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Value Indicator |
"Rough Road Ahead. Our Value Long-term Indicator Shows A 5 to 10 Year Difficult Market Ahead With NO Long-term Gain. Read Why"
Economic research has shown the United States stock market undergoes extended 12-18 year market trends called ‘secular bull’ (up) and ‘secular bear’ (down) periods. Within each period we find shorter up and down periods of ‘cyclic bull’ and ‘cyclic bear’ markets. An astonishing reality is that all the investment gain occurs in the cyclic bull periods. The cyclic bear periods barely break even with annual returns less than 2% and trail after inflation allowances! Until year 2014 you must NOT use buy and hold for investments.
Since 2000 you must take advantage of these shorter cyclic up AND down trends. Click here to see how we do it following Trend Indicator.
From the chart we see value is improving as the market declines. BUT, to get UP returns in this DOWN market you need to be either 1) a great stock picker, 2) know when to stay safely in a money fund or 3) follow short term measures to make the most of shorter-term up and down moves. Check our Trend and Sentiment Indicators for the complete story.
Our new Value Long-term Indicator VLI plots a measure of investment value based on the accumulated retained earnings by all companies in the S&P 500 Index. Values above 1.00 suggest the market price is beyond its ‘fair value’ and unattractive based on the aggregate earning power of 500 US companies. Likewise, values below 1.00, after bottoming for 8 to 14 years, suggest stock investments will be attractive for the next decade.
In 1966 the trend break of the initial short, ascending green trend line marked the start of a 16 year secular bear market with annualized gains of 1.78% before inflation and a loss of –4.75% annualized after inflation. A tough market period!
We see the upward break of the downward, red line in 1982 marked the transition to a secular bull market of 18 years with an annualized return of 14.80% before and 11.00% after inflation. It was a great investment environment!
In 1999 the VLI reversed well above 1.00 breaking the dotted green trend line. From 1999 onward we see the decline of stock prices is bringing the VLI downward toward a more attractive valuation. Of course it has taken a market price decline of over 35% to generate that increase in value. Earnings are accumulating over time which also moves the curve downward toward a more attractive valuation.
Click here for the full story and to receive my report Mastering The Market's Mind which details our three market indicators and their complete trading rule set.
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Last Modified 2009-07-06