12-Month MA Slope — The slope of the 12-month moving average (which is essentially the same as the 250-day moving average) refers to whether the 12-month moving average is rising, flat or falling. If the slope of the 12-month moving average (MA) of prices for a stock or ETF is rising, it is considered to be in a long-term uptrend and is a positive signal. If the slope of the 12-month MA is flat, it is neutral. If the slope of the 12-month MA is declining, it is considered to be in a long-term downtrend and is a negative signal. The slope provides an additional “check” on the 12-month MA. For example, if the price is below a falling 12-month MA, that is generally a more meaningful bear market signal than if it is below a rising 12-month MA. That signals the trend is changing in a more pronounced manner than with a simple price drop below the 12-month MA. Using the slope can help reduce “whipsaws” and “head fakes” of false price breakouts.

12-Month Relative Strength vs S&P 500 — Relative strength versus the S&P 500 is the price performance of a stock or ETF compared to the S&P 500. A stock or ETF with relative strength that is rising above its 12-month moving average (MA) is considered to be outperforming and is a positive signal. Relative strength that is flat and roughly inline with its 12-month MA is neutral. Relative strength that is falling and below its 12-month MA is considered to be underperforming and is a negative signal. Relative strength is very important for identifying the best investments to buy long or sell short. For example, if you want to outperform the S&P 500 in a stock bull market, you should not just buy investments that are in a bull market uptrend of their own. You should only buy investments that are both in a bull market uptrend and performing at least as well as, if not better than, the S&P 500. The reverse is true in a stock bear market. You should then only short investments that are both in a bear market and performing inline with or worse than the S&P 500.

20-Day MA Above/(Below) 60-Day MA — If the 20-day moving average (MA) is above the 60-day MA, it is considered to be in a short-term uptrend and is a positive signal. If the 20-day MA is roughly inline with the 60-day MA, it is neutral. If the 20-day MA is below the 60-day MA, it is considered to be in a short-term downtrend and is a negative signal.

3-Month MA Above/(Below) 12-Month MA — If the 3-month moving average (MA) of prices for an ETF or stock is above the 12-month MA, it is considered to be in a long-term uptrend and is a positive signal. If the 3-month MA is roughly inline with the 12-month MA, it is neutral. If the 3-month MA is below the 12-month MA, it is considered to be in a long-term downtrend and is a negative signal. If the 3-month MA is rising or falling below the 12-month MA, that signals a change in trend has been in place long enough to make it more significant than it would be otherwise. This also helps reduce the chance of a “whipsaw”, which is a false price breakout signal. Note that the 3-month moving average (MA) is essentially the same as the 60-day moving average.

Above/(Below) 12-Month MA — The 12-month moving average (MA) is the line that plots the average price of a stock or ETF over the past 12 months. It “moves” each month, adding the latest month’s price to the average and dropping the 13th month’s price. It is essentially the same as the 250-day moving average. If a stock or ETF is trading above its 12 month moving MA, it is considered to be in a long-term uptrend and is a positive signal. If it is trading roughly inline with its 12-month MA, it is neutral. If it is trading below its 12-month MA, it is considered to be in a long-term downtrend and is a negative signal. This is similar to the 48-month MA, but is much more timely. The price rising above or falling below the 12-month MA often signals a major change in trend. If this is the only technical indicator you look at, it could improve your long-term returns significantly. Thus, we refer to the 12-month MA as our “desert island indicator”, since it is the one indicator we would not want to do without, particularly when combined with the 12-month MA Slope.

Above/(Below) 48-Month MA — The 48-month moving average (MA) is the line that plots the average price of a stock or ETF over the past 48 months. It “moves” each month, adding the latest month’s price to the average and dropping the 49th month’s price. If a stock or ETF is trading above its 48-month MA, it is considered to be in a long-term uptrend, which is a positive signal. If it is trading roughly inline with its 48-month MA, it is neutral. If it is trading below its 48-month MA, it is considered to be in a long-term downtrend, which is a negative signal. This indicator is much slower moving than the other indicators we monitor, so it is not as useful for precise timing of bull and bear trends. However, it is useful for confirming and assessing the strength of a price trend, since 48 months clearly represents a long-term trend. If the price of an investment rises above or falls below this trend line, that typically implies much more to come with the current price trend based on the 12-Month MA.

Asia OECD Leading Economic Indicators — Asian monthly leading economic indicators produced by the Organization for Economic Co-operation and Development (OECD). This typically leads growth for Asia economy around its trend line by about six months.

Assets Under Management — Assets Under Management, or “AUM”, is the market value of assets that are managed by a financial institution for investors. AUM is a key factor in assessing the attractiveness of an Exchange Traded Fund, or “ETF”. This is because the higher the AUM, the more liquid an ETF, which typically means narrower bid-ask spreads, which enables investors to get better prices when buying and selling the ETF. 

Austrian Business Cycle Theory — It is very important for investors to understand what causes business cycles. This enables investors to better allocate capital to the right investments at the right time. Our economic analysis is based on centuries of sound free market economic thought, as developed by classical economists such as Adam Smith, J.B. Say and Frederic Bastiat, as well as Austrian School economists Ludwig von Mises and his leading students, 1974 Nobel Prize winner F.A. Hayek and Murray N. Rothbard. In particular, Bull And Bear Profits uses the Austrian Business Cycle Theory developed by these Austrian School economists. 

In the Bull And Bear Profits analysis, we provide logical and empirical support for the Austrian Business Cycle Theory versus the Keynesian and Monetarist theories popular in mainstream media and apply it to current events. The basic outline of Austrian Business Cycle Theory for our modern economy is as follows:

1. the government’s “central bank” (in the US, it is the Federal Reserve or “Fed”) creates money out of thin air (they effectively “print it”, although typically in the form of digital entries now), usually by buying Treasury bills or bonds from commercial banks, which then…
2. is deposited in commercial banks which, through the process of fractional reserve banking (where banks are legally allowed to keep only a fraction, such as 10%, of their deposits in cash reserves), create even more money out of thin air to lend to their customers, which then…
3. leads to lower interest rates than would prevail in a free market without a central bank and fractional reserve banks legally creating money out of thin air, which then…
4. causes businesses and consumers to borrow the newly created money to invest in long-term projects such as mines, factories, houses, etc., since the net present value of those investments appears higher now with a lower cost of capital, which then…
5. leads to the unsustainable “boom” phase of the business cycle where scarce capital is misallocated to unsustainable investments since the real resources of labor, raw materials and equipment needed to finish these long-term projects are not physically available; while paper money may literally grow on trees, the actual scarce resources needed to create goods and services do not (printing money does not create the goods needed for profitable investment – if it did, Zimbabwe would be the wealthiest country in the world and we could all stop working, saving and investing); then…
6. the higher money supply leads to higher price inflation, which raises production costs and usually causes the central bank to slow the growth rate of money supply and raise interest rates (if they do not, it will eventually lead to hyperinflation, which effectively destroys a functioning currency and economy), which then…
7. leads to the “bust” phase of the business cycle, where the unsustainable investments are proven to be unprofitable and must be liquidated to allocate capital to the most productive uses that meet consumer desires.

As this theory shows, the dreaded “boom and bust” business cycle is not inherent in a free market economy. It is caused by the legal privilege granted to central and fractional reserve commercial banks to create money out of thin air. 

In a free market society, we all must work, save and invest to obtain money and resources to survive and thrive. It is illegal for us to create money out of thin air, which is called “counterfeiting” if we try to do it. However, when central and fractional reserve banks do it, it is called “stimulating the economy.” Yes, it “stimulates the economy”, but only in an unsustainable manner that wastes scarce capital and resources, which lowers productivity and long-term living standards. Eventually, all monetary-induced booms must end in busts. Thus, the way to end business cycles in the future is theoretically simple: abolish central banks and require 100% commercial bank reserves, eliminate legal tender laws and allow private production of money. That will likely lead to people using commodities as money that cannot be created out of thin air, such as precious metals like gold and silver, which is the form money used to take.

Austrian School of Economics — The Austrian School of Economics is the modern-day heir to the “classical” economics of Adam Smith, David Ricardo, J.B. Say, Frederic Bastiat and others of the eighteenth and nineteenth centuries. The Austrian School began with Austrian economist Carl Menger in the late 1800s and reached its pinnacle with the works of Ludwig von Mises, F.A. Hayek (both Austrians) and Murray N. Rothbard (the leading American exponent) in the 20th century. It stands in stark contrast to government interventionist schools of economics such as Marxism, Keynesianism and Monetarism. Key Austrian School books include Mises’ Human Action, Hayek’s Prices and Production and Rothbard’s Man, Economy and State with Power and Market.

Balance Sheet Strength — The balance sheet strength of a company is determined by the amount of its assets, particularly cash, relative to the amount of its liabilities, particularly debt. Companies with strong balance sheets typically make better and safer long-term investments, since they are able to more easily invest in growth opportunities and have less financial and bankruptcy risk.

Bank Lending Standards — Bank lending standards can be determined by the net percentage of banks that are tightening lending standards on commercial loans for small firms, as reported in the quarterly Federal Reserve Senior Loan Officer Opinion Survey. When banks are tightening lending standards, they tend to lend less, thereby creating less money out of thin air. Generally, when the percentage of banks tightening lending standards rises above 30%, it leads to a recession. Conversely, when it falls below 30% during a recession, it leads to a recovery.

Bollinger Bands — Bollinger Bands are volatility bands based on the standard deviation of prices placed above and below a moving average of prices. Bollinger Bands widen with increasing volatility and narrow with decreasing volatility. They can be used for many purposes, including signaling overbought or oversold conditions.

Bull and Bear Markets — “Bull Market” is a financial market in a rising price trend, with higher highs and higher lows. Bull markets in stocks are driven by positive investor psychology and more money being created out of thin air. “Bear Market” is a financial market in a declining price trend, with lower highs and lower lows. Bear markets in stocks are driven by negative investor psychology and less money being created out of thin air.

Buying Long — “Buying long” is buying a stock, ETF or other investment in anticipation of profiting from a rise in its price.

Case-Shiller Home Price Growth — The growth rate in the popular Case-Shiller index of US home prices provides a good indication of overall increases or decreases in US home prices. Home prices, like many other financial asset prices driven by mass psychology and monetary and interest rate manipulation, tend to fall heading into and during a recession and rise in a recovery and expansion.

Cash — Cash is the most liquid asset that holds its value in nominal terms, such as bank and savings accounts, money market funds, Treasury bills, etc. Cash is where we can park our investment capital until we are ready to capitalize on a bull or bear market price trend. It is better to sit in Cash and wait for high probability opportunities than lose money, although losing money on occasion is an inevitable part of investing. Regardless, we should always remember Warren Buffett’s two rules of investing: #1) don’t lose money and #2) don’t forget rule #1.

Chicago Fed National Activity Index — The Chicago Fed National Activity Index provides a good indication of current US economic trends. It is a weighted average of 85 monthly indicators of national economic activity. The indicators are drawn from four broad categories: production and income; employment, unemployment, and hours; personal consumption and housing; and sales, orders and inventories. A positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

China Manufacturing PMI — Similar to how the Markit US Manufacturing PMI is a good measure of current US manufacturing activity, the Markit China Manufacturing PMI is a good measure of current manufacturing activity in China. Numbers above 50 indicate expansion, while numbers below 50 indicate contraction.

China Money Supply Growth – M1 — M1 money supply growth in China. See discussion of US M1 growth in “Money Supply Growth -- M1”.

Coincident Economic Activity Growth — The Coincident Economic Activity Index provides a good indication of the strength of the current US economy. It includes four indicators: non-farm payroll employment, the unemployment rate, average hours worked in manufacturing and wages and salaries. The trend for the index is set to match the trend for GDP. A recession generally follows when the growth rate falls below 2.5% and a recovery typically ensues when it rises back above 0%.

Commercial Loan Growth — Growth in commercial and industrial loans typically accelerates in the boom phase of the business cycle and decelerates (and often turns negative) during the bust phase of the business cycle. According to Austrian Business Cycle Theory, loan growth created by fractional reserve banking is the primary driver of the boom and bust business cycle.

Commodities – Copper — The JJCTF ETF tracks the price of Copper using futures contracts. Copper is pro-cyclical like Stocks, since it is an industrial metal. As with other commodities, Copper secular bull markets tend to occur during Stock secular bear markets, which can last 10 to 20 years. It has an annual expense ratio of 0.75%.

Commodities – Copper (short) — The BOS ETF mimics a short position in the Deutsche Bank Liquid Commodity Index – Optimum Yield Industrial Metals Excess Return, which is similar to a short position in Copper. It has an annual expense ratio of 0.75%.

Commodities – Gold — The SGOL ETF tracks the price of Gold with ownership of physical gold bullion in Zurich, Switzerland. Gold tends to perform well during periods of high inflation, low real interest rates and economic and political uncertainty. As with other commodities, Gold secular bull markets tend to occur during Stock secular bear markets, which can last 10 to 20 years. It has an annual expense ratio of 0.39%.

Commodities – Gold (short) — The DGZ ETF mimics a short position in the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return, which is similar to a short position in Gold. It has an annual expense ratio of 0.75%.

Commodities – Total — The DJP ETF tracks the Dow Jones-UBS Commodity Index, which is one of the most diversified commodity indexes available, comprised of 34% Energy, 28% Agriculture, 17% Industrial Metals, 15% Precious Metals and 6% Livestock commodity futures. Commodity secular bull markets tend to occur during Stock secular bear markets, which can last 10 to 20 years. It has an annual expense ratio of 0.75%. Since DJP uses futures contracts to try to mimic the Index, it does not track underlying prices as closely as Gold ETFs, which own actual gold bullion.

Commodities -- Total (short) — The DDP ETF mimics a short position in the Deutsche Bank Liquid Commodity Total Return Index which is weighted 55% Energy, 22.5% Grains, 12.5% Industrial Metals and 10% Precious Metals. It has an annual expense ratio of 0.75%.

Competitive Advantages — The competitive advantages of a company are its relative strengths that enable it to outperform competitors, gain market share and earn above average returns on invested capital. Typical competitive advantages include low cost operations enabling low prices for consumers, a strong brand, unique proprietary technology or capabilities, high barriers to entry, etc. Strong competitive advantages are a key characteristic of outperforming stocks.

Copper Prices — Copper is widely used in economically sensitive industrial production and construction. Thus, rising prices of “Dr. Copper” (as many economists call it due to its status as a reliable leading indicator) tend to signal global economic expansion, while falling prices tend to signal global economic weakness. 

Corporate Profits Growth — Corporate profits (revenues less expenses) growth tends to slow late in an expansion as rising costs (including labor and raw material costs and interest rates) hurt margins. Profits then decline during recessions as spending falls. Profits growth reaccelerates in a recovery due to lower costs and rising spending. The more the free market is allowed to set prices without government interference, the faster prices will fall and the faster a recovery can occur.

CPI Growth — Consumer Price Inflation (CPI) growth is used to measure changes in the cost of living. It is a weighted average of prices of a basket of consumer goods and services, such as food, shelter and healthcare. CPI growth tends to peak during the later stages of a “boom” as newly created money unbacked by real savings chases a limited supply of goods. Higher inflation tends to cause the Fed to raise interest rates by slowing money supply growth, which leads to the “bust” phase of the business cycle. Importantly, since the basket of consumer goods in the CPI calculation does not include investments such as stocks and bonds, it can mask the amount of real price inflation resulting from creating money out of thin air. Also, while the CPI definition has been changed over the years by the government to mask the inflationary impact of their money printing policies, the growth rate of CPI still provides important economic information.

Cyclical Bull and Bear Markets — Cyclical bull and bear markets occur within longer secular bull and bear markets. As the name suggests, cyclical bull and bear markets are generally driven by the dreaded “boom and bust” business cycle. Cyclical bull markets for stocks and commodities generally occur during periods of economic recovery and expansion. Cyclical bear markets in stocks and commodities generally occur during recessions and periods of economic weakness. On average during the 20^th century, cyclical bull markets in US stocks lasted about 28 months and generated total returns of about 90% over that period. By contrast, cyclical bear markets in US stocks lasted about 17 months and generated 30% declines on average. How does the secular affect the cyclical? Generally, secular bull markets cause cyclical bull markets to last longer and provide higher returns than cyclical bull markets that occur within secular bear markets. They also cause cyclical bear markets to be shorter and provide less negative returns than cyclical bear markets that occur within secular bear markets. Thus, while it is best to focus on investing to profit from cyclical bull and bear markets, it’s important to know whether an investment is in a secular bull or bear market so one can better judge the risk/reward and length and strength of the cyclical market.

Cyclicals vs Consumer — This is the relative performance of the S&P 500 Industrials Index compared to the S&P 500 Consumer Staples Index. Generally, Industrials tend to outperform Consumer Staples stocks in a bull market and underperform in a bear market. This is consistent with Austrian Business Cycle Theory, which explains why investment spending tends to outpace consumption spending during the boom phase and underperform during the bust phase of the business cycle. When the relative performance is rising and above the 250-dma (daily moving average), it is a positive signal, when it is inline and at the 250-dma, it is a neutral signal and when it is falling and below the 250-dma, it is a negative signal.

Daily MACD Trending Up/(Down) — MACD stands for Moving Average Convergence/Divergence. The MACD Line (the black line in stockcharts.com charts) is the 12-day exponential moving average (“EMA”; EMA differs from simple moving averages [“SMA”] by giving greater weight to recent prices) less the 26-day EMA. The Signal Line (the red line in stockcharts.com charts) is the 9-day EMA of the MACD line. The MACD Histogram is the MACD Line less the Signal Line, so the Histogram is positive when the MACD Line is above the Signal Line and negative when the MACD Line is below the Signal Line. By comparing moving averages, MACD displays trend following characteristics, and by plotting the difference of the moving averages as an oscillator, MACD displays momentum characteristics. If the MACD Line is trending up above the Signal Line (i.e., the Histogram is positive), it signals a positive near-term price trend. If it is trending flat with the Signal Line, it is a neutral signal. If it is trending down below the Signal Line, it signals a negative near-term price trend. This indicator is very useful in timing buy and sell trades after one is convinced of the longer-term trend.

Daily RSI Overbought/Oversold — Relative Strength Index (RSI) is an oscillator ranging from 0 to 100. Values below 30 are considered oversold and are usually a positive near-term signal, values above 70 are considered overbought and are usually a negative near-term signal, while values in between are neutral. Overbought/oversold indicators provide objective evidence that an investment has likely moved too far and too fast in one direction. Typically, these indicators provide a warning that the price direction will likely reverse soon. Thus, it provides a potential leading indicator of changes in trend. This can be very helpful in planning future trades. Generally, it is wise to buy oversold situations and short overbought situations. But it is usually best to wait for some follow-through in MACD, since investments can sometimes stay overbought or oversold longer than you think (and longer than you can remain solvent). Also, it is worth noting that oversold signals usually work better than overbought signals, as the emotion of fear that drives an investment into oversold territory is usually more powerful than the emotion of greed that drives an investment into overbought territory. Daily RSI is similar to Monthly RSI, but is much more sensitive and provides more frequent and shorter-term signals.

Daily Stochastics Overbought/Oversold — Stochastics is an oscillator ranging from 0 to 100. Values below 20 are considered oversold and are usually a positive near-term signal, values above 80 are considered overbought and are usually a negative near-term signal, while values in between are neutral. Overbought/oversold indicators provide objective evidence that an investment has likely moved too far and too fast in one direction. Typically, these indicators provide a warning that the price direction will likely reverse soon. Thus, it provides a potential leading indicator of changes in trend. This can be very helpful in planning future trades. Generally, it is wise to buy oversold situations and short overbought situations. But it is usually best to wait for some follow-through in MACD, since investments can sometimes stay overbought or oversold longer than you think (and longer than you can remain solvent). Also, it is worth noting that oversold signals usually work better than overbought signals, as the emotion of fear that drives an investment into oversold territory is usually more powerful than the emotion of greed that drives an investment into overbought territory. Daily Stochastics is similar to Daily RSI, but is much more sensitive and provides more frequent and shorter-term signals.

Debt Outstanding Growth — As with bank credit, growth in total debt of non-financial sectors tends to slow heading into and during a recession, and then reaccelerates in a recovery on lower interest rates and improving confidence.

Delinquency Rate on Loans — This is the percentage of commercial and industrial loans that are past due thirty days or more. Delinquency rates increase during economic “busts” and decrease during economic “booms”. This is consistent with Austrian Business Cycle Theory, as loans taken out during the artificial boom phase of the business cycle are not sustainable since the borrowed capital is wasted on malinvestments.

Dividend Yield — This is the dollar amount of annual dividends per share (i.e., cash payments from a company to its shareholders) divided by the current stock price for an individual stock or ETF. High dividend yields, and ideally rising dividend yields, are usually desirable characteristics in a stock or ETF.

Dow Theory: DJIA and DJ Transportation — The “Dow Theory” was developed over 100 years ago by Charles Dow, then editor of The Wall Street Journal. For this indicator, an uptrend signal occurs when both the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average reach a higher high within a close period of time. A signal confirming a downtrend occurs when both Averages reach a lower low within a close period of time. Divergences, where the two indexes diverge from each other in terms of near-term highs and lows, signal a potential change in trend.

Economic Indicators — Economic indicators are helpful in gaining greater conviction on the fundamental backdrop that will influence investment prices going forward. However, technical indicators always trump economic indicators for practical investment purposes, because investment prices do not always follow the economy as one would expect. For example, there have been stock bull markets during recessions and bear markets during periods of expansion. Also, financial markets, particularly stock markets, typically lead the economy. Economic indicators that point toward economic growth and expansion are usually positive for stock, REIT and commodity prices, while those that point toward an economic slowdown and recession are usually negative for those investment prices.

ECRI Coincident Index — The Economic Cycle Research Institute, or “ECRI”, calculates and analyzes numerous leading economic indicators for most major economies around the world. Their track record in predicting recessions, recoveries and inflation is the best of any major forecasting institution. ECRI’s index of coincident economic activity is one of the most authoritative measures of the current state of the economy.

ECRI Future Inflation Gauge — The Economic Cycle Research Institute, or “ECRI”, calculates and analyzes numerous leading economic indicators for most major economies around the world. Their track record in predicting recessions, recoveries and inflation is the best of any major forecasting institution. ECRI’s Future Inflation Gauge is a leading indicator of inflation. Inflation tends to peak at the end of an expansionary boom and trough during a recession.

ECRI Public Forecast — The Economic Cycle Research Institute, or “ECRI”, calculates and analyzes numerous leading economic indicators for most major economies around the world. Their track record in predicting recessions, recoveries and inflation is the best of any major forecasting institution. On their website at www.businesscycle.com, they provide interviews and articles sharing their current economic outlook with the public (with a delay after sharing their views in more detail with their limited number of paying clients, which includes large investment firms and corporations). We refer to this commentary as their “Public Forecast”.

ECRI Weekly Leading Index — The Economic Cycle Research Institute, or “ECRI”, calculates and analyzes numerous leading economic indicators for most major economies around the world. Their track record in predicting recessions, recoveries and inflation is the best of any major forecasting institution. ECRI’s US Weekly Leading Index usually leads the economy by six or more months. It is highly correlated to the US stock market, so divergences are important to watch.

Elliott Wave Theory — Elliott Wave Theory is an interesting form of technical analysis based on chart patterns. It argues that bull markets typically move in patterns of five waves up, followed by a correction of three waves down, while bear markets typically move in patterns of five waves down, followed by a correction of three waves up. While Elliott Wave Theory is helpful in putting chart patterns in context, it is very difficult for even highly experienced Elliott Wave practitioners to invest successfully based on these patterns since they are not always reliable and they occur at all time levels, from short-term daily patterns to long-term patterns lasting centuries. That makes it very difficult to determine the significance of chart patterns in real time, but it can be useful in looking back at history. 

Employment Growth — Employment growth slows heading into a recession and turns negative during a recession, as the unsustainable boom in investment spending turns into a bust. Employment growth rises in an economic recovery. Involuntary unemployment would be short-lived in a free market society without interferences in the labor market (such as minimum wage laws, pro-union laws allowing unions to use force, unemployment insurance, etc.) and without business cycles caused by central bank and fractional reserve bank money creation.

EPS Estimate Revisions — This is the change in earnings per share or “EPS” (i.e., net income divided by the number of shares of a company) estimates for a stock. Positive estimate revisions are typically a key characteristic of outperforming stocks, while negative revisions are typically a key characteristic of underperforming stocks.

EPS Growth — This is the year-over-year growth rate in earnings per share or “EPS” of a company (i.e., net income divided by the number of shares of a company). Rapid and/or accelerating EPS growth is typically a key characteristic of outperforming stocks, while decelerating or declining EPS growth is typically a key characteristic of underperforming stocks.

EPS Surprise — This is the amount or percentage by which reported quarterly earnings per share or “EPS” (i.e., net income divided by the number of shares of a company) exceeded the consensus estimate of EPS. Positive EPS surprises are typically a key characteristic of outperforming stocks, while negative EPS surprises are typically a key characteristic of underperforming stocks.

ETF Expense Ratio — This is the ratio of the expenses of an Exchange Traded Fund or ETF (for management, advertising, etc.) divided by the amount of assets in the fund. The lower the expense ratio, the better for investors, since those expenses reduce the returns of the fund.

Eurozone Manufacturing PMI — Similar to the Markit US Manufacturing PMI, the Markit Eurozone Manufacturing PMI is a measure of manufacturing activity in the Eurozone. Numbers above 50 indicate expansion, while numbers below 50 indicate contraction.

Eurozone Money Supply Growth – M1 — M1 money supply growth in the Eurozone by the European Central Bank. See discussion of US M1 growth in “Money Supply Growth -- M1”.

Eurozone OECD Leading Economic Indicators — Eurozone monthly leading economic indicators produced by the Organization for Economic Co-operation and Development (OECD). This typically leads growth for the Eurozone around its trend line by about six months.

Exchange Traded Fund (ETF) — An Exchange Traded Fund or “ETF” is an investment fund, similar to a mutual fund, but it trades on a stock exchange like a traditional stock. As with traditional stocks, they can be traded throughout the day and can utilize stop-loss and good ‘til canceled orders. ETFs can invest in US and international stocks, bonds, REITs, commodities, currencies and other investment choices. ETFs can offer a low cost and tax efficient way to get exposure to a wide variety of investment markets. There are also ETFs that use derivatives to mimic short and levered long and short positions in an asset.

Extended from 250-Day MA — If the price of a stock or ETF is about 10% or more below its 250-day moving average (MA), it is considered overextended to the downside which is a positive near-term signal. If the price is about 10% or more above the 250-day MA, it is considered overextended to the upside and is a negative near-term signal. If it is within 10% of the 250-day MA, it is a neutral signal. Investment prices usually do not become too extended above or below the 250-day MA for long periods of time. They usually “come back to earth” at some point. Thus, it is generally riskier to buy an investment when the price is extended well above the 250-day MA and to short an investment when it is extended well below the 250-day MA.

Federal Funds Rate — The Federal (or Fed) Funds Rate is the overnight interest rate banks charge to lend to each other, using their reserves held at the Fed. The Federal Reserve targets this interest rate by creating or destroying money, usually by buying or selling Treasury securities. “Tighter” monetary policy (usually by the Fed taking money out of the economy by selling Treasury securities) drives lower money supply growth and a rising Federal Funds Rate. This usually leads to recessions. “Easier” monetary policy (usually by the Fed adding money to the economy by buying Treasury securities) drives faster money supply growth and a falling Fed Funds Rate. This usually leads to economic “recoveries” coming out of Fed-created recessions (although they are always unsustainable, as explained by Austrian Business Cycle Theory) and price inflation.

Fibonacci Retracement Levels — Italian mathematician Leonardo Pisano, also known as Leonardo Fibonacci, introduced the Fibonacci sequence of numbers in the 13th century. Every number is the sum of the two numbers before it, so the sequence starts with these numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144. In technical analysis, common ratios of numbers from this sequence are used to determine potential price retracement levels of a bullish or bearish trend, since these are typical percentage retracements due to human psychology and behavior. These Fibonacci ratios are 0%, 23.6%, 38.2%, 50%, 61.8%, and 100%. The start of the retracement is 0%, halfway is 50% and 100% is a complete reversal of move. The 23.6% is calculated by dividing one number by a number three places to the right, the 38.2% is calculated by dividing one number by a number two places to the right and the 61.8% is calculated by dividing one number by a number one place to the right.

Financial Stress Index — This index constructed by the St. Louis Fed includes 18 weekly indicators of “financial stress”, including various interest rates, yield spreads, volatility measures, etc. Financial stress both signals and causes weaker economic conditions, as tighter financial conditions lead to higher capital costs, which leads to less investment and lower economic growth. Lower financial stress leads to easier financial conditions, lower capital costs, rising investment spending and economic expansion.

Free Cash Flow — Free cash flow is the cash generated by a company in a given period. It is typically calculated as Cash Flow From Operations (Net Income Plus Depreciation and Other Noncash Expenses) Less Capital Expenditures and Changes In Net Working Capital. Highly positive and growing free cash flow is typically a key characteristics of stocks that outperform, while weakening or negative free cash flow is typically a key characteristic of stocks that underperform.

Global Manufacturing PMI — This is JP Morgan’s composite of Purchasing Manager Indexes (PMIs) from around the world. This is a short leading indicator of global industrial production. Levels above 50 signal expansion, while levels below 50 signal contraction.

Global OECD Leading Economic Indicators — Global monthly leading indicators produced by the Organization for Economic Co-operation and Development (OECD). This typically leads growth for the global economy around its trend line by about six months.

Global Stock Prices — Global stock prices tend to fall a few months ahead of a recession due to declining profits and higher risk premiums. Conversely, global stock prices tend to rise a few months ahead of an economic recovery due to improving profits and lower risk premiums. Stocks in major countries tend to fall together during major recessions and bear markets and rise together during major recoveries and bull markets.

Global Stocks ETF — A good low cost ETF for global stocks is the Vanguard Total World Stock ETF (ticker: VT). It represents the “world stock market” of developed and emerging market stocks. This ETF tracks the FTSE All World Index, which is comprised of roughly 2800 stocks in 47 countries. Regional weightings are roughly 47% North America, 3% South America, 28% Europe and 22% Asia, with 11% in emerging markets. The VT ETF has an annual expense ratio of 0.25% and annual turnover in its holdings of 7%. Stocks tend to perform well during economic recoveries and expansions and poorly during economic slowdowns and recessions. While we generally prefer to buy those segments of the global stock market (e.g., US Small Caps, Emerging Markets, etc.) which appear likely to offer higher returns than VT, investors who want to limit the number of ETFs they invest in can often use VT to cover the stock market portion of their portfolio.

Gross Private Domestic Investment Growth — This is the growth in total private investment used in the US GDP calculation. It includes non-residential and residential replacement purchases, as well as net additions to capital assets and investments in inventories. Since investment spending is sensitive to interest rates and money creation, this indicator tends to fall heading into a recession and rise in a recovery. Austrian Business Cycle Theory explains how lower interest rates and money creation by central banks and fractional reserve banks causes malinvestment unbacked by real savings during the boom phase of the business cycle. Then higher interest rates from less money creation leads to the liquidation of this unsustainable investment spending during the “bust” phase of the business cycle.

High Yield Bonds Above/(Below) 250-Day MA — The SPDR High Yield Bond ETF (ticker: JNK) seeks to match the performance of the Barclays High Yield Very Liquid Index. High yield bonds are risky corporate bonds with low credit ratings that are very sensitive to the boom and bust business cycle. If the SPDR High Yield Bond ETF is trading above its 250-day moving average (MA), it is considered to be in a long-term uptrend and is a positive signal. If it is trading roughly inline with its 250-day MA, it is neutral. If it is trading below its 250-day MA, it is considered to be in a long-term downtrend and is a negative signal.

High Yield Corporate Bond Spreads — This is the BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread (OAS). It tracks the interest rate spreads between a computed OAS index of all bonds below investment grade (those rated BB or below) and Treasury Bond rates. Higher bond spreads both signal and cause weaker economic conditions, as tighter financial conditions lead to higher capital costs, which leads to less investment and lower economic growth. Narrower bond spreads lead to easier financial conditions, lower capital costs, rising investment spending and economic expansion.

High Yield Emerging Market Bond Spreads — This is the BofA Merrill Lynch High Yield Emerging Markets Option-Adjusted Spread (OAS). It tracks the interest rate spreads between a computed OAS index of all bonds below investment grade (those rated BB or below) in Emerging Markets and corresponding Treasury Bond rates. Higher bond spreads both signal and cause weaker economic conditions, as tighter financial conditions lead to higher capital costs, which leads to less investment and lower economic growth. Narrower bond spreads lead to easier financial conditions, lower capital costs, rising investment spending and economic expansion.

Housing Starts and Permits Growth — Housing starts and permits growth, like other long-term investments driven by monetary and interest rate manipulation, tends to fall heading into recessions and rise in recoveries.

Industrial Production Index Growth — The Industrial Production Index measures the amount of output in the manufacturing, mining and utilities industries. Industrial production falls in a recession and rises in a recovery.

Initial Unemployment Claims — This is the four-week moving average of the weekly initial unemployment insurance claims. It tends to lead other employment indicators. Unemployment increases during the “bust” phase of the business cycle as companies cut costs and liquidate malinvestments incurred during the “boom” phase of the business cycle. Lower employment leads to less production of goods and services and lower standards of living. Employment increases in an economic recovery. 

International Stock Prices — International stock prices tend to fall a few months ahead of a recession due to declining profits and higher risk premiums. Conversely, international stock prices tend to rise a few months ahead of an economic recovery due to improving profits and lower risk premiums. Stocks in major countries tend to fall together during major recessions and bear markets and rise together during major recoveries and bull markets.

International Stocks – EAFE — A good low cost ETF for developed market stocks is the Vanguard FTSE Developed Market ETF (ticker: VEA). The VEA ETF tracks the MSCI EAFE Index, which includes large cap stocks in Europe, Australasia and the Far East. It is comprised of 970 stocks in 22 countries. Europe is 64% and Asia is 35% (Japan is 21% and Australia is 9%). It has an annual expense ratio of 0.12% and annual turnover in its holdings of 6%.

International Stocks – EAFE (short) — A good ETF for shorting developed market stocks is the ProShares Short MSCI EAFE ETF (ticker: EFZ). EFZ mimics a short position in the MSCI EAFE Index. It has an annual expense ratio of 0.95%

International Stocks – Emerging Markets — A good low cost ETF for emerging market stocks is the Vanguard FTSE Emerging Markets ETF (ticker: VWO). The VWO ETF tracks the MSCI Emerging Market Index of 750 companies in less developed countries. Asia is 58% (China is 16% and Taiwan is 11%), Latin America is 20% (Brazil is 13%), Europe is 14% (Russia is 7%) and Africa is 6%. It has an annual expense ratio of 0.22% and annual turnover in its holdings of 12%.

International Stocks – Emerging Markets (short) — A good ETF for shorting emerging market stocks is the ProShares Short MSCI Emerging Markets ETF (ticker: EUM). EUM mimics a short position in the MSCI Emerging Markets Index. It has an annual expense ratio of 0.95%.

International Stocks – Small Cap — A good low cost ETF for international small cap stocks is the Vanguard FTSE All-World ex-US Small Cap ETF (ticker: VSS). The VSS ETF tracks the FTSE All-World ex US Index of 3000 Small Cap stocks in 44 countries. It is 44% Europe, 38% Asia, 13% North America and 3% Latin America. It has an annual expense ratio of 0.33% and annual turnover in its holdings of 19%.

Inverse ETF — This is an Exchange Traded Fund (ETF) that uses derivatives such as futures and options to mimic a short position in a given asset. It will increase in price when the price of the underlying asset falls and will decrease in price when the price of the underlying asset increases. These can be useful in trying to profit from a bear market price trend. As with traditional “long” ETFs, there are also levered inverse ETFs that can provide returns that are double or triple the returns from a regular short position.

Investment less Consumption Growth — This is Gross Private Domestic Investment less Personal Consumption Expenditures. Since investment spending tends to be more sensitive to interest rates and money creation, as explained by Austrian Business Cycle Theory, this indicator tends to fall heading into a recession and rise in a recovery.

Investor Sentiment — We gauge investor sentiment primarily by using the American Association of Individual Investors sentiment survey, the National Association of Active Investment Managers survey and the Commitments of Traders futures positioning. Bearish investor sentiment is a positive contrarian indicator and bullish investor sentiment is a negative contrarian indicator. American Association of Individual Investors sentiment survey: When the Bull:Bear Ratio of this survey of individual investors is above 1.60, it is contrarian bearish. When it is below 1.10, it is contrarian bullish. National Association of Active Investment Managers survey of management sentiment: When the stock market exposure in this survey of investment managers is above 80%, it is contrarian bearish. When it is below 50%, it is contrarian bullish. Commitments of Traders futures positioning: When Large Speculators are very long S&P 500 futures and Commercials are very short, that is contrarian bearish. When Large Speculators are very short S&P 500 futures and Commercials are very long, that is contrarian bullish.

Levered ETF — This is an Exchange Traded Fund (ETF) that uses derivatives such as futures and options to magnify returns to double or triple a normal long or short position in a given asset. For example, an ETF levered +2x long on the S&P 500 would typically increase 2% in price on a day when the S&P 500 is up 1% in price. These ETFs can be useful in trying to increase profits when you are confident in a bull or bear market price trend. Of course, caution should be used with levered ETFs since leverage works both ways -- up and down.

Loan Demand — Loan demand can be determined by the net percentage of banks reporting stronger demand for commercial loans from large and medium firms, as reported in the quarterly Federal Reserve Senior Loan Officer Opinion Survey. Usually when the percentage falls below zero, it leads to a recession within a year or two. When it rises during a recession, it tends to lead to a recovery. 

Long-Term Returns — “Long-Term Returns” are the likely total returns (dividends plus price appreciation) that can be expected from an investment over the coming 10 years or so. Obviously, with such a long time horizon, it is impossible to forecast returns with perfect accuracy. However, it is helpful to have some reasonable expectations of long-term returns when investing. These return estimates are all before taxes, so your net after-tax returns in taxable accounts will be considerably less, depending on your tax bracket. 

Here is the general formula we use for estimating the Long-Term Returns of an investment: Yield + Growth + Value Change = Nominal Long-Term Returns – Long-Term Inflation = Real Long-Term Returns. 

Yield is the current income an investment provides divided by its price. For Stocks and REITs, it is the dividend yield. For Commodities, there is no income and no Current Yield. As a result, Commodities are the most difficult investments to estimate Long-Term Returns for, since the entire return is generated by future prices. For Bonds, Current Yield is the interest income yield. Bonds are generally the easiest investments to estimate Long-Term Returns for, since fixed income yields are directly observable and do not change and the principal amount is known.

Growth is the estimated long-term annual increase in dividends. The Growth estimate for a) Stocks is the historical dividend growth rate of 2% above inflation, since companies invest capital to grow, b) REITs is the historical dividend growth rate of 2% below inflation, since REITs must pay out their earnings as dividends and cannot invest retained earnings to grow, c) Commodities is zero, since they do not pay dividends or interest and d) Bonds is zero, since the Yield is the total long-term return for bonds to maturity. 

Value Change is the most difficult variable to estimate in this equation. The Value estimate for Stocks and REITs is based on the following formula for calculating Nominal Long Term Returns: (1 + dividend growth) x (original yield / terminal yield) ^ (1 / number of years) - 1 + (original yield + terminal yield) / 2.

This Value formula has been very accurate historically in forecasting Nominal returns for the S&P 500 and US REITs in the past. The terminal yield for Stocks is the historical average yield of the S&P 500 of 4% and the terminal yield for REITs is the historical average yield of US REITs of 6%. The number of years is 10. Note that the Real return of the S&P 500 is generally consistent with the current Shiller P/E ratio. The Value estimate for Commodities is based on our assessment on whether they are in a secular bull or bear market, so it is highly subjective. The Value estimate for Bonds is zero, since the Yield is the total long-term return for Bonds (if the bond is held to maturity).

Nominal Long-Term Returns are the total expected returns including inflation.

Long-Term Inflation is the long-term expected inflation rate based on history and inflation expectations. It has averaged about 4% since WWII, but could be higher going forward given the explicitly inflationary policies of central banks. Or it could be lower if we have a deflationary depression like the 1930s, which is possible given the extreme amounts of leverage in the global financial system.

Real Long-Term Returns are the total expected returns after inflation. Investments in Secular Bull Markets tend to generate above average annual real returns (usually 5-10% or more), while investments in Secular Bear Markets tend to have subpar annual real returns below 5%.

While actual results will likely differ somewhat from these estimates (particularly for NASDAQ 100, US Small Cap and International Stocks and REITs, for which it is more difficult to estimate dividend growth and historical yields, as well as commodities), we believe these estimates are more reasonable than the typical assumption that historical results will continue forever in the future, regardless of valuation levels, or are based on faulty measures that have not worked in the past, such as the “Fed model”.

LT Government Bonds – International — A good ETF for international bonds is the SPDR Bloomberg Barclays International Treasury Bond ETF (ticker: BWX). The BWX ETF tracks the Barclays Capital Global Treasury ex US Capped Index of International Treasury Bonds. International investments such as this are particularly attractive when the US dollar is weak. It has an annual expense ratio of 0.50% and annual turnover in its holdings of 80%. 

LT Government Bonds – US — A good low cost ETF for long-term US government bonds is the Vanguard Long-Term Treasury ETF (ticker: VGLT). The VGLT ETF tracks the Barclays Capital US Long Government Float Adjusted Index of US Treasury Bonds, with bond maturities of 10+ years. Long-term bond prices rise when interest rates fall and vice versa. Bond prices usually rise (and interest rates fall) during periods of economic weakness (particularly recessions/depressions) and lower inflation, unless investors are worried about debt repayment. Bond prices tend to be less volatile than Stock, REIT and Commodity prices, so we tend to favor those more volatile (and higher potential return) investments, except during periods of economic weakness. VGLT has an annual expense ratio of 0.15% and annual turnover in its holdings of 94%.

LT Government Bonds – US (short) — A good ETF for shorting long-term US government bonds is the ProShares Short 20+ Year Treasury ETF (ticker: TBF). TBF mimics a short position in the Barclays Capital 20+ Year US Treasury Bond Index. It has an annual expense ratio of 0.95%.

Manufacturers’ New Order Growth — This is growth in manufacturers’ new orders for non-defense capital goods excluding aircraft. New orders typically slow heading into a recession and rebound in a recovery. New orders lead industrial production, which drives the business cycle.

Manufacturing Capacity Utilization — This is the percentage of the nation’s productive factories, mines and utilities that are in use. Utilization typically falls heading into a recession and rises in a recovery.

Market Capitalization — This is the total dollar value of a company’s or ETF’s shares. It is calculated as the share price times the number of shares outstanding. Typically, the higher market capitalization of an ETF the better, since it leads to higher trading liquidity and lower expenses.

Money Supply Growth – Austrian — This measure of “Austrian” money supply is calculated as M2 (which is demand deposits and savings accounts, as well as travelers checks, small time deposits and money market funds) less travelers checks, small time deposits and money market funds. This is a more theoretically correct definition of money supply than simple M1 or M2, because it only includes money that can be spent immediately on demand without being converted into money. Austrian money supply growth tends to lead the business cycle by about a year. Declining money supply growth generally causes recessions, stock bear markets and disinflation/deflation, while rapidly rising money supply growth generally causes unsustainable booms, stock bull markets and inflation.

Money Supply Growth – M1 — This is growth in US M1 money supply. M1 is an official money supply measure defined as currency plus demand deposits (checking accounts) at banks plus travelers checks. M1 growth tends to lead the business cycle by about a year. Declining M1 growth generally leads to recessions, stock bear markets and disinflation/deflation, while rapidly rising M1 generally leads to unsustainable booms, stock bull markets and inflation. 

Money Supply Growth – M2 — This is growth in US M2 money supply. M2 is an official money supply measure defined as M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions and (2) balances in retail money market funds less IRA and Keogh balances at money market funds. M2 growth tends to lead the business cycle by about a year. Declining M2 growth generally leads to recessions, stock bear markets and disinflation/deflation, while rapidly rising M2 generally leads to unsustainable booms, stock bull markets and inflation. 

Money Supply Growth – Monetary Base — The Monetary Base is defined as currency plus commercial bank reserves at the Federal Reserve (the “Fed”). The Fed directly controls the monetary base by creating and destroying money, usually by buying and selling Treasury securities. By manipulating the money supply and interest rates, the Fed is the primary cause of the boom and bust business cycle, as explained by the Austrian Business Cycle Theory developed by Austrian School economists Ludwig von Mises, F.A. Hayek, Murray N. Rothbard and others. Thus, the Monetary Base is usually one of the most important indicators for identifying future economic conditions. Slower growth (or contraction) in the Monetary Base usually causes recessions, stock bear markets and disinflation/deflation, while faster Monetary Base growth usually causes unsustainable booms, stock bull markets and inflation. In normal times, Monetary Base growth tends to lead the business cycle by about a year. However, when banks are parking their excess reserves at the Fed instead of lending, the Monetary Base may be a less useful indicator.

Monthly MACD Positive/(Negative) — MACD stands for Moving Average Convergence/Divergence. For the monthly MACD, the MACD Line (the black line in stockcharts.com charts) is the 12-month exponential moving average (“EMA”; EMA differ from simple moving averages [“SMA”] by giving greater weight to recent prices) less the 26-month EMA. The Signal Line (the red line in stockcharts.com charts) is the 9-month EMA of the MACD line. The MACD Histogram is the MACD Line less the Signal Line, so the Histogram is positive when the MACD Line is above the Signal Line and negative when the MACD Line is below the Signal Line. By comparing moving averages, MACD displays trend following characteristics, and by plotting the difference of the moving averages as an oscillator, MACD displays momentum characteristics. If the monthly MACD Line is above 0, it is considered to be in a long-term uptrend and is a positive signal. If it is roughly 0, it is neutral. If it is below 0, it is considered to be in a long-term downtrend and is a negative signal. 

Monthly MACD Trending Up/(Down) — MACD stands for Moving Average Convergence/Divergence. The monthly MACD Line (the black line in stockcharts.com charts) is the 12-month exponential moving average (“EMA”; EMA differ from simple moving averages [“SMA”] by giving greater weight to recent prices) less the 26-month EMA. The Signal Line (the red line in stockcharts.com charts) is the 9-month EMA of the MACD line. The MACD Histogram is the MACD Line less the Signal Line, so the Histogram is positive when the MACD Line is above the Signal Line and negative when the MACD Line is below the Signal Line. By comparing moving averages, MACD displays trend following characteristics, and by plotting the difference of the moving averages as an oscillator, MACD displays momentum characteristics. If the monthly MACD Line is trending up above the monthly Signal Line (i.e., the Histogram is positive), it is a signal of a positive long-term price trend. If it is trending flat with the Signal Line, it is a neutral signal. If it is trending down below the Signal Line, it is a signal of a negative long-term price trend. This indicator is very useful identifying the longer-term trend.

Monthly RSI Overbought/Oversold — Relative Strength Index (RSI) is an oscillator ranging from 0 to 100. Values below 30 are considered oversold and are usually a positive near-term signal, values above 70 are considered overbought and are usually a negative near-term signal, while values in between are neutral. Overbought/oversold indicators provide objective evidence that an investment has likely moved too far and too fast in one direction. Typically, these indicators provide a warning that the price direction will likely reverse soon. Thus, it provides a potential leading indicator of changes in trend. This can be very helpful in planning future trades. Generally, it is wise to buy oversold situations and short overbought situations. But it is usually best to wait for some follow-through in MACD, since investments can sometimes stay overbought or oversold longer than you think (and longer than you can remain solvent). Also, it is worth noting that oversold signals usually work better than overbought signals, as the emotion of fear that drives an investment into oversold territory is usually more powerful than the emotion of greed that drives an investment into overbought territory. Monthly RSI is a good long-term overbought or oversold indicator.

NASDAQ Advance-Decline Volume — This breadth indicator is the cumulative daily volume of advancing (rising) stocks less declining (falling) stocks on the NASDAQ. Generally, when the Advance-Decline line is over the 250-dma, it is a positive signal, when it is at the 250-dma, it is neutral and when it is below the 250-dma, it is a negative signal.

NASDAQ Bullish Percent Index — This is the percentage of stocks on the NASDAQ that are trading on Point & Figure buy signals. Point & Figure charts show rising price trends in a column with X’s and falling price trends in a column with O’s. A Point & Figure buy signal occurs when a column of X’s exceeds the prior column of X’s. This is another very good indicator of market breadth. When the Bullish Percent Index is over 70%, it is a positive signal, when it is between 30% and 70%, it is neutral and when it is under 30%, it is a negative signal.

NASDAQ New Highs-New Lows — This is the cumulative number of NASDAQ stocks hitting new 52-week highs less the number hitting new 52-week lows. When it is above the 250-dma, it is a positive signal, when it is at the 250-dma, it is neutral and when it is below the 250-dma, it is a negative signal.

NASDAQ Percent Stocks > 200-Day MA — This is the percentage of NASDAQ stocks trading above their 200-day moving average. This is one of the best indicators of market breadth, as it shows the percentage of stocks in a general uptrend or downtrend. When it is over 70%, it is a positive signal, when it is between 30% and 70%, it is neutral and when it is under 30%, it is a negative signal.

NASDAQ Record High Percent Index — This breadth indicator is the ratio of NASDAQ stocks hitting a new 52-week high divided by the sum of the number of stocks hitting a new 52-week high and the number of stocks hitting a new 52-week low. We use the 50-day moving average of this statistic to reduce volatility and generate meaningful signals for longer-term investing. When the ratio is over 70%, it is a positive signal, when it is between 30% and 70%, it is neutral and when it is under 30%, it is a negative signal.

NASDAQ Summation Index — This is the cumulative sum of all daily McClellan Oscillator readings on the NASDAQ, which is a measure of market breadth based on “net advances”, which is the number of advancing issues less the number of declining issues. Generally, when it is above 0, it is a positive signal and when it is below 0, it is a negative signal and when it is near 0, it is neutral.

Net Worth Growth — Net worth (assets less liabilities) growth tends to fall heading into a recession as house and stock prices fall and debt rises. It then rises in a recovery as asset prices rise and debt is paid down.

November-April or May-October — According to the annual Stock Trader’s Almanac, from 1950 to 2016 the average gain in the Dow Jones Industrial Average from May to October was only 0.4%, while the average gain from November to April was 7.6%. If we are in the favorable seasonal period for the stock market of November to April, it is a positive factor. If we are in the unfavorable May to October period, it is a negative factor.

NYSE Advance-Decline Volume — This is the cumulative daily volume of advancing stocks less declining stocks on the NYSE. This is another good indicator of market breadth. Generally, when the Advance-Decline line is over the 250-day MA, it is a positive signal, when it is at the 250-day MA, it is neutral and when it is below the 250-day MA, it is a negative signal.

NYSE Bullish Percent Index — This is the percentage of stocks on the New York Stock Exchange (NYSE) that are trading on Point & Figure buy signals. Point & Figure charts show rising price trends in a column with X’s and falling price trends in a column with O’s. A Point & Figure buy signal occurs when a column of X’s exceeds the prior column of X’s. This is another very good indicator of market breadth. When the Bullish Percent Index is over 70%, it is a positive signal, when it is between 30% and 70%, it is neutral and when it is under 30%, it is a negative signal.

NYSE New Highs-New Lows — This is the cumulative number of NYSE stocks hitting new 52-week highs less the number hitting new 52-week lows. When it is above the 250-dma, it is a positive signal, when it is at the 250-dma, it is neutral and when it is below the 250-dma, it is a negative signal.

NYSE Percent Stocks > 200-Day MA — This is the percentage of NYSE stocks trading above their 200-day moving average. This is one of the best indicators of market breadth, which shows the percentage of stocks in an uptrend or downtrend. When it is over 70%, it is a positive signal, when it is between 30% and 70%, it is neutral and when it is under 30%, it is a negative signal.

NYSE Record High Percent Index — This is the ratio of NYSE stocks hitting a new 52-week high divided by the sum of the number of stocks hitting a new 52-week high and the number of stocks hitting a new 52-week low. We use the 50-day moving average of this statistic to reduce volatility and generate meaningful signals for longer-term investing. When the ratio is over 70%, it is a positive signal, when it is between 30% and 70%, it is neutral and when it is under 30%, it is a negative signal.

NYSE Summation Index — This is the cumulative sum of all daily McClellan Oscillator readings on the NYSE, which is a measure of market breadth based on “net advances”, which is the number of advancing issues less the number of declining issues. Generally, when it is above 0, it is a positive signal, when it is below 0, it is a negative signal and when it is near 0, it is neutral.

On Balance Volume — On Balance Volume (OBV) is the cumulative total of volume additions and subtractions. Volume is added when prices rise and subtracted when prices fall. Since volume typically precedes price, rising OBV is a bullish indicator, while falling OBV is a bearish indicator.

Operating Profit Margins — Operating Profit Margins are calculated as Operating Profits (Revenues Less Operating Expenses or Earnings Before Interest and Taxes) divided by Revenues.  Rising Operating Profit Margins are typically a key characteristic of outperforming stocks, while falling Operating Profit Margins are typically a key characteristic of underperforming stocks.

Percentage Price Oscillator (PPO) — The Percentage Price Oscillator (PPO) is a momentum oscillator that measures the difference between two exponential moving averages (EMAs) as a percentage of the larger moving average, usually the 12 and 26 period EMAs. It is shown with a Signal line, which is usually the 9 period EMA of the PPO.  When the PPO is above the Signal line, it shows bullish near-term price momentum. When the PPO is below the Signal line, it shows bearish near-term price momentum. PPO is similar to MACD, but it is more useful since the PPO is not subject to the price level of the security, which allows securities with very different price levels to be compared.

Philadelphia Fed US Leading Index — The leading index from the Philadelphia Federal Reserve predicts the six-month growth rate of their coincident economic index. It includes housing permits (1 to 4 units), initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill. This index typically falls below 1% heading into a recession and rises above 1% in a recovery.

Price/Earnings Ratio — The Price/Earnings (P/E) Ratio of a stock is calculated as the Price of the stock divided by its earnings per share or EPS. It is a common, albeit somewhat crude, measure of the valuation of a stock. Lower P/E Ratios are typically preferable to higher P/E Ratios, but more important than valuation is the fundamental operating performance and technical picture of a stock.

Put/Call Ratio — This is the ratio of the total number of put options divided by the total number of call options, based on CBOE data. Generally, when it is above 1.1, it is a positive signal, when it is below 0.9, it is a negative signal and when it is between 0.9 and 1.1, it is neutral. For example, when there is heavy call buying relative to put buying, that signals investors are very bullish. This is a contrarian bearish signal, since the crowd is rarely right at extremes in sentiment. In this case, since all those who want to buy have likely already done so, a limited amount of selling can lead to meaningful price declines since buying power has already been exhausted. Conversely, when there is heavy put buying relative to call buying, that signals investors are very bearish. This is a contrarian bullish signal. We look at both the Total Put/Call Ratio, which includes index options as well as individual stock options, and the Equity Put/Call Ratio, which looks just at individual stock options. This provides a complete picture of the sentiment of option traders. We use the 100-day moving average of this statistic to reduce volatility and generate meaningful signals for longer-term investing.

Real GDI Growth — This is growth in Gross Domestic Income (GDI) adjusted for inflation. GDI measures economic activity based on all of the money earned for all of the goods and services produced in the nation during a specific period. GDI is the sum of all sources of income, including wages, profits and taxes, while GDP is the sum of the value of all goods and services produced. Real GDI and Real GDP should theoretically result in the same numbers, but due to differences in data sources and statistical estimation methods, there can be divergences which are important to monitor. When real GDI growth falls below 1.6%, it often signals an oncoming recession. However, various leading indicators usually provide signals much earlier.

Real GDP Growth — This is growth in Gross Domestic Product (GDP) adjusted for inflation. GDP is the sum of spending on final goods and services for Consumption, Investment, Government and Net Exports (Exports less Imports). This is a very crude and flawed measure of the economy, particularly since it views higher government spending as contributing to economic well-being, even though virtually all government spending harms economic growth and living standards, including regulations, wars, welfare payments and unemployment subsidies that discourage productive work, savings and investment. It also overstates the importance of consumer spending on the economy (as the media often notes that consumer spending is 70% of GDP), since production is the real driver of improving living standards and economic growth, as well as the boom-bust business cycle. However, it can serve as a useful coincident indicator. When real GDP growth falls below 1.6%, it often signals an oncoming recession. However, various leading indicators usually provide signals much earlier.

Real Manufacturing and Trade Sales Growth — This is inflation adjusted sales growth for manufacturing, wholesale and retail trade. Growth in this metric usually slows heading into recession, turns negative during a recession and turns positive in a recovery. 

REITs – International — A good low cost ETF for international REITS is the Vanguard Global ex-US Real Estate ETF (ticker: VNQI). The VNQI ETF tracks the S&P Global ex US Property Index. International investments such as this are particularly attractive when the US dollar is weak. It has an annual expense ratio of 0.35% and annual turnover in its holdings of 14%. 

REITs – US — A good low cost ETF for US REITS is the Vanguard Real Estate ETF (ticker: VNQ). The VNQ ETF tracks the MSCI US REIT (Real Estate Investment Trust) Index. REITs tend to follow the business cycle like stocks, but have higher dividend yields and the correlation between REITs and stocks is only about 40%. It has an annual expense ratio of 0.12% and annual turnover in its holdings of 12%.

REITs – US (short) — A good ETF for shorting US REITs is the ProShares Short Real Estate ETF (ticker: TBF). REK mimics a short position in the DJ US Real Estate Index. It has an annual expense ratio of 0.95%.

Return On Equity — Return On Equity or “ROE” is calculated as annual Net Income divided by Shareholders Equity. This shows how much profit a business generates on the capital invested by shareholders. Rising ROE is typically a key characteristic of outperforming stocks, while falling ROE is typically a key characteristic of underperforming stocks.

Revenue Growth — This is the year over year growth rate of revenue. Accelerating revenue growth is typically a key characteristic of outperforming stocks, while decelerating revenue growth is typically a key characteristic of underperforming stocks.

Rydex Asset Ratio — The ratio of investor assets in all Rydex bear and money market funds (bearish positioning) compared to investor assets in all Rydex bull funds (bullish positioning).

Secular Bull and Bear Markets — Secular bull and bear markets can usually be identified by valuation levels (e.g., dividend yields, earnings yields, bond yields, relative prices). A secular bull market usually starts with low (attractive) valuation levels and rising prices lead to higher valuations over time, while a secular bear market usually starts with high (unattractive) valuation levels and falling prices lead to lower valuations over time. Low initial valuation levels, such as US stocks and bonds had in the early 1980s and gold had in the early 2000s, help cause secular bull markets as rising valuations over time lead to above-average returns. Similarly, high initial valuation levels, such as the US stock market had in 1929 and at the peak of the Tech Bubble in early 2000, cause secular bear markets, as falling valuations lead to below average returns over time. Secular stock bull markets tend to generate double-digit positive annual returns with relatively low volatility, while secular stock bear markets usually generate low single digit positive annual returns with higher volatility.

Selling Short — “Selling short” is selling an ETF or stock (or buying an ETF designed to mimic a short position in a traditional long ETF) in anticipation of profiting from a fall in the price.

Shiller P/E Ratio — This is the cyclically adjusted price to earnings (P/E) ratio of the S&P 500, based on the average inflation adjusted earnings of the past ten years. It is a useful measure of stock market valuations. High Shiller P/E Ratios typically lead to below average returns over time, while low Shiller P/E Ratios typically lead to above average returns over time.

Stop-Loss % Downside — This is the percentage downside risk from the current price of the stock or ETF if the stop-loss is triggered. We usually try to limit losses to 5-15%.

Stop-Loss Price — This is the price we generally recommend exiting the investment position to limit losses in case the investment does not work out as planned. Our recommended stop-loss prices will tend to limit losses to 5-15%. It is usually not based on a simple percentage amount, but rather is based on important technical support areas, such as the 60-day or 250-day moving average. The purpose of a stop-loss is to try to take the emotions out of a losing position and keep a small loss from becoming a large loss. We strongly advocate the use of stop-losses to minimize risk. Stop-losses can be set up with your brokerage firm to be automatically triggered when the stop-loss price is hit (which is ideal when you are traveling or otherwise unable to easily execute a trade) or you can use them as “mental” stop-losses if you are able to monitor your investments daily and keep your emotions in check, which is a very rare skill.

Technical Indicators — Technical indicators are used to determine trends and buy and sell decisions based on the price and volume action of a given ETF or stock. These are the most important indicators for investing for bull and bear profits, since economic indicators cannot tell us when to buy and sell each investment as precisely as technical indicators can. Technical indicators help identify the most promising investments at any given time, as well as help time buy and sell trades. This is based on the belief that “the tape tells all,” which means that significant fundamental and psychological investment information is embedded in price and volume action. As with leading economic indicators, it is important to remember that no single indicator works perfectly and on every occasion. Thus, we follow the “weight of the evidence” by looking at a collection of indicators. 

Trend Stage — We identify the price trend “stage” an investment is in, whether in a “bottoming” stage, “uptrend” stage, “topping” stage or “downtrend” stage. Ideally, you want to buy in the late “bottoming” stage or early “uptrend” stage and sell (and possibly short) in the late “topping” stage or early “downtrend” stage. This is one of the most subjective “indicators” we use and it can sometimes be difficult to assess, particularly the “bottoming” and “topping” stages, since both could instead be a temporary pause before continuing the prior trend. Nonetheless, it is important to take a step back and try to make a reasonable assessment about what trend stage the investment is in. If it is not clear, that can suggest to tread more cautiously in making an investment.

Trendline — A trendline connects two or more prices in a straight line and is extended into the future to act as a line of support or resistance for the investment. If the price breaks through the support or resistance line, that suggests the trend has changed. The longer the trendline has been in place and the more price points it touches, the more meaningful it is. 

TRIN — The Trading Index (TRIN) is the ratio between the average volume of declining stocks and the average volume of advancing stocks on the NYSE. We use the 100-day moving average of this statistic to reduce volatility and generate meaningful signals for longer-term investing. This serves as a “pressure gauge” for the stock market. When it is above 1.3, it is considered oversold and is a positive signal, when it is between 1.3 and 1.05, it is neutral and when it is below 1.05, it is considered overbought and is a negative signal.

US Manufacturing PMI — The Markit US Manufacturing PMI (Purchasing Managers Index) is the composite index for their US manufacturing report. It is based on surveys of 600+ companies. It is the average of New Orders, Output, Employment, Suppliers’ Delivery Times and Stocks of Items Purchased. It closely tracks GDP growth, but is much more timely. Numbers above 50 indicate expansion, while numbers below 50 indicate contraction.

US OECD Leading Economic Indicators — This is the US monthly leading economic indicators produced by the Organization for Economic Co-operation and Development (OECD). It typically leads growth for the US around its trend line by about six months.

US Stock Prices — US stock prices tend to fall a few months ahead of a recession due to declining profits and higher risk premiums. Conversely, stock prices tend to rise a few months ahead of an economic recovery due to improving profits and lower risk premiums. Stocks in major countries tend to fall together during major recessions and bear markets and rise together during major recoveries and bull markets.

US Stocks – NASDAQ 100 — A good low cost ETF for NASDAQ 100 stocks is the Invesco QQQ Trust ETF (ticker: QQQ). The QQQ ETF tracks the largest 100 non-financial stocks traded on the NASDAQ market. They are typically large cap technology stocks such as Apple, Microsoft, Google, Amazon, etc. QQQ tends to outperform the S&P 500 in bull markets and underperform in bear markets. QQQ has a very low annual expense ratio of 0.06% and annual turnover in its holdings of 5%.

US Stocks – NASDAQ 100 (short) — A good ETF for shorting NASDAQ 100 stocks is the ProShares Short QQQ ETF (ticker: PSQ). PSQ mimics a short position in the NASDAQ 100. It has an annual expense ratio of 0.95%.

US Stocks – S&P 500 — A good low cost ETF for the S&P 500 stock index is the Vanguard S&P 500 ETF (ticker: VOO). The VOO ETF represents the most widely followed US stock market index, the S&P 500, comprised of 500 of the largest US stocks by market capitalization. This ETF has a very low annual expense ratio of 0.06% and annual turnover in its holdings of 5%.

US Stocks – S&P 500 (short) — A good ETF for shorting the S&P 500 stock index is the ProShares Short S&P 500 ETF (ticker: SH). SH mimics a short position in the S&P 500. It has an annual expense ratio of 0.92%.

US Stocks – Small Cap — A good low cost ETF for US small cap stocks is the Vanguard Small Cap ETF (ticker: VB). The VB ETF tracks the MSCI US Small Cap 1750 Index, which includes the smallest 1750 US stocks, which represent about 11% of the US market. Small cap stocks tend to outperform large cap stocks over long periods of time and particularly in bull markets, since they are riskier. This ETF has an annual expense ratio of 0.06% and annual turnover in its holdings of 12%.

US Stocks – Small Cap (short) — A good ETF for shorting US small cap stocks is the ProShares Short Russell 2000 ETF (ticker: RWM). RWM mimics a short position in the Russell 2000 Index of 2000 small cap stocks. It has an annual expense ratio of 0.95%.

Value Line Above/(Below) 250-Day MA — The Value Line Geometric Index is an equally weighted index of 1,675 stocks. It uses a geometric average, so the daily change is closest to the median stock price change. It is a good “plain vanilla” representation of the overall US stock market, as it is not distorted by a handful of mega-cap stocks. If the Value Line Index is trading above its 250-day moving average (MA), it is considered to be in a long-term uptrend and is a positive signal. If it is trading roughly inline with its 250-day MA, it is neutral. If it is trading below its 250-day MA, it is considered to be in a long-term downtrend and is a negative signal.

VIX — The Market Volatility Index (VIX) for the S&P 500 measures market volatility and can be a gauge of investor fear. We use the 50-day moving average of this statistic to reduce volatility and generate meaningful signals for longer-term investing. When it is below 15, it is a negative signal, when it is between 15 and 25, it is neutral, and when it is above 25, it is a positive signal. The idea of this indicator is that when investors are complacent and expect positive trends to continue, this can be dangerous, as they are not worried enough about risk. Conversely, when they are panicking and afraid, that is often a good time to buy, since they are dumping their stocks at fire sale prices. As with many overbought/oversold gauges, VIX works better as an oversold fear gauge, since fear is usually a more powerful emotion than greed.

Yield Curve – 10 Year less 90 Day Yield — The Yield Curve indicator is the spread between the interest rate or “yield” on 10 Year Treasury Bonds less the yield on 90 Day Treasury Bills. In a pure free market economy without a central bank or fractional reserve banks creating or destroying paper money out of thin air, interest rates would be generally uniform across all maturities. Thus, 10-year and 30-year bonds would have roughly the same interest rate as 90-day bills. This is known as a “flat yield curve”. However, in our centrally planned monetary system, shorter-term interest rates like 90 day T-bills are typically lower than longer-term rates when monetary policy is “easy” and the Fed is printing money at accelerating rates. This “upward sloping yield curve” drives unsustainable recoveries and booms, partly because it is very profitable for banks to lend at rates that are much higher than their short-term borrowing rates. However, when the Fed is tightening money by slowing money supply growth, that can cause short-term rates to be higher than long-term rates. This “inverted yield curve” causes recessions partly because it makes it unprofitable for banks to lend when their short-term borrowing rates are above their long-term lending rates. An inverted yield curve usually leads recessions by a year or so, but it is not a perfect economic signal (note: there are no perfect economic signals, which is why we recommend looking at a variety of indicators and focusing on the weight of the evidence of those indicators).