Monday, 9 January 2012

The Macro Value Economic Indicator - ASX 5000

Bull market ahead?

As mentioned in looking forward to 2012, I have developed an economic fair value indicator which appears very useful for medium to long term time-frames in predicting the movement of the ASX index - as measured by the XJO (S&P500). Whilst it is not yet useful for absolute price targets, it appears to be exceptionally useful in determining the nature of the markets.

I have performed a more recent update of the economic data inputs that feed through to the fair value indicator and it is becoming very bullish. For the first time since 2007, fair value has clearly surpassed price and is currently sitting at a target of 5000. Based on the historical performance of this indicator, one can clearly see that 9500 was too high in 2005 - however it still was correct in calling the bull market. So until the data flows break down, it looks like the Aussie market could be in for a solid run upwards in 2012.

Historical View

1 Year View

On a shorter-term basis, it is interesting to note how closely the change in the indicator matches market prices - even though no market data is incorporated in the indicator. This is something that I will look to analyse further, however one problem is that the data series lags market prices by up to one month - which is why the most recent figure on the indicator is flat, and is an area that will receive further attention and development.

Good luck to all in 2012.


  1. As I have said before, this research seems very interesting and well worth following (within a prudential framework).

    It is also interesting that in the last couple of days only, a number of other online bloggers are hinting at the emergence of a bullish trend. Their hints, however, seem based more upon intuition, an uptick in the US S&P and recent market fluctuations in Asia- nothing as formal as a leading economic idex (of non-market variables).

    Let's see how it all emerges over the next 6 months.

    ceteris paribus

  2. Thanks again ceteris paribus.

    I appreciate your comments.

    I hate investing based on intuition because it can be so flawed. Human perception can do many strange things.

    I generally have invested based on clear value plays, however have done poorly in being able to capture the broader trends.

    My hope is that this indicator will allow me to have a quantitative and impartial basis for making turn-around and trend calls, which I think are hugely important in either protecting capital or consistently achieving out-sized returns.

    I also am very interested to see how things play out over the next 6 months.


  3. Just a qualification to my last statement: I have done exceptionally well in relation to my value plays, but the broader trends have somewhat eroded my success and resulted in undesired volatility.