I have seen a number of posts on investing using factors (like the stockranks) and Technical Analysis (various approaches), but cannot remember much on Economic indicators.
This is a new one on me and it is sourced from Chris Dillow. He writes for the investors chronicle (paywalled) but also posts fairly prolifically - and on more political and philosophical topics - on his blog.
A recent post introduced me to a new indicator. This is from https://stumblingandmumbling.t...
It is a long post on forecasting in general (covid) and those who are thought to be superforecasters and the wisdom of crowds. There there is a small part on forecasting index returns. Theemphasis below is mine.
Posted here because it is new to me.
... It shows that medium-term returns on UK equities have been highly predictable by a simple ratio of retail sales to the All-share index: this ratio predicts decent returns over the next three years (as I say, a forecast should be a test of a hypothesis).
(deliberately not linked or copied his chart)
...This measure works for two reasons. First, consumer spending is, partly, forward-looking: if we anticipate good times we’ll spend more than if we anticipate bad, and on average across millions of consumers forecast errors largely cancel out. Secondly, equity investors do not fully price in this wisdom of crowds, causing equities to be under-priced when retail sales are strong relative to share prices. (For more sophisticated versions of this theory, see Lettau and Ludvigson (pdf) and this paper from the Bank of England).
I am aware of a number of index level / economic indicators / 'rules'
- Discounted value of dividends
If the dividend yield on the index is well below its long term average, prices are likely to fall and v.v. (I use this one) - January Effect
- Sell in May, Buy in November
- Foreign purchases o f US equities
- Momentum / 10 Month Moving Average
Indices have momentum - if prices are above their 10 month MA, they tend to carry on rising and v.v. - Defensives
Over the long term defensive stocks tend to outperform
There are many others and they have been shown to exist statistically, but, it has also been shown that it is hard to actually profit from the effects.
