BarroMetrics Views: Philly Fed

In his most recent newsletter, Jason Goepfert (www.sentimentrader.com) did a most interesting study on what happens to US stocks whenever the Philly Fed Index registers below -30.

Jason crunched the numbers and concluded that short term, the reading was bearish but 12-months out bullish.

(BTW, there are two sources of quant studies that I love: Jason’s and Rob Hanna’s Quantifiable Edge. Rob has a free blog as well as a paid service. Both Rob and Jason provide excellent value for money).

I have often been asked how I integrate quant studies with  my way of trading. This blog will show the process.

The first thing I did here was place the times the PFI regitered below -30 on a monthly chart - Figure 1. The first thing that caught my eye was there were no readings that occurred in a secular bear market; they appeared either in a sideways or bull market.

I then focused on a bull market readings and sideways market readings that did not occur at the extreme of a correction zone or boundary of congestion.

If we put aside the bullish bias of a secular bull market my conclusion agreed with Jason’: the reading would achieve maximum bearishness 3-months after the event. This would take us into November 2011. Given this study, I’d now lean towards the cycle high occurring towards end Oct rather than late Sept/early Oct.

In addition, if my view that the cycle high will mark the start of bear market, we should not see the second part of Jason’s study: that in Aug 2012, prices will be (based on the mean gain) at  1432.

In one way that doesn’t help me much since I take the view that if my scenario is correct, we shall not see acceptance above 1370.  On the other hand, in an uncertain situation, it may provide some valuable clues. Time will tell.

FIGURE 1 Monthly S&P

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