VLMAP to wealth? Commentary: Last time market-timing indicator was more bullish was in 1982

By Mark Hulbert, MarketWatch Oct. 20, 2008
Comments: 111ANNANDALE, Va. (MarketWatch) -- I have good and not-so-good news about a stock-market timing indicator with a good long-term record.
First, the good news: The last time it was as bullish as it is now was in late 1990, just before the bull market of the 1990s was about to take off. And the last time it was more bullish was in 1982, just as the great bull market of the 1980s was commencing.
Now for the not-so-good news: This indicator's greatest predictive power comes when forecasting the market's level four years' hence. It does not say how the market gets there from here. So the indicator's bullish posture currently does not guarantee that a bottom has been seen of the bear market that began a year ago.

What is this indicator?
It is a single number published each week by Value Line, Inc. (VALU:Value Line Inc VALU 33.50, -0.86, -2.5%) in its flagship newsletter, the Value Line Investment Survey. This number represents the median of the projections made by Value Line's analysts of where the 1,700 widely-followed stocks they closely monitor will be trading in three to five years' time. Followers refer to this number as the VLMAP, which stands for Value Line's Median Appreciation Potential.

The VLMAP currently stands at 135, which means that the median Value Line analyst is projecting that the stocks he follows will be 135% higher in four years.
Though Value Line itself does not believe that market timers should place undue weight on VLMAP, it has not stopped other advisers from doing just that. Dan Seiver, for example, a visiting finance professor at San Diego State University and editor of an investment newsletter called the PAD System Report, bases his newsletter's market-timing model almost exclusively on the VLMAP.

Another eminent analyst who has recognized VLMAP's potential is Peter Bernstein, publisher of an institutional newsletter called Economics and Portfolio Strategy. Research he conducted in the 1980s and 1990s led him to conclude that the VLMAP has an excellent track record forecasting the stock market's level four years hence. Seiver's and Bernstein's confidence in VLMAP prompted the Hulbert Financial Digest to conduct an extensive econometric analysis of its own into the VLMAP's potential as a market timing indicator. That study, conducted in summer 2004 by Brandon Mills of Haverford College, at the time interning at the Hulbert Financial Digest, confirmed Seiver's and Bernstein's findings. If you're interested in a copy of Mills' analysis, email me.

Weekly data for VLMAP exists back to the late 1960s. Since then, it has ranged from a low of 17 to a high of 255. It has oscillated in a narrower range in recent years, however. Over the past 20 years, for example, its low has been 30 and its high has been 135, which is where it stands now.

The market-timing system that Seiver devised using VLMAP considers the risk-reward ratio for stocks to be attractive enough to warrant investing new money in the market only when it rises to at least 100. Prior to the past couple of months, it was this high just two other times this decade: Immediately following the Sept. 11, 2001, terrorist attacks (when it got as high as 105), and at the end of the 2000-2002 bear market (when it got as high as 115). In both cases the stock market was markedly higher in four years' time, needless to say.
asr: Buffet must be following this kind of model, when he is investing in market for long term upside in stock based on these levels

To underline that the VLMAP is not a short-term market timing indicator, however, consider that the VLMAP first hit 100 this year in mid-July, when the Dow Jones Industrial Average ($INDU:Dow Jones Industrial Average $INDU 9,204.58, -60.85, -0.7%) briefly dipped below the 11,000 level. The market has proceeded to drop a lot lower than that.

With the VLMAP as high at is, Seiver has announced his intention to redeploy all the sizeable amount of cash in his newsletter's model portfolio and become fully invested by year's end. Which stocks is he buying? He wrote last week that, "We are already feeling like the proverbial 'kid in the candy store.' There are so many stocks on sale at low prices we can't decide which ones to buy."
Here are a few that he says are on his watch list:

Automatic Data Processing, Inc. (ADP:Automatic Data Processing, Inc
ADP 34.31, -1.07, -3.0%)
AFLAC Inc. (AFL:AFLAC Incorporated
AFL 44.11, -0.20, -0.4%)
Autodesk (ADSK:Autodesk Inc

ADSK 24.79, -0.38, -1.5%)
Autoliv (ALV:autoliv inc com

ALV 23.07, -0.69, -2.9%)
Intuitive Surgical (ISRG:intuitive surgical inc com new
ISRG 186.09, -8.03, -4.1%)

Kinetic Concepts (KCI:kinetic concepts inc com new
KCI 23.47, +0.85, +3.8%)
On Assignment (ASGN:On Assignment Inc
ASGN 5.57, -0.18, -3.1%)