December 2005 Marketimer Model Update
Bob Brinker Fan Club (home Page)
by Kirk

The main Economic indicator is GDP. I think Bob also looks at the direction too. The 3% to 4% range is what many, including Alan Greenspan, consider the sweet spot for strong sustained economic growth without inflation. We are a tad above the top of that range. The indications are that GDP is starting to trend upward and so are earnings. The Economic indicator could turn next year if GDP growth stays above 4% long and we see the rapid growth Bob refers to as one of the root causes of bear markets. As of now most think next year GDP will dip below 4%. This all seems to confirm this indicator is bullish in bob’s model. Looking at what the Federal Reserve is doing with the money supply and short-term interest rates can sum up the Monetary indicator. I am looking forward to hearing what Bob has to say about the FED no longer reporting M-3 money supply. It is possible Bob may not even comment on it since he tracks M-1 and M-2 plus the Monetary base. A growing money supply is important as it acts as fuel to a growing economy. He looks at these in real or inflation adjusted and in nominal growth percentages. The key to look for is a growing money supply and we are doing nicely so that is bullish. I think like all of us Bob is waiting for the FED to stop increasing short-term rates. In September Bob would have applauded a pause in hiking rates in the post Katrina and oil spike period. They didn’t pause then and didn’t on November 1. It is always hard to know for sure what the FED will do, many are expecting a couple more .25% increases before Alan Greenspan retires at the end of January 2006. I suspect Bob will look at Monetary policy closely until we see how Ben Bernanke handles his first meeting as Chairman of the FOMC, which won’t be until March 28, 2006. By the way Money supply data can be found here. For now I would think Bob is still viewing Monetary as accommodative or to say it another way bullish. Up to now I’ve been discussing items considered various types of fundamental analysis. The remaining 25% of the model is more along the lines of technical analysis or relying on market history to help predict market future. In a sense the entire concept of market timing could be considered technical analysis or relying on history to repeat itself and signal times to raise and lower your asset allocation. If all of this leaves you scratching your head and saying “What did he say?” Don’t feel bad. I don’t think any group of people can look at the same data and agree what it means, or if it is even relevant. I don’t know that Bob understands this stuff any better than anyone else but, hey, you got to give credit to someone that is willing to learn new things and look to improve their work.

The Sentiment indicator is perhaps the most elusive of all model indicators. It was not included in Bob’s original model but was reportedly added after he incorrectly exited a bull market following the Stock market crash of 1987. From what I can gather Bob rode the market down with so many others and finally threw in the towel within 10% of the bottom and went to 100% cash in January 1988. Over the next three years Bob adjusted his allocation several times in both directions before becoming fully invested in January 1991. The index he was using as a benchmark, the DOW, was some 25% higher than when he went to all cash. It was during this time frame Bob added the Sentiment indicator. I recall him saying on the radio once that he had back tested his revised model and the Sentiment indicator would have prevented him from making the 1987-91 error. Some months later he also said on the radio when asked about back testing his model he doesn’t do back testing because it would serve no purpose. It would leave him open to ridicule since he couldn’t prove himself without revealing how his proprietary model works. So I leave it up to you which story to believe regarding back testing. That being said I find the Sentiment indicator fascinating. When I first heard Bob mention this indicator he exclusively mentioned the weekly poll done by Investors Intelligence, which he is a participant. He went on to explain how he looks at the percentage of Bull/ (Bulls + Bears). He ignores the correction number. When the percentage is between 50% and 70% Bob feels this is neutral and the market is more than likely not in for any drastic moves. When it is below 50% this means a majority are on the sidelines and can only have an influence on market direction by buying. This is bullish and is often a signal of pending buying opportunities. When the percentage comes in over 70% this is a sign to stop and take a cautionary look at the other indicators and be ready to lower your equity allocation. Should it get into the 80% range plus I would think Bob would find it hard to remain fully invested. I should add that Bob uses a four week moving average to avoid a sudden swings of emotion. If you want updates on what Brinker is saying on Moneytalk delivered to your email box, usually within 24 hours after Sunday's show, then send us a note at TalkAboutMoney@gmail.com and ask to get on our mailing list. In late 1998 Bob started talking about other technical indicators amid the Long term Capital Management panic. It was then Bob mention the Put/Call ratio and when the ten-day moving average is near 1.00 it is bullish, he recently has been throwing in the 60 day Put/Call ratio too. As I recall the ten-day Put/Call was about 1.2 when Bob declared in October 1998 “You can’t afford to be out of the market for a single day”. VIX is another sub indicator that can be helpful but I did hear Bob say it hasn’t been of much use lately. I believe direction is key for VIX rather than an absolute number. He from time to time also has mentioned testing lows on around 25% lower volume as a sign of bottoms and buying opportunities. For a time he seemed enamored with TRIN but as of late hasn’t mentioned it. Bob often looks at market internals such as new highs vs. new lows and the advance/decline line to help identify inflection points in the market. I think he noted the 90% down day in March 2003 and decided to become fully invest then in large part to that one data point. Keep in mind these all seem to be secondary and are used to confirm what the other major indicators are saying. I am very sure Bob places no value in charts other than to see what has happened in the past. I don’t think he finds any predictive value in charting. I feel Bob has limited understanding of these so called technical analysis measures but realizes they are worth looking at if it can help prevent an error like he made in 1988-91. I don’t think Bob uses any consistent set indictors but looks at them all and focuses in on those that are changing rapidly and then deciding if this component is bullish neutral or bearish. I think this portion of the model has evolved with time as Bob himself has learned more about these fascinating data points. One thing to keep in mind, the entire sentiment indicator is the most volatile and capable of making a major shift in direction the quickest so it is worth reviewing on a weekly basis should you decide to interpret Bob’s model yourself. The other indicators really only need be looked at monthly unless something unexpectedly happens. I would think Bob would today say Sentiment is neutral. So there you have it. For now I tally one neutral and three bullish. Enough for Bob to remain fully invested. 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