winner from the old NFL (now the National Football Conference, now NFC) means dust off your red cape, because the bulls are coming. The SBI has been on the money 32 years out of 40, which represents a success rate of 80%. Due to league expansion, franchise moves, and conference shifts, the SBI has posed some interpretive problems in recent years as fewer and fewer Super Bowls pit former AFL teams against old-line NFL times. Super Bowl XLIII (43) featured the American Football Conference champion Pittsburgh Steelers and the National Football Conference champion Arizona Cardinals. Of historical note, this game matched up two franchises previously merged into a single team (Card-Pitt) for the 1944 season in response to the depleted rosters during World War II.
In my opinion, you have in your hands one of the most unique market investment/trading tools in existence. Since you've already paid for it, you know that this is not sales hype, it is fact! While no indicator is perfect, its uncanny record in calling significant turning points and overall trend for the stock market is, in my experience, unparalleled, particularly since it is published early in the year and looks out nearly 12 months in advance.
Included herein are charts for: The Dow Jones Industrials, Gold, the US Dollar Index, the 10-year Treasury Yield, and Crude Oil. We have posted the 2008 charts for each of these markets, so you don't have to separately refer to last year's report, but that report is still available by clicking on 'View Last Year's Report' below.
A word of caution. My original work for the Annual Forecast Model was formulated for the Dow Jones Industrials. Though I have had considerable success with this Model for the Dow Industrials over the years, results have been mixed for the other markets presented. It is likely that the same formulation used for the Dow Industrials just doesn't work as well for Gold, the US Dollar Index, the 10-Year Treasury and Crude Oil. Still, I will continue to present this research for our mutual edification. As I repeatedly mention, the dates listed along the horizontal axis are often coincident with 'change points' in the various markets and are still useful to traders whether the overall forecast for those markets are on track or inverted.
We respectfully ask that you keep these Models in strict confidence. The more eyes that see it, the less reliable it will ultimately become. In other words, you don't want the #1 U.S. Market Timer for 2006, the #2 U.S. Market Timer for 2007, and the #1 Intermediate Market Timer for the 10-year period ending 2007, the #1 Gold Timer (March 31, 2008) and then present these forecasts on national television. You have paid quite a bit of money to see them. However, we do reserve the right to show small pieces of the AFM in the media for promotional purposes, especially historical results. I am, of course, referring to the Nightly Business Report on PBS where you may have occasionally seen pieces of the AFM broadcast or at the Money Show in Las Vegas or the World Economic Conference in Vancouver, B.C. The following comment may sound extraordinary, but years ago I was informed by famous anonymous source that felt I had tapped into the Federal Reserve System or perhaps the Plunge Protection Team 'Model' or perhaps they were even using my 'Model'. Just something to think about.
Please keep in mind this is a business where analysts such as myself who developed incredible multi-year or decade track records are judged solely by they 'last' trade. In other words, you're a bum if you're last trade was a bad call to the detriment of all your previous work. New or novice investors or those only seeking to eek out short-term gains may by chance acquire access to this 'Model' at a moment it gets out of sync and judge it harshly. Those of you, however, who have tracked these reports for several years know differently. No one can be perfect all the time and this report provides 'value-added' to your own research and insight. Regardless of whether the current signals (especially the Dow Industrials below) pan out or not, I'm sticking with the AFM, as it has served me well for over twenty years and placed my name at the top of market-timers in the United States.
For those of you new to the AFM's construction and guidelines, let me lay some ground rules. First, the AFM's construction is fairly simple. The vertical axis denotes direction and the horizontal axis denotes time. A chart zig-zagging lower is a bear market pattern, but a chart zig-zagging higher is a bull market pattern. Secondly, please note the AFM does NOT attempt to predict amplitude, but only predicts direction! In other words, the Model's forecast the TIME when high and low points in the stock market may occur, not precisely high or low the market may be. Peaks and troughs can be at any level. It basically comes down to a question of relativity. Even though the chart may show a high point or a low point, there is no specific numerical value associated with that point, i.e., Dow Industrials 13,000 or 9,000. The AFM formula simply does not generate such values. In addition, new relative highs or lows in the AFM does not necessarily suggest higher market highs or lower market lows. These points could turn out to be relative highs or lows and nothing more. Thirdly, the AFM is presented in good faith as a general guide for the future. Though we make no modifications during the course of the year, we are always paying close attention to other technical, cyclical and sentiment indicators to help 'fine tune' what is unfolding in the marketplace. As we have all learned in the past, placing too much weight on any one indicator (including the AFM) may not be the best decision.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS!
The dates presented may or may not turn out to be accurate representations of high or low points in the market. There have been occasions when a date is coincident (a bull's eye) with a market peak or trough. More frequently, however, the actual market peak or trough is skewed either side of the predicted date. What we are looking for is the GENERAL PATTERN of the AFM in any given period. Is the pattern bullish or bearish, is the pattern rising or falling dramatically or modestly? The bearish pattern displayed in the 2000 AFM when it was published February 1, 2000 certainly presented clear warning of what may lay ahead. The low point predicted for the end of March, 2001 dramatically presented the power of the AFM to predict an excellent near-term buying opportunity. The high point predicted for the end of March, 2002 or the low point in July, 2002 also turned out to be deadly accurate presaging a multi-month correction to the downside for the former and a sharp rally for the latter. The AFM for 2003 predicted a low point in March (specifically, March 26 which was ten days off - doesn't that sound familiar? - Same thing happened in July, 2002). Last years AFM for the Dow Industrials correctly predicted a May high and a summer low. The AFM for 2007 was outstanding except for the last couple of weeks of December. It called for top in January/February, a mid-March low a high June/July, a mid-August low, a low the third week of October then followed by year-end rally - a year-end rally which unfortunately ran into a brick wall in mid-December. The AFM for 2008 was a clear bear market signal, even though the predicted low point was early (mid-September). Remember, that warning was flashed in January to subscribers!
DOW INDUSTRIALS for 2009
The AFM for the Dow Jones Industrials clearly shows a bear pattern into mid-year and for the year at large. As you can see in the chart below we are following on the heels of a negative 2007 with not much relief in sight. We may be destined into a choppy sideways pattern for several months as the market attempts to build a base. There is an indication we can rally out of a late summer low into the fall, but failing again into year-end. The dates along the horizontal axis are the same for all the AFMs, but please make a note of them as they could represent my above-mentioned 'change points'. Those dates are:
1/20/09;2/6/09; 2/25/09; 3/16/09; 4/1/09; 4/21/09; 5/7/09; 5/27/09; 6/12/09; 7/1/09; 7/20/09; 8/6/09; 8/24/09; 9/11/09; 9/29/09; 10/16/09; 11/3/09; 11/20/09;12/9/09; 12/29/09.
The AFM was originally created to provide an overall cyclical forecast for the year ahead. In this regard it has done an excellent job over the years. Luckily over the years the AFM has also been fortunate enough to pinpoint exact turning points during the year. The downside, however, was that expectations grew too high that the AFM will consistently perform as well going forward. No indicator or analyst is perfect.
With regard to 2009, the AFM was published in mid-January and again in early February when bullish expectations were growing. The AFM warned that a potentially severe decline was ahead and forecast that low for the July/August period. As it turns out, the washout ended in early March, but the warning saved clients untold sums of money while, hopefully, making others boatloads of money on the short-side.
For those of you who subscribe to my VRtrader.com Platinum or Silver service, you know that I was warning of a possible 'change point' or reversal in the marketplace at or near the Vernal Equinox and, in fact, flashed a TIMER DIGEST 'Buy' Signal after the close of March 4. Yes, I ignored the Annual Forecast Model because of other seasonal factors and the formation of my primary indicator, 'The Volume Reversal ™'. In this instance, it was a Positive Volume Reversal ™.
I am currently on a TIMER DIGEST 'Sell' signal (posted May 27) due to the formation at that time of a Negative Volume Reversal ™, anticipation of a further correction due to the Annual Forecast Model and with a view to 'Sell May and Go Away'. The May 27 call was early, but will likely be vindicated in the weeks ahead and I remain in a bearish mode.
Looking at the AFM (below) and taking the pattern literally, one might surmise that we're going to trend sideways to lower into the fall (around September 29) and then begin to stage a rally phase into November and December. My personal view is that most investors are on the sidelines until the fall willing to await the passing of this long hot summer enjoying other business activities or a long summer vacation. I would not expect to see the market make any kind of substantive upward move for several more weeks and more than likely continue lower retesting (or possibly even breaking) the March, 2009 lows.
The bottom line is that I remain bearish until the fall and begin looking for a trading opportunity on the long-side. One possibility (emphasize 'possibility') I suppose for the months ahead (presumably into next year) is the completion of a 50% retracement of the bear market decline. In the S&P 500 which has declined from 1576 to 666, a 50% retracement would equate to 1121. In the Dow Industrials which has declined from 14,198 to 6469, a 50% retracement would equate to 10,300.
Beyond that speculation, we will have to wait for the 2010 Annual Forecast Model for further clues.
10-YEAR TREASURY BOND YIELD for 2009
The AFM for the 10-Year Treasury Bond Yield shows a clear upward bias in 2009. At the same time a high in yield (lower bond prices) early in the year (by February 25 to March 16) reverses and we again see a decline in yield (higher bond prices) into the June 12 - July 1 timeframe. From that point forward rates again rise. It will be interesting to see if this zig-zag pattern indeed unfolds.
The pattern depicted in the Annual Forecast Model for 10-Year Treasury Yields has been clearly bullish, i.e., high interest rates. The AFM pattern predicted initial upside strength followed by a retracement into May to be later followed by a year-end rally. The overall cyclical forecast has been on track. How many forecasters predicted higher interest rates for the year in January? We are currently experiencing a pullback in rates, but I suspect the AFM will remain on target, as rates will once again move higher following the current correction. It is interesting to note that this is entirely a 'cyclical' forecast and had nothing to do with my opinion of the interest rate market, economics, the world economy or the stock market.
THE U.S DOLLAR INDEX for 2009
The AFM for the US Dollar Index reveals basically a zig-zag pattern higher. The fundamental weight of the evidence appears to point to a lower Dollar due to expectations for strong inflationary pressures, but perhaps the deflationary spiral will continue and the Dollar will be viewed as a bastioned of relative safety. Regardless, the AFM calls for a peak around February 25, a trough around April 1, another peak around May 27, etc. The high for the year appears scheduled for the time period around September 29.
Remember, a cyclical forecast is a cyclical forecast. I do not change my forecast mid-year for any of the Annual Forecast Models. Technical analysis is much different. Technicals can and do change and we react accordingly, especially with regard to my Positive Volume Reversals ™ or Negative Volume Reversals ™. The US Dollar Index AFM characterized 2009 as basically a positive year for the US Dollar Index interrupted by pullbacks in spring and summer. Well, we started out strong for the US Dollar Index with the rally carrying until early March at which point it turned south. That pretty much mirrors the AFM below. Going forward, however, though the Index has retraced within the timeframe specified (the summer), it has been far weaker than indicated in the Model. According to the AFM, we should soon be resuming the rally that was underway at the beginning of the year. It will be interesting to see if we indeed reverse higher going forward, despite all the fundamental reasons we should not, i.e., printing presses running 24/7. Perhaps, deflationary forces are far stronger than inflationary forces and the US Dollar will be once again viewed as a safe haven for capital. Hard to believe, but possible! The US Dollar Index rallied into March just as stocks were collapsing. If you're a bear, pray for a rally in the US Dollar Index. It's counter-intuitive, but that's what makes the merry-go-round turn. Recall, a rally in the US Dollar Index will likely be synonymous with a correction in the stock market as well as the gold market.
GOLD for 2009
The AFM for Gold is clearly bullish for 2009, but there appears to be risk of another nasty correction along the way. Taken literally the AFM calls for a high in Gold early in the year, either/or February 25 and April 1, followed by a zig-zag correction into the June 12 to July 1 period. From that point it begins a steady advance in October 16. A pullback into December 9 follows. I believe investors should hold on for the ride, but traders have to be cognizant of the 'zigging' and 'zagging' along the way.
Is the AFM for Gold inverted or simply skewed off a bit? The rally in Gold which essentially traded inversely with the equity markets ended in late February. We then pulled back into April which was followed by another rally that ended in early June. As you know, the AFM was calling for a retracement into early summer to be followed by a strong rally into the fall. At this writing, Gold is in the anticipated corrective phase and there are no clear signs of a bottom. One of those clear signs, of course, would be the formation of broad-based Positive Volume Reversals ™. If the AFM is inverted, then we need to be looking for a low on or about August 6 and another potential low on or about September 29. Though I am waiting for a strong renewed technical buy signal, I remain positive on Gold and Gold shares.
CRUDE OIL for 2009
Crude Oil recovers into February 25, but pretty much goes nowhere in 2009. A base pattern seems to unfold through mid-year followed by an upward spike climazing on or about October 16. The pattern pretty much contradicts the view that Crude Oil is oversold and due for a healthy recovery. According to the AFM, if we don't get the recovery now, we have to wait until the fall.
Except for weakness into February 20, Crude Oil had been tracking higher into June which confirms the AFM has been mostly inverted. However, I would watch the dates on the horizontal axis carefully. Since we are now in a corrective mode and the AFM was calling for a low during the summer followed by an upward spike into September or October, a buying opportunity may be lurking in the weeds, subject to technical confirmation, of course.
Mark Leibovit
Chief Market Strategist
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