Where Might the Average Stock be in Five Years?

As we often do on Mondays, we want to highlight the current levels of our Asset Allocaiton Model this morning.

Once again, it is very obvious in the graphic above that our Psychology Composite (still at P5) is out of sync with the positive ratings we're getting from our Monetary and Valuation Composites.  Today's ratings suggest that of the investors and traders still in the market, they have moved to a stance that's a little more optimistic than we would like. 

Today, I'd like to point out an indicator that is an important part of our measure of the stock market's valuation (that we keep in our peripheral vision in relation to our Valuation Composite) - the Value Line Appreciation Potential (VLAP).  We don't want to over exaggerate its importance as part of our process, but we just want to suggest that keeping track of its progression is not a bad idea.  History says this indicator is very, very good at predicting the potential appreciation for the "average" stock, while our Valuation Composite is much better at predicting the overall stock market (S&P 500).  So with that explanation, it is interesting to see how the VLAP has been acting in recent weeks in the chart below.

You can see above that in 2010 and 2011, as the correction was about to ensue, the VLAP dipped down and kissed that dark red line.  Only a month ago, we also saw it come down to 9.9%, not a negative signal, but we didn't like the trend. In the last few weeks that deteriorating trend has reversed, and it is now right back to its median reading.

So today's bottom line is the same one that we've been relaying for weeks.  While we would like to see some improvement in our Psychology Composite in the short-term, our long-term outlook on the market remains positive.

Don Hays

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