Steve Thompson's Bob Brinker Timing Model Update for December 31, 2006

MODEL ANALYSIS for December 31, 2006

VALUATION INDICATOR

I must say I was surprised when in October of this year, Bob revealed his 2007 S&P 500 earnings estimate of $87.75. The figure that Bob is using seemed like a huge leap from his prior 2006 estimate of $82 which was closer to his forecast of $79 that he started the year making. I wonder if Bob's forecast is a little high this time. If we use Bob's $87.75 figure and the present level of 1,418.30, we get a price-to-earnings ratio of just over 16. The FED model used by Ed Yardeni suggests a P/E of 21.23 would be fairly valued. If Bob is right on his earnings estimate and we get some modest multiple expansion, 2007 could easily see new all time highs in the S&P 500 with a P/E of 18! If the long bond rises to 5.55%, the FED model would suggest a P/E of 18 is reasonable. I can see why Bob would be bullish when the foundation of his model at this time is sanguine. I rate this indicator as bullish.

MONETARY POLICY

Bob looks at short term rates and real money supply growth in connection with the Monetary Policy Indicator of his timing model. Last month, Ben Bernanke stated that the money supply has become unreliable as a tool for forecasting inflation and growth. Still, it is a component of Bob's model so let's take a look at where it is now. Real seasonally adjusted growth in M-2 is showing a decent gain of 2.78%. This is due to, in part, the latest CPI number of 2.0%. I had written a few months ago that I felt the next two CPI reports would be noteworthy. My thinking was that the year-over-year comparisons would be easy since they spiked up in the post Katrina/Rita period due to higher energy prices. So now with lower oil costs we are showing minimal CPI increases. Real growth in M-2 is starting to look like it could provide some fuel for a growing economy. I don't see the FED changing short-term rates soon since they worked so hard to normalize them. The Core PCE came in December 22, 2006 at 2.2%. This is down from the previous report of 2.4%. Should future reports come in under 2%, we may be able to start looking for a cut in short-term rates from the FED. I see the monetary indicator as neutral.

ECONOMIC INDICATOR

The final third quarter GDP number came in at 2.0%. That was a slight disappointment since the preliminary figure was 2.2% a month earlier. The good news is this sluggishness gives the FED no cause to take action to slow the economy. As the first week of the New Year ends, all eyes will be on the employment report, particularly the closely followed nonfarm payrolls which will be announced on Friday. We shall have to grind this one out and see if growth has bottomed and will turn upwards into 2007. The fourth quarter advanced GDP report comes out January 31st. For now, I rate this indicator as bullish.

SENTIMENT INDICATOR

Analyzing sentiment is something that Bob added to his "model" after the poor performance he suffered in the 1987 to 1991 time frame. When I first recall him mentioning it, the primary data point was the Investors Intelligence four week moving average of Bulls/Bulls + Bears. That data point has been in the 50s for most of the summer through the correction which is a neutral reading. In mid-October, it bumped up into the 60s. It has been in the low 70s since mid-November and has been inching toward the mid-70s the past two weeks. The four-week moving average is now 73.32%. That is in Bob's caution zone. Conversely, the Put/Call ratio continues to show healthy levels of doubt. The 10-day is 0.94, while the 60-day is at 0.88. Though it is not part of Bob's model, the American Association of Individual Investors has been a more reliable sentiment measure at least this year, and is currently at 56.1% and the four week moving average is 54.02%. I would rate the sentiment indicator as bullish right now.

I believe that as time goes by, Bob has learned more about technical analysis and added other data points to this Indicator in an attempt to diversify and avoid mistakes. During the panic of autumn 1998, Bob started talking about other indicators such as the Put/Call ratio. It was also then he seemed to key in on market internals such as new highs/new lows, advance/decline, volume, etc. He liked to see the market make a bottom and then drift higher, then retest the low on lighter volume. The theory was that those that were going to sell already did and that only left buyers left to move the market. To my way of thinking, the Sentiment Indicator is BULLISH.

CONCLUSION

To summarize, I believe Bob Brinker's timing model is still Bullish with three bullish and one neutral indicators. With valuations so reasonable and the large increase in earnings estimates, I would say that Bob Brinker views the future as bright for the U.S. equity markets, but at the same time realizes corrections do happen. I don't think Bob would be panicked to see a correction take the S&P 500 back under 1300. In fact, I would expect Bob to see that as a buying opportunity.

Steve Thompson

Bob Brinker Timing Model Update For October

Steve Thompson’s Bob Brinker Timing Model Update For October 2006

Steve gives his update of Bob Brinker's Market timing model indicators. At the end of the article, Steve predicts if Brinker will remain bullish or turn bearish.

• Steve Thompson's Bob Brinker Timing Model Update For October 2006
  
  The stock market is performing beautifully as we begin the fourth quarter. It seems some of the cash on the sidelines came into equities in September as oil prices dropped. It looks like earnings are going to be strong and bond yields have dipped, so investors have been gravitating towards stocks. With no major weather interruptions and things calming down in Iran and North Korea the near term looks hopeful for the U.S. stock market. It is possible the Mid term presidential cycle lows came earlier this year, in June. Those that bailed out of the market in May and hoped to get back in this autumn could do so now with only a minor loss after sitting out a shaky summer.
  
  Let's see how Bob Brinker maybe interpreting his model as we begin the fourth quarter.
  
  Valuation: We shouldn't be surprised to see the S&P 500 near recovery highs with the lack of bad news lately. Using Bob's $82 estimates for 2006 S&P 500 earnings we get a P/E in excess of 16. Investors are comfortable and could very well drive the multiples higher. For now the market is undervalued. Valuation is bullish.
  
  Monetary: Real seasonally adjusted M-2 money supply is still sluggish coming in at a meager .7% annual growth. The next two CPI releases are going to be worthy of attention as we hopefully work through the energy induced inflation spike last fall. I have noticed of late Bob is much more happy with FOMC chairman Ben Bernanke after they paused in August and September. Towards the end of this year the effects of the last rate increase of June should be working its way through the economy. For now I see this indicator as neutral.
  
  Economic: Final Second Quarter GDP came in a 2.6%. This should be no surprise, as we all know housing has cooled. I did notice a couple flies in the GDP ointment. The core inflation component of the GDP report, personal consumption spending was revised down to 2.7% from 2.8%. This is hotter than the FED would like. Corporate profits took a big hit, revised down to a measly 0.3% from 2.1%. Is this an early sign future earnings will take a beating? Or is it the normal ebb and flow nature of the business cycle? We shall know in the fullness of time. Last Friday's Chicago PMI report surprised economy watchers coming much stronger than expected. Conversely the ISM numbers came in soft and could be indicating slower growth ahead. Look to the September jobs report on October 6th for some guidance in sorting this all out. For now I'd rate this indicator as bullish, we are still growing but not at a pace that warrants short term rate increases.
  
  Sentiment: The Investors Intelligence survey has been very stable all summer and is now working its way to the upper 50s territory. It still shows a healthy level of respect. The latest four week moving average of bulls/(bulls+bears)= 57.38%. As we look to the 10-day Put/Call ratio we see .95, which is shows plenty of pessimism. The 60-day level is even more impressive coming in at .98! As a contrarian indicator this is bullish.
  
  CONCLUSION: I believe Bob Brinker is still bullish on the market as we are one good day away from his minimum target on the S&P 500 of 1350.
  
  Steve Thompson

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