Thursday, 26 January 2012

A short-term dip to come before the bull?

ASX S&P200 XJO 4000 before 5000

I have been developing two fair value market indicators: one based on forecast earnings and the other based on economic indicators. They both are very useful for me in being able to be able to determine market conditions and likely trends. Both these indicators are in continuous development and one area that I had not previously explored was the short-term efficacy. Until now.

Contrary to my prior thoughts about a coming bull run in the markets, I'm not sure if the timing is right. The reason is that the indicators also appear useful in providing guidance over shorter periods. Whilst the longer term direction is certainly up, short-term is decisively down - or at least flat.

Is this a case of trying to peer too far around the corner? Perhaps. We shall see. However the indicators are accurate enough to give me caution for now (although I remain positive on gold and gold equities).

US Fed versus Greece
Markets rallied on the US Federal Reserve FOMC statement last night, with the announcement of continued low rates and the market's assumption that further monetary easing is on the way. In the near term we have Greece attempting settle with bond holders. We have rumblings from Portugal and Spain. Perhaps there is enough there to dislodge the current upswing for now.

The Scenario

*Note: these short-term indicators are newly developed so this is primarily a theoretical exercise at this stage.

A bounce down towards, or below, 4000 in the near term.

Whilst we could see markets run up a little further from here, the indicators are suggesting that it is unlikely.  

The short-term economic model is suggesting either a flat or down market starting very soon and potentially bouncing later in February.

The short-term fair value model is also suggesting a dip soon.

Whilst toying around with short-term indicators and forecasts, I noticed that the long term economic indicator is consistently too early. This is how it looks when the indicator is delayed by around 6 months.


And how it looks over the next six months...

Bringing us back to the first graph, illustrating the potential scenario...

Note that the delayed economic indicator model shown here is a long term directional tool, which does not accurately forecast absolute price levels, but it does appear to work well in picking up the trend.


  1. Thanks for warning about the possibilities of these short-term scenarios.

    I agree that Greek re-financing over the next couple of months could test or delay any pending major upswing


  2. I thought I'd put it out there as it is something that I'm working on. I'm not sure about the efficacy yet, however it is compelling enough to give me caution in my own strategy. Perhaps it may be useful.

  3. I sense the current weak spot in the local market- but with the strong US NFP figures, is the ASX-200 likely look through the short-term weakness here and take its lead from what appears to be an entry into a higher trading range on the S&P 500?

  4. NFP numbers are pretty terrible outside the headline figure. I remain bearish in the near term. Waiting.

  5. Hey Steve, you have been off the radar for a while. Hope you are well


  6. The market is over due for a major correction.