You’re the defensive coordinator for an NFL team playing defense. It’s 3rd down with 3 yards to go. Will you defend against a run play, or a pass play?
In the long run you would be wise to defend against a pass play; since 2008, NFL teams have passed 55.27% of the time when faced with 3rd down and three yards or less to go. Researchers developed a model that is able to further predict whether a team will run or pass under similar circumstances with 76% accuracy when taking into consideration factors like the number of seconds left in the half, the score differential, the yard-line the ball is placed, and whether a team is in shotgun or not. This model does not always predict the correct play, but it would be foolish to ignore this (or similar models) when calling NFL plays.
I developed a model for investing that takes into consideration factors like market valuations, credit conditions, and investor sentiment to anticipate Bearish or Bullish market conditions. It recently called Very Bearish conditions, and you would have been wise to at least reduce your equity holdings (I purchased Put options and have returned 17% this month).
One measure of market valuation - Warren Buffet’s preferred “Buffett Indicator ''- was never higher (at 151.8%) than the recent market top. As of today (March 10th, 2020) it remains around 138% which is still higher than the market top in 2007 (110%). For this reason (and others), the model remains Very Bearish.
Even the most savvy NFL data analysts cannot predict every play, and the investing model cannot predict every market move. But by taking into consideration factors like market valuations, credit conditions, and investor sentiment it has proven to be very helpful in detecting bear and bull markets, and has returned in excess of the Vanguard Total Market Index (VTI).
As an anecdote, consider that Nobel-prize winning economist Rober Shiller released a book on October 2019 titled Narrative Economics: How Stories Go Viral and Drive Major Economic Events. The aim of the book is to “vastly improve our ability to predict, prepare for, and lessen the damage of financial crises, recessions, depressions, and other major economic events.” Shiller’s book was released a little over six months ago. His last book, Irrational Exuberance, published its first edition on March 2000- five months before the Bear Market of 2000-2003. The second edition of Irrational Exuberance, released March 2005, warned that housing prices were in a bubble (housing prices peaked in 2006). Shiller’s books and release dates are prescient, and his recent book release “preparing to lessen the damage of financial crises” suggests we are in a Bear Market.
On Monday, March 9th the Volatility Index (a “fear gauge”) spiked to 59. The past two bear markets have both ended within five months of the VIX going over 45. Additionally, economies tend to rebound quickly following pandemics. Therefore I eagerly anticipate a shift to Bullish conditions perhaps as early as the next several months. For now however I remain Very Bearish and am protecting against further wealth loss.
This report reflects the current opinion of the author. The report is based upon sources believed to be accurate and reliable. Opinions and statements about the future expressed in the report are subject to change without notice. The report is not a solicitation or an offer to buy or sell any security.