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June 30, 2010
Edited: July 1, 2010
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In doing so here at the home office of the completely fictional Druids Investment Group -- Can You DIG It? -- I created the Big DIGgers' Market-Timing Model a few months ago. Since then, I have employed the BDMTM in my attempts to assess the long-, intermediate-, and short-term conditions of major equity-market indices, such as the Standard & Poor's (S&P) 500 (SPX); stock-market-sector proxies, such as the Materials Select Sector SPDR (XLB); and individual issues, such as E.I. du Pont de Nemours and Co. (DD).
I mention the BDMTM in this blog post because of the change in the model's assessment of the S&P 500's long-term condition -- from Strong to Weak -- that became effective at the market close today.
Based on my interpretation of SPX data during the 60-plus years between 1950 and 2010, inclusive of today, a Strong condition in the index is strongly associated with positive returns and a Weak condition in the index is weakly associated with negative returns. Following are a few relevant data points:
-- The BDMTM module focused on the S&P 500's long-term waves identifies 24 discrete Strong periods, with 23 of them showing positive returns and one of them showing a negative return.
-- Regarding duration of the Strong periods, the median was 13.50 months, the mean was 14.67 months, and the standard deviation was 9.25 months. Also, the longest period was 40 months, and the shortest period was two months.
-- With respect to magnitude over the Strong periods, the median return was 23.30%, the mean return was 22.77%, and the standard deviation was 15.91%. In addition, the highest return was 55.08%, and the lowest return was -6.35%.
-- The BDMTM module focused on SPX's long-term waves also identifies 23 discrete Weak periods, with 11 of them showing positive returns and 12 of them showing negative returns.
-- Regarding duration of the Weak periods, the median was 13.00 months, the mean was 14.39 months, and the standard deviation was 5.26 months. Also, the longest period was 26 months, and the shortest period was six months.
-- With respect to magnitude over the Weak periods, the median return was -1.50%, the mean return was -2.48%, and the standard deviation was 22.46%. In addition, the highest return was 56.09%, and the lowest return was -43.67%.
As one who is neither a market permabear nor a market permabull parsing the data, I believe the trend is your friend -- or foe -- depending on the way(s) you position yourself in relation to it . . .
