|Valuation - 30% Weight||Value||Signal|
|Price / Peak Earnings||17.57||-34%|
|Cyclically Adjusted P/E (Schiller P/E)||24.22||-100%|
|Price / Sales||1.59||-100%|
|Median Price / Sales||2.03||-100%|
|Median Price / Earnings||21.18||-82%|
|Trend - 30% Weight||Signal|
|SMA 200 Slope||100%|
|EMA 200 Slope||100%|
|EMA 20>150 or 50>200||100%|
|SMA 20>150 or 50>200||100%|
|Intermediate / Long|
|EMA 20>50 or 50>200||100%|
|SMA 20>50 or 50>200||100%|
|Interest Rates - 20% Weight||Signal|
|Intermediate Term Trend|
|TNX 50 EMA Slope||100%|
|IRX EMA 20<50+0.1||100%|
|TNX EMA 20<50+0.1||100%|
|Long Term Trend|
|TNX 200 EMA Slope||-100%|
|IRX 200 EMA Slope||100%|
|TNX EMA 20<200+0.1||-100%|
|IRX EMA 20<200+0.1||100%|
|Seasonality - 15% Weight||Signal|
|Sentiment - 5% Weight||Value||Signal|
|AAII Bull Ratio||0||100%|
Data as of February 15, 2014
The long term market model is an overview of indicators that can help form an expectation of how the market will do over the next couple months. While the model is just a guideline, its goal of the model is to perform inline with the stock market with significantly less volatility before accounting for interest earned when it is not fully invested. Including interest, the goal is to significantly outperform the market. Its signals do not change very frequently, with significant shifts in position happening only a few times per year. Smaller changes, however, may happen from week to week.
Each indicator is given a score between 100% and -100% based on its signal or on where it is relative to its historical range. These scores are averaged into categories.
Valuation and trend are two of the most important factors in long term market performance and so these categories are each given a 30% weight in the composite score. Interest rate trends were given a slightly smaller 20% weight, and seasonality was given an even smaller weight of 15%. Sentiment is more of an intermediate term indicator and does not fit here as well, so it only has a 5% weighting.
The scaled signal is the percentage the model is invested in the market. The composite indicator cannot be used as this for two reasons a) it would be partially short the stock market than one third of the time, and b) as an average of other indicators, it never reaches fully invested, even at the most favorable of times. Historically, the composite indicator has remained largely between -60% and 60%. Because we don't want the model to be short the market, and we also want it to be fully invested a significant portion of the time, we set -33% to 0%, or a cash only position, and 33% to 100%, or a fully invested position.
This strategy can be used to allocate assets between stocks and cash by holding the amount indicated by the scaled signal in stocks. However, it is a strategy for long term investors only as it is conservative and can underperform the market for significant periods of time during overvalued bull markets that eventually crash.
One way it can be used is as an overlay for strategies that pick stocks. An investor would hold a portfolio of stocks but would vary the exposure according to the current market environment.