Market timer eyes 2,150 for S&P 500
Sam Eisenstadt, who has spent decades calling stocks' twists and turns, is expecting an 8% rise by the end of the year.
This incredible bull market, which pushed the Standard & Poor's 500 Index ($INX) above 2,000 earlier this week, is still alive and well. By the end of the year, the benchmark index may rise to around 2,150, about 8 percent higher.
So says Sam Eisenstadt, who has more successfully called the stock market in recent years than almost every other market timer I can think of -- including many who I have featured in this column.
Eisenstadt, for those of you who don’t know of him, is the former research director at Value Line Inc. Though he retired in 2009, after 63 years at that firm, he continues in retirement to update and refine a complex econometric model that generates six-month forecasts for the S&P 500 -- and he shares them with inquiring columnists.
Six months ago, when the S&P 500 was trading in the mid-1,800s, Eisenstadt's model was forecasting that the index would hit 2,100 in September. Though even he at the time worried that such an outcome was too good to be true, he insisted on following the objective dictates of his econometric model rather than his subjective hunches.
His life-long dedication to following the data paid off, and the market is now within 5 percent of meeting his target.
Nor are the past six months unique. Though Eisenstadt's model is not perfect, its track record has been impressive statistically. He reports an R-squared of 0.36 for his model since the early 1950s, which means that it has been able to explain 36 percent of the variation in six-month changes in the S&P 500.
R-squared is a statistical measure of how much one data series is correlated with changes in another; a model that had perfect explanatory power would have an R-squared of 100. Though it would be fantastic if this, or any model, had perfect explanatory power, no such model exists -- or will ever exist, for that matter. In fact, most of the models you read or hear about have a vanishingly small R-squared.
Note carefully that Eisenstadt's model focuses on only the next six months. So it sheds no light on what may happen over the longer term. For example, as I reported earlier this week, other studies have found there to be an elevated probability that -- at some point over the next five years -- the market will be significantly lower than it is today. The prediction of Eisenstadt's model is not necessarily inconsistent with that conclusion, though if both forecasts are right, then the market will be rising over the near term and then falling later.
One clue as to when that drop might occur comes from reviewing the inputs to Eisenstadt's model. Though it is proprietary, he does say that one of the most bullish inputs to his model right now is low interest rates. Since the Federal Reserve has signaled that it could begin raising short-term interest rates in 2015, Eisenstadt’s model could as early as next year start forecasting a less rosy six-month outlook.
In the meantime, however, he notes that "the market does not appear to be concerned -- neither is the model."
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