Predictive Model Output

[nodoodahs]

From the data as of November 18 2005 closing. The EPCR model is unchanged, but the other models are modified with additional technicals and fundamentals, while substituting M2 for M3.

For the last week, the EPCR has been progressively more bullish in terms of consensus, with the 20 day and the 100 day EPCR both topping out on Tuesday and declining through the rest of the week. Meanwhile, our return on the S&P 500 over the last 21 sessions has been 5.9%, well into the 10th decile of returns since June of 2003. We are well set up for a below average to negative return on the S&P 500 over the next 21 sessions. Output for the EPCR model is in the 2nd decile, bearish.

The 13-week model for the S&P 500 is reading near the bottom of the 9th decile, bullish. A 9th decile reading would suggest median and average returns in excess of 6% for the next quarter, with greater than 80% chance of gains, 70% chance of above-average gains, and negligible chance of ending the quarter down more than 10% from where we are today.

The 52-week model for the S&P 500 is solidly in the 7th decile, bullish. Median and average returns for this reading exceed 15%, with 90% chance of gains, greater than 60% chance of above-average gains, and less than 5% chance of ending the year down more than 10% from where we are today.

Overall the models suggest a correction in the S&P 500, followed by a bullish trend, short and long term.

The 13-week model for the 10YT is way down in the 1st decile, suggesting that yield could drop below 4% by the end of the quarter. While the standard deviation is high for results when output is this low, the model suggests a 95% chance that yield will be lower in a quarter from now.

The 52-week model for the 10YT is down in the 3rd decile, suggesting that yield should be below 4% in a year. At any rate, the model suggests 93% odds the yield will be lower in a year. Looks like the reversal Henry said he expects.

The overall indication is for lower yields from today.

The 13-week model for the USDX is in the 4th decile, suggesting 65% odds that the USD will decline short-term by 1-1.5 points. Standard deviations are very high compared to median and average output for this model, so I think of this model more as a general directional indicator.

The 52-week model for the USDX is in the 6th decile, which is neutral for the USD. The chance of a rise in the USDX is good, but one funny thing about the USDX is that generally, it rises. The declines in the USDX are rarer but larger than the increases. Example, from Nov 1980 the USDX has risen 52.5% of the time in each year period, but the average increase over each year period is negative 1 point, meaning that large declines are skewing the average.

Both of these new models, the 13- and 52-week models for the USDX, have rolled over in the last 2-3 months. Three months ago the 13-week model was 10th decile for increasing USDX, and less than two months ago the 52-week model was 9th decile.

Overall indication is the USD will top out soon.

Discussion with outside-the-model inputs:

The Fed may have discontinued M3 because they intend to prop up bond prices (and hold down yields and U.S. borrowing costs) after the new Iranian oil exchange starts taking place (oddly enough, slated for March 2006 and to be denominated in Euros). Assuming, of course, that the U.S. hasn’t invaded Iran by then. If the premise of the petro-dollar is correct (exposited in various other posts by me), this would be bearish for bonds and the USD. The Fed can prevent calamity by buying the bonds themselves, which would hold yields down and keep the housing bust from accelerating and tanking GDP, but this won’t do anything to help the U.S. dollar (will it?). Another thing that might be bearish for the dollar, is the 2006 expiration of the repatriation tax benefits for corporations.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.