Can Historical Data Be Used to Predict the Stock Market?

OBJECTIVE

CrystalBull professionals have tirelessly studied complex historical data to locate patterns and relationships (cause & effect) looking for indicators which lead the stock market.  We use computerized modeling to study financial and demographic data and analyze the trends, which we explain to our subscribers.  Through our analysis, we will illustrate and define various timing models and leading indicators which may correlate with the markets.  We realize that history does not always dictate the future, that past indicators are not always representative of future results (This is why we repeatedly remind you of the risks involved, and insist that you consult your own investment adviser before utilizing any of the information provided herein.)  Our objective is to illustrate ways to possibly reduce risk/reward ratios, and to perform well in the stock market in general.  While some might compare stock market timing as being similar to card counting at a casino, it is actually a discipline.  You will not win every bet, but there may be times when the odds are in your favor.  Through CrystalBull's Stock Market Timing Models, we attempt to illustrate and teach times when history tells us that the stock market may be ready to change directions.  To that end, CrystalBull.com is seeking to build the world's most accurate stock market indicator, using these disciplines.

STOCK MARKET TIMING THEORY

Some analysts think of stock market prices as a yo-yo on an escalator, where the escalator is the long term trend, as the yo-yo moves along a cyclical, shorter term path.  The data are certainly more complex than that.  What appears at first glance as an unpredictable mess can many times be deciphered through analysis.  By breaking down the pricing into the long-term trend, intermediate trend, short-term trend, and daily noise, we attempt to isolate the trends to see what may be coming next.  Obviously, computer and mathematical modeling is imperative here.  Stock market prices seldom move instantaneously to their next target on the path; that is the definition of a trend.  By spotting trends ahead of time, a person may be able to take steps to participate in (or avoid) the next trend.  Through our analysis, we have developed proprietary trading algorithms (black boxes), which are used to help describe certain considerations which investors may wish to consider for market timing.  These algorithms, backtested to 1995, would have outperformed the broad market by a wide margin.  Click here to see the hypothetical past performance of the CrystalBull Trading Indicator (Stock Market Timing Model), based on our current model.  We will show how certain decisions could have led to poor performance while also representing what trading decisions could have led to positive returns in the broad market.

BUY-AND-HOLD vs. MARKET TIMING

By definition, a buy-and-hold investor receives the market return.  No more, no less.  Interestingly, the pool of traders who do not follow the buy-and-hold strategy also, in aggregate, receives the market return.  Remember, the market return is the average return of all investors combined.  So, for every investor who beats the market by frequent trading, there is another trader who underperforms the market.  Many investment banks and hedge funds may have raked billions in profits from the market through trading strategies.  That leaves many individual investors, not knowing much about trading strategies, at a tremendous disadvantage.  With that disadvantage, most underperform the market.  Add in capital gains taxes, investment costs, research costs, etc, and it becomes very difficult for the individual investor to beat the market.

Think of Stock Market Timing as an enhanced version of buy-and-hold.  We only want to hold when the trend is favorable, and we want to be out of the market when the trend is downward.  This is not a system for day traders.  The model does not pick individual stocks, but encourages a broadly diversified holding, such as the S&P 500 (ETF: SPY) or a total stock market index.  The time between trades is typically several weeks, but can range into years, too.  We attempt to buy on weakness and sell into strength.  Most investors do just the opposite; they buy when the market is strong (when everyone else is buying), and sell when the market is weak (when everyone else is selling).  They buy high and sell low.  Through CrystalBull's Stock Marketing Timing models, we will attempt to illustrate disciplines and guidelines supporting the age old notion of "buy-low-sell-high".  Again, this chart: Hypothetical performance of the CrystalBull Trading Indicator (Stock Market Timing Model) compares a Buy-And-Hold strategy with our Stock Market Timing Model, backtested using our current model.

DOLLAR COST AVERAGING

Dollar Cost Averaging uses the magic of arithmetic to add return to a dedicated, regular investment plan.  Instead of purchasing a fixed number of shares in each period, dollar cost averaging purchases a fixed dollar amount each period.  Thus, more shares are purchased when the stock price is low than when the price is high.  The result is that the investor's average cost per share is usually less than the average share price over the time period.  An enhanced version of dollar cost averaging would be to save the investment funds until periods which are identified as entry points (buy signals), times when the market is weaker and expected to recover.  Using CrystalBull's stock market timing models, we will help to illustrate what to look for as entry and exit points and various considerations for the dollar cost averaging investor as well.

BUY SIGNAL / SELL SIGNAL

Traditional stock market technical indicators typically use a chart of the indicator reading, with lines drawn for critical levels above or below which trigger a buy signal or sell signal when crossed.  We use similar graphs, but avoid using the terms "buy" or "sell".  Again, we do not give investment advice, nor recommend buying or selling any securities.  These are simply indicators to be reviewed with your investment adviser, or in the testing or study of their respective models.  When studying the stock market timing charts, graphs, meters, or gauges, the green lines indicate the possibility of a bullish stock market trend ahead, and the red lines indicate the possibility of a bearish stock market trend going forward.  We call the crossing of such critical stock market indicator levels "possible trend reversals", or at times, possibly "overbought" or "oversold" conditions.  Nothing is correct 100% of the time, so these remain "possibilities".  And, it is quite common for different indicators to give conflicting indications of the stock market trends ahead, with one indicator in the green, while another is in the red.  Thus, consulting with your investment adviser is imperative.  No stock market timing indicator or technical indicator will be correct 100% of the time.


That said, let's get started.  Please visit the Stock Market Timing Dashboard, then click on any gauge to go to a chart showing what CrystalBull believes to be possible leading and lagging indicators relative to the stock market.