ANNANDALE,
Va. (MarketWatch) -- It is one of the ironies of stock-market timing
that it is easier to forecast where the market will be in several years
than where it will be in several days.
And, according to a valuation model from a research firm with an
excellent long-term record, the stock market is likely to be
significantly higher in several years' time -- regardless of whether
the final low of the last year's bear market has been seen.
The firm in question is
Ford Equity Research of San Diego. This firm is on my radar screen
because it publishes a newsletter entitled Ford Equity Research
Investment Review. And its market-timing model deserves to be on your
radar screen because it has a good long-term record.
Ford bases its model on
an analysis of individual stocks' valuations. For each of several
thousand issues, Ford calculates a so-called price-to-value ratio,
which "is computed by dividing the price of a company's stock by the
value derived from a proprietary intrinsic value model."
According to Ford, "A [price-to-value ratio] greater
than 1.00 indicates that a company is overpriced while a [ratio] less
than 1.00 implies that a stock is trading below the level justified by
its earnings, quality rating, dividends, projected growth rate, and
prevailing interest rates." After calculating a price-to-value ratio
for each of the several thousand stocks that it monitors, Ford
calculates an overall average.
Since 1970, when Ford
started calculating the ratio, this average's record high level was
1.81, which it hit at the end of September 1987, three weeks prior to
the worst crash in U.S. stock market history. Its second highest level,
1.79, was registered at the end of February 2000, just a couple of
weeks prior to the bursting of the Internet bubble and the beginning of
the 2000-2002 bear market.
Today, this average
stands at 0.68. That's the lowest since December 1974, when it got
slightly lower, to 0.61. Other than that December 1974 reading, the
current level of this average is the lowest since 1970, when Ford began
calculating it.
In addition, the current level is well below the four-decade average, which stands at 1.17.
This would certainly appear to be good news for the stock market.
To test whether Ford's model has statistical significance, I fed the
monthly values for the average price-to-value ratio into my PC's
statistical package, along with data on how the stock market performed.
As expected, I found an inverse correlation between where the Ford
average stood and the stock market's performance over the subsequent
one-, three-, and five-year periods.
That is, higher
price-to-value ratios were more often than not followed by lower market
returns, and vice versa. And these correlations were significant at the
95% confidence level that statisticians often use to judge whether a
correlation is genuine.
Can the Ford data be used to forecast anything shorter term?
Ford's analysts pointed out in a recent special report prepared for
their clients that the average price-to-value ratio of U.S. stocks
"dropped below 1.0 [only] seven previous times - April 1973, April
1976, April 1980, September 1990, August 1993, August 1998, and June
2002. In each of these cases, the market made an initial low within the
first three months" after breaking below that 1.0 level.
In the current bear
market, the 1.0 level wasn't broken until October. As a result, Ford's
analysts conclude that, "We should expect to see that the market has
bottomed by year-end."
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发表于 2008-12-10 06:50 PM
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