Annual Forecast Model - 2011

February 1, 2011 Update

A picture is worth a 1000 words, so I will try and keep my commentary brief. But, first, some background for new subscribers.

Thank you once again for subscribing to The VR Forecaster (Annual Forecast Model) - published annually since 1982. It is, in fact, the success of 1987 Model that set the stage for all future reports. The rudimentary chart of the 1987 Model (below) which was published in January warned of some significant volatility for the October ahead and in my January commentary I stated:

"What does 1987 hold in store? Well, if a picture is worth a thousand words, this one should be clear: We're going up! But watch out for that nasty step scheduled around early October."

Well, we all know that 'nasty step' was the 1987 Crash and the rest is history. The financial press provided me with some recognition at that time. I recall while on the Wall Street with Louis Rukeyser program in September, 1987 stating that something was coming by the third week of October, though I was cautiously bullish up until that time. Of course, early October saw a sharp reversal to the downside with a one-day 90 point decline which was huge for 1987. That changed everything and the Annual Forecast Model was now very much in sync.

1987 Chart

For years, the various 'Bellwether' rules and axioms for predicting the future course of the stock market have been freely bandied about and in most stances were regarded as nothing more than curiosities without any real or practical application. Students of these bellwether indicators, however, take them more seriously and usually have statistics backing them up when presenting their conclusions. Examples of such bellwether applications include the Super Bowl Indicator, the General Motors Bellwether Theory, the Hemline Indicator and, of course, the January Barometer.

THE JANUARY BAROMETER

The January Barometer was first made notable by Yale Hirsch, authoring the fascinating Stock Trader's Almanac. Yale, by the way, was kind enough to dedicate his 1987 edition of this almanac to me and three other technical analysts calling us the 'New Prognosticators'. That was a great personal honor for me, especially since the Stock Trader's Almanac was the first book I ever read back in college regarding the stock market.

Devised by Yale Hirsch in 1972, the January Barometer states that as the S&P 500 goes in January, so goes the year. The indicator has registered only five major errors since 1950 for a 91.4% accuracy ratio. Vietnam affected 1966 and 1968; 1982 saw the start of a major bull market in August; two January rate cuts and 9/11 affected 2001; and the anticipation of military action in Iraq held down the market in January, 2003.

THE GENERAL MOTORS BELLWETHER

The General Motors Bellwether Theory based on the notion that the performance of U.S. automaker General Motors (GM) is a pre-cursor to the performance of the U.S. economy and stock market. The GM Indicator relies on the assumption that when people are confident and making money one of the first things they would do is buy a new car. There is still some talk behind this strategy as there is a correlation between auto sales and the overall economic standing of individuals. But this theory had more weight in the 1970s-80s when GM was by far the largest carmaker in North America. Since then GM's importance to the U.S. economy has declined due to greater competition. During the recent financial crisis and the bankruptcy of the company, I think you would agree the GM Bellwether is now ancient history.

THE HEMLINE INDICATOR

The Hemline Indicator (also known as the "bull markets and bare knees" indicator) looks to the length of women's dresses and skirts to determine market sentiment. The "Hemline Index" was first developed by technical analyst/economist George Taylor in 1926. It gained popularity around the 1929 stock market crash. The theory states that the stock market rises and falls with women's hemlines. The hemline indicator has been historically accurate since the late 19th century, when long skirts and bearish markets were the norm. Then, during the roaring '20s, the stock market soared while women's knees were bare. Women's fashion in October 1987 shifted from the once-popular miniskirt to longer ones. And notably, the market then crashed.

Below is a famous graphic depicting the stock market and hemlines from 1897 to 1990 constructed by Alan Shaw's legendary technical analysis group at Smith Barney.

If this theory still holds, the story above is a bearish indicator for the stock market. We now know that it hasn't work for the past six months!

Here is an article from June, 2010:

The New York Times - A Long, Lean Backlash to the Mini

"There is definitely a movement to a very lengthy look, especially among the young," said Nevena Borissova, a partner in Curve, a progressive retailer with stores in New York, Los Angeles and Miami. Ms. Borissova favors radically stretched-out skirts and dresses that "drag on the floor, with raw edges, and worn with combat boots," she said. And as she pointed out, these myriad calf- or ankle-grazing iterations of the mile long skirt bear no relation to "Big Love" or, for that matter, the Summer of Love. There is nothing remotely prim or saccharine about the latest interpretations of this look, with their distinctly urban overtones. Current versions, even the most languid, are likely to be toughened up with a military parka or a biker jacket and thick-soled shoes. A muted, and at times ascetic, successor to the sweet-as-a-bonbon, Hamptons-worthy maxi-dresses that first alighted on downtown streets a couple of summers ago, the new maxis are more Morticia than Ophelia. They are "darker and more sophisticated" than last summer's flounced beach dresses, said Morgan Yakus, a partner in No.6, a haven for style-setters in downtown Manhattan.

THE SWIMSUIT INDICATOR

There is a new twist on the old idea: According to the Bespoke Investment Group's in the 15 different years (over the last 31 years) an American appeared on the cover of the Sports Illustrated "Swimsuit Issue," the average performance of the S&P 500 gained 13.9 percent with 13 positive years (87 percent). The other 15 years when no American took the cover spot, the S&P 500 had an average gain of only 7.2 percent with 11 positive years (73 percent). The 2010 edition (link below) highlighted Brooklyn Decker (an American) and we had a positive year in the markets. The 2011 edition is yet to be released. We're holding our breadth!

http://sportsillustrated.cnn.com/2010_swimsuit/more/cover.html

HOW ABOUT THE SUPER BOWL INDICATOR?

The Super Bowl Indicator holds that if a team from the original National Football League wins the big game, the stock market will go up for the year. But the Super Bowl Indicator has such a troubled history, it makes Plaxico Burress or Michael Vick look like Boy Scouts.

It's often said the Super Bowl Indicator was first proposed in the Sports section of the New York Times in 1978 by Leonard Koppett, a sportswriter for the Gray Lady. Koppett died in 2003 and more importantly, a quarter-century after he invented the SBI, Koppett remained flabbergasted that anybody had ever taken him seriously.

His original articles were Swiftian satires on the dangers of confusing correlation with causation. Koppett told said that decades earlier he had been jawboning about spurious correlations with his friends Bill Veeck, the impresario who owned the Chicago White Sox, and Lawrence Ritter, the NYU finance professor who also wrote the brilliant baseball book "The Glory of Their Times." They jokingly concocted a theory that baseball batting averages and annual returns in the stock market ought to be inversely correlated.

Eventually, Koppett noticed a second spurious correlation - how could the winner of a single overhyped football game possibly predict the performance of thousands of stocks? - and tossed both idiotic ideas into two smartly written columns: one in the Sporting News (Feb. 11, 1978), the other in Sports Illustrated (Apr. 23, 1979).

"It's a joke!" exclaimed Koppett, "I meant the whole thing as a satire on the fallibility of human statistical reasoning." He added, "It's too stupid to believe." How did he feel about the fact that several people were taking credit for having invented the Super Bowl Indicator. "I don't care to correct them," he said. "If someone else wants to take credit, then they'll get the hate mail from any investor who's stupid enough to try the foolish thing. It's too silly to believe."

Ed Dyl, a finance professor at the University of Arizona, found in 1989 that the stock market went up 2.9% in the four weeks after the Super Bowl when an original NFL team won - versus a (4.6%) loss when an original AFL team prevailed. (This covers the post-1978 period, after Koppett introduced the SBI.)

Dyl pointed out that these results might occur not because investors are idiotic enough to believe in the SBI - but merely because they think other people might be idiotic enough to believe in it.

When I asked him to update his results this week, Dyl found that "the anomaly seems to still be there, but weaker." Factoring in all the games through last year's Super Bowl XLIV, over the month following the big game, the market has gained about 1.1% on NFL victories and lost about (-0.1%) on AFL wins.

How about Super Bowl XLV? Both the Pittsburgh Steelers and the Green Bay Packers are old NFL teams, meaning they were part of the NFL before the league merged with the AFL. Super Bowl victories by old NFL teams lead to full-year gains for stocks nearly 80% of the time.

There's even more good news. According to Capital IQ, the S&P 500 has risen by an average of 26% when the Steelers win the Super Bowl. The index has an average return of 23% when the Packers win. The average market return is also positive when either team loses in the Super Bowl.

THE PRESIDENTIAL CYCLE

On average, the first two years of the U.S. presidential cycle are the weakest with the S&P 500 Index performing poorest in the first year of the four-year election cycle. The third and fourth are the best historical years with the 3rd year being the best. Sam Stovall at Standard & Poor's calculates that the S&P 500 has an average 17% gain in the third year of a presidential cycle. (His data dates back to 1945.)

MARK LEIBOVIT - THE ANNUAL FORECAST MODELS

You have in your hands one of the most unique market investment/trading tools in existence. Since you've already paid for it, you know that this is not sales hype, it is fact! While no indicator is perfect, its uncanny record in calling significant turning points and overall trend for the stock market is, in my experience, unparalleled, particularly since it is published early in the year and looks out nearly 12 months in advance.

Included herein are charts for: The Dow Jones Industrials, The Canadian TSX, Gold, the US Dollar Index, the 10-year Treasury Yield, and Crude Oil. You can see last year's report by clicking on 'View Last Year's Report' below.

A word of caution. My original work for the Annual Forecast Model was formulated for the Dow Jones Industrials. Though I have had considerable success with this Model for the Dow Industrials over the years, results have been mixed for the other markets presented.

BACKGROUND OF THE ANNUAL FORECAST MODELS

As of January 25, 2010, TIMER DIGEST has named me the 7th Market Timer for the 5 year period ending 12/31/09; the 3rd Market Timer for the 8 year period ending 12/31/09 and the #2 Market Timer for the 10 year period ending 12/31/09.

As of January 25, 2009, TIMER DIGEST also named me the #2 Gold Timer for the 10 year period ending 12/31/09!

Previously, I was named #1 U.S. Market Timer for 2006, the #2 U.S. Market Timer for 2007, and the #1 Intermediate Market Timer for the 10-year period ending 2007, the #1 Gold Timer (March 31, 2008).

I mentioned these credentials only because in large part my calls were based on the Annual Forecast Models displayed in this report.

Try and keep these reports confidential. You have paid quite a bit of money to see them. The more eyes that see it, the less reliable it will ultimately become. However, even though I reserve the right to show small pieces of the AFM in the media for promotional purposes, especially historical results. It has been shown on the Nightly Business Report on PBS, the Business News Network (BNN) in Canada, at the Money Show in Las Vegas or at the World Economic Conference in Vancouver, B.C.

The following comment may sound extraordinary, but years ago I was informed by a famous 'anonymous' source that My Annual Forecast Model may be replication of either the Federal Reserve System or perhaps the Plunge Protection Team 'Model' for market in the year ahead. He even suggested that perhaps they may even be using my 'Model'. How about that?

Please keep in mind this is a business where analysts such as myself who developed incredible multi-year or decade track records are judged solely by their 'last' trade. In other words, you're a bum if you're last trade was a bad call to the detriment of all your previous work. New or novice investors or those only seeking to eek out short-term gains may by chance acquire access to this 'Model' at a moment it gets out of sync and judge it harshly. Those of you, however, who have tracked these reports for several years know differently. No one can be perfect all the time and this report provides 'value-added' to your own research and insight. Regardless of whether the current signals (especially the Dow Industrials below) pan out or not, I'm sticking with the AFM, as it has served me well for over twenty years and placed my name at the top of market-timers in the United States.

UNDERSTANDING THE ANNUAL FORECAST MODELS CONSTRUCTION

The dates listed along the horizontal axis are often coincident with 'change points' in the various markets and are still useful to traders whether the overall forecast for those markets are on track or inverted. For those of you new to the AFM's construction and guidelines, let me lay out some ground rules. First, the AFM's construction is fairly simple. The vertical axis denotes direction and the horizontal axis denotes time. A chart zig-zagging lower is a bear market pattern, but a chart zig-zagging higher is a bull market pattern. Secondly, please note the AFM does NOT attempt to predict amplitude, but only predicts direction! In other words, the Model's forecast the TIME when high and low points in the stock market may occur, not precisely high or low the market may be. Peaks and troughs can be at any level. It basically comes down to a question of relativity. Even though the chart may show a high point or a low point, there is no specific numerical value associated with that point, i.e., Dow Industrials 13,000 or 6,500. The AFM formula simply does not generate such values. In addition, new relative highs or lows in the AFM does not necessarily suggest higher market highs or lower market lows. These points could turn out to be relative highs or lows and nothing more. Thirdly, the AFM is presented in good faith as a general guide for the future. Though we make no modifications during the course of the year, we are always paying close attention to other technical, cyclical and sentiment indicators to help 'fine tune' what is unfolding in the marketplace. As we have all learned in the past, placing too much weight on any one indicator (including the AFM) may not be the best decision.

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS!

The dates presented may or may not turn out to be accurate representations of high or low points in the market. There have been occasions when a date is coincident (a bull's eye) with a market peak or trough. More frequently, however, the actual market peak or trough is skewed either side of the predicted date. What we are looking for is the GENERAL PATTERN of the AFM in any given period. Is the pattern bullish or bearish, is the pattern rising or falling dramatically or modestly? The bearish pattern displayed in the 2000 AFM when it was published February 1, 2000 certainly presented clear warning of what may lay ahead. The low point predicted for the end of March, 2001 dramatically presented the power of the AFM to predict an excellent near-term buying opportunity. The high point predicted for the end of March, 2002 or the low point in July, 2002 also turned out to be deadly accurate presaging a multi-month correction to the downside for the former and a sharp rally for the latter. The AFM for 2003 predicted a low point in March (specifically, March 26 which was ten days off - doesn't that sound familiar? - Same thing happened in July, 2002). The 2006 AFM for the Dow Industrials correctly predicted a May high and a summer low. The AFM for 2007 was outstanding except for the last couple of weeks of December. It called for top in January/February, a mid-March low a high June/July, a mid-August low, a low the third week of October then followed by year-end rally - a year-end rally which unfortunately ran into a brick wall in mid-December. The AFM for 2008 was a clear bear market signal, even though the predicted low point was early (mid-September). Remember, that warning was flashed in January to subscribers! The 2009 AFM was bearish into the summer followed by a rally into year-end. As you know, the low came instead in March, but the overall pattern was correct of looking for a buy point by mid-year. And, the 2010 AFM foretold a rally into the summer to be followed by a sharp (nearly crash) sell-off. Instead, we saw the 'Flash Crash' on May 6.

The AFM was originally created to provide an overall cyclical forecast for the year ahead. In this regard it has done an excellent job over the years. Luckily over the years the AFM has also been fortunate enough to pinpoint exact turning points during the year. The downside, however, was that expectations grew too high that the AFM will consistently perform as well going forward.

DOW INDUSTRIALS FOR 2011:

The AFM for the Dow Jones Industrials predicts a correction in the first quarter bottoming by the end of March (on March 31) followed by a rally that peaks just before summer (on June 13), then sells off into the end of June or early July, trades higher into early August and follows a zig-zag decline into the fall. As always, we have to watch my other technical indicators, especially the Leibovit Volume Reversal® for guidance. At present, I agree about the correction in the first quarter, but I disagree regarding the overall bearish pattern depicted in the Model. But, who am I to disagree? Mr. Market will make the decisions and I'll do my best to follow suit.

The dates along the horizontal axis are the same for all the AFMs, but please make a note of them as they could represent my above-mentioned 'change points'. Those dates are:

• January 19
• February 7
• February 24
• March 15
• March 31
• April 19
• May 6
• May 25
• June 13
• June 30
• July 19
• August 5
• August 23
• September 12
• September 28
• October 17
• November 2
• November 21
• December 9
• December 29

TSX FOR 2011:

For the second year I am including the TSX in this report. The pattern here is slightly different than for the Dow Jones Industrials above. A rally into February 24 is followed by a decline that ends on April 19. From there we zig-zag higher for the rest of the year, except for a pause in June and again in August. A big washout apparently is in store at the end of the year around November/December.

10-YEAR TREASURY BOND YIELD for 2011:

The AFM for the 10-Year Treasury Bond YIELD shows a zig-zag non-trending pattern for all of 2011. In other words, 10-Year yields will pretty much end the year where they began. In either event the dates along the horizontal axis should provide a general sense of timing 'reversal' points along the way. In other words, if a low date turns out to be a high, that's valuable information if you're trading. Such extreme points include February 24, April 19, May 25, June 30, August 23, and October 17.

THE U.S DOLLAR INDEX for 2011:

The AFM for the US. Dollar Index in 2010 was nearly perfectly inverted, so I'm entering 2011 keeping an open mind. Since we've currently been a fairly defined downtrend since June, 2010, it's difficult to imagine a strong uptrend now emerging. That said, the AFM points to a rally beginning in February and carrying into the peak for the year on April 19. The rest of the year follows the pattern of a slow decline. Regardless, let's watch April 19 or thereabouts, just in case it turns out to be a high instead.

GOLD for 2011:

The really sharp correction we were expecting based on last year's AFM in Gold never came. Either this is the year or we have one heck of an inverted chart below. According to the AFM, a high in February is followed by a sharp decline into March 31. A rally then ensues to June 13 where a small trading top is formed. A quick sell-off takes Gold lower until the end of June or early July where another rally try takes Gold up until early August. A slow and steady sell-off follows and carries all the way to October 17. Looks like a year-end bounce follows:

CRUDE OIL for 2011:

Last year's AFM for Crude Oil tracked pretty well until the end of April, but inverted for the balance of the year. This year the AFM is showing dramatic volatility with no real sense of direction. Taken literally, a big low is ahead on or about March 31 followed by a big rally into first May 25 and then into August 5. A huge sell-off follows and carries into October, November and possibly December with a chance of a sharp recovery as the year draws to a close.

Thank you for subscribing to the 2011 VR Forecaster Report. May I extend my very best wishes to you for a happy, healthy and prosperous year no matter which way the winds blow.

Mark Leibovit,
Chief Market Strategist
VRtrader.com
VRGoldLetter.com
February 1, 2011

View Last Year's Report