Changing the Interpretation of the Timing Outlook

I am making a small change to the interpretation of the Timing Outlook.

First, a little history. The Timing Outlook (TO) was invented during the writing of Sensible Stock Investing. Originally, the TO had eight indicators. Four of them came from another investment Web site and were used by permission. Those four were all trend indicators. From the beginning, the TO was calculated by assigning each indicator a score of 0, 5, or 10, and then calculating a simple average to get a single number between 0 and 10.

In mid-2008, the other site discontinued its indicators. So I home-brewed six trend indicators of my own, replaced the four missing ones for a total of ten indicators, and created the Timing Outlook that is in use today.

I began publishing the TO in this Newsletter in 2007. At a reader's suggestion, I began writing more detailed articles--showing the individual indicators and adding commentary--in 2008. These days, I publish a new TO article each time I recalculate it, generally every other week.

From the beginning, the TO was not meant to be a single, exclusive timing device. Rather, it was part of the Sensible Stock Investor's toolkit. The idea was to increase the likelihood of successful investment decisions. I wanted something to improve the probability that decisions to buy, hold, or sell would get off to a good start.

As described in the book, the interpretation of the Timing Outlook was in three "zones":
--0-4 was considered negative;
--4-7 was considered neutral; and
--7-10 was considered positive.

Recently I went back to evaluate how helpful or accurate the Timing Outlook has been since I began calculating it regularly in 2006. In a nutshell, it does seem to provide an edge, although of course it is not correct all of the time. But it has been correct in predicting the direction of the market two weeks out 58% of the time; 59% for the market's level one month later; and 68% for three months later. One thing I discovered in doing this review is that using a 3-period simple moving average (SMA) of the Timing Outlook improves those percentages slightly. Another point of interest is that, not surprisingly, it does better in markets that are trending as distinguished from up-and-down markets.

That information provides the background for the change I am making.

After examining the data, I have decided that three zones are too granular. So the new simplified interpretation will be just whether or not the Timing Outlook is 5 or more:
--0-4.9 will be considered negative; and
--5-10 will be considered positive.

In this context, "positive" means that the Timing Outlook is suggesting that the market is more likely to move higher in the short term, and "negative" suggests that the market is more likely to move lower. The ambiguous "neutral" category has been eliminated.