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Who to believe? Former VL research director Eisenstadt vs. VLMAP

Monday, November 7, 2016 15:24
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I got a few questions about an apparent contradiction in my last post (see Don’t be fooled, Election 2016 isn’t the Brexit referendum). I had highlighted a Mark Hulbert article indicating that former Value Line researcher director Sam Eisenstadt had a SPX target of 2270 to 2310 by April 2017.

At about the same time, Hulbert had also written a Barron’s article on November 3, 2016 where he postulated little or no upside in stock prices, based on the analysis of the Value Line Median Appreciation Potential (VLMAP). In fact, VLMAP readings are similar to levels seen at the 2007 market top:

Market timers use the VLMAP to project where the stock market will be in four years, the midpoint of the analysts’ three-to-five-year horizon.

The VLMAP is currently at one of its lowest levels in years—as low, in fact, as it stood at the top of the bull market in October 2007, right before the worst bear market in the U.S. since the Great Depression.

Value Line itself does not recommend using the VLMAP as a market-timing tool, even though the firm is not against anyone using it or any of the other data it produces. As far as I can tell, the VLMAP-based market-timing model originates in work done in the 1970s and 1980s by Daniel Seiver, a member of the economics faculty at California Polytechnic State University and editor of an investment advisory service called the PAD System Report.

It’s worth noting that a casual reader of the Value Line Investment Survey wouldn’t immediately become alarmed upon viewing the latest VLMAP reading. It stands at 40%, which over four years is the equivalent to an annualized return of 8.8%.

As Eisenstadt had been the long serving research director of Value Line until 2009, how can investors reconcile these apparent contradictory bullish and bearish views based on similar data. Which interpretation of Value Line data should we believe?

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