From the February 01, 2012 issue of Futures Magazine • Subscribe!

How to market-time with stock fundamentals

Real earnings model

Inflation-adjusted real earnings can be used to build a predictive model of S&P 500 price action. While we can’t consider this a standalone trading model because of its long-term nature and the estimation of earnings data, we can demonstrate its value as a measure of market sentiment. We will start our analysis using the S&P 500 cash index without any adjustment for dividends.

The core premise of the model is that earnings momentum leads price. We can build a simple intermarket divergence model using this relationship. Here are the rules:

  • If real earnings are in an uptrend and the S&P 500 is in a downtrend, we buy
  • If real earnings are in a downtrend and the S&P 500 is in an uptrend, we sell

And here’s the code:

Sub SP500_EarningSimple (MkLen,IntLen)

Dim Mk_Osc As BarArray

Dim Int_Osc As BarArray

Mk_Osc=Close-Average(Close,MkLen,0)

Int_Osc=Close Of independent1-Average(Close Of independent1,IntLen,0)

If Int_Osc>0 And Mk_Osc<0 Then Buy(“”,1,0,Market,Day)

If Int_Osc<0 and mk_osc>0 Then Sell(“SE”,1,0,Market,Day)

End Sub

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