Vous êtes sur la page 1sur 102

Forecast of Top Index Funds

for
Investing in the Stock Market

Outlook for 2015 and Beyond


for the
Leading Exchange Traded Funds:
DIA, SPY and QQQ

2015 Edition

A Market Brief
by

Steven Kim

MintKit Investing
www.mintkit.com

Disclaimer This brief is provided as a resource for information and education.


The contents reflect personal views and should not be construed as
recommendations to any investor in particular. Each investor has to conduct
due diligence and design an agenda tailored to individual circumstances.

2015 MintKit.com

Short Summary
A rundown of the top index funds sets the stage for an orderly approach to forecasting and
investing in the stock market. The leading benchmarks of the bourse are found in the Dow
Jones Industrial Average, the S&P index of 500 giants, and the Nasdaq yardstick of 100
heavyweights. For these beacons of the stock market, the tracking vehicles take the form
of DIA, SPY and QQQ respectively. The major milestones and likely moves for each of the
exchange traded funds are sketched out in detail for 2015 and beyond.

Extended Summary
A review of the top index funds sets the stage for a coherent approach to forecasting and
investing in the stock market. For this purpose, the vehicles of choice are found in the
exchange traded funds for the leading benchmarks of the bourse; namely, the Dow Jones
Industrial Average, the S&P 500 index, and the Nasdaq 100 yardstick. For these
touchstones, the tracking vehicles take the form of DIA, SPY and QQQ respectively.
By contrast to received wisdom, the financial forum is entwined with the real economy not
only in the future but also the present which happens to spring from the past. In view of the
jumbling, the shrewd investor has to examine the milestones in the backward direction as
well as the outcrops in the current environment in order to sketch out the conditions
downstream.
Moreover, the slant of the markets depends on the forces at work right now along with the
contours of the landscape downstream. For this reason the survey here draws partly on,
and fleshes out, the drivers at work over the coming year and beyond.

From a pragmatic stance, the companies listed in the stock market earn their living within
the economy at large. That much is true even in the case of virtual firms such as online
retailers and brokerage houses. As a result, the aggregate level of economic output plays
a vital role in corporate earnings and thus the price action on the bourse.
Within the tangible economy, the conditions have not changed a great deal over the past
few years. On the downside, the politicians of the West have gone out of their way to
solidify the distortions in the housing sector in the aftermath of the financial crisis of 2008.
Another bungle involved the prop-up of some of the biggest and most unproductive firms in
the economy. In particular, trillions of dollars round the world were handed out as bailouts
for a gaggle of gutted banks that had succumbed to their own reckless schemes.
To make matters worse, the struts put in place have prevented the property market from
shedding the mountain of blubber it had built up during the manic bubble in real estate
prior to the financial blowout. Due to the shackles in place, the economy as a whole has
been doomed to gasp and limp well into the 2020s.
In this shaky environment, the prospects for the industrial nations are lackluster at best. A
glaring example lies in Europe, which continues to wallow in the doldrums. Given the
torpor of the rich countries, the emerging markets round the planet will have to plod along
despite the general weakness of the world economy.
On a positive note, though, the U.S. is starting to recover from the disruptions stemming
from the housing craze in the run-up to the financial flap of 2008. The mangling of the
markets during the bubble was compounded by a welter of knee-jerk reactions by
impulsive politicians, as in the likes of lifelines for ruined banks along with crutches for real
estate. After stumbling for half a decade in the aftershock of the Great Recession, the U.S.
economy has finally taken the first tentative steps toward regaining its health for real.
In a nutshell, the outlook for the global economy is a mixed bag. For the world as a whole,
the volume of output should increase by about 3.0% this year after adjusting for the
pinch of inflation based on the official figures cooked up by government agencies. The
forecast for 2016 is marginally better, amounting to a growth rate of 3.3%.
4

In line with the norm, the developing regions as a group will contribute the lions share of
the increase in global output thanks to an upturn of 4.8% in 2015, followed by 5.3% the
next year. By contrast, the rich countries will muster a mere 2.2% this year before crawling
up to 2.4% in 2016.
On the financial front, the stock market faces a raft of challenges over the year to come.
Moreover, some of the biggest stumpers have nothing to do with the substance and reality
of the marketplace but everything to do with the perception and bias of the investors.
As an example, the Dow index will run into a huge obstacle at the nice, round number of
20,000 points. As things stand, this barrier will crop up by the summer. There are of course
lots of other factors that prod the market to the upside as well as downside.
As is often the case at the beginning of the calendar, the stock market is slated to thrash
around more than press ahead during the months of January and February. After the spate
of churning, however, the bourse should marshal enough energy to climb higher in
earnest.
On the upside, the first milepost for DIA also known as the Diamonds lies at the
$189.07 level. Based on current conditions, the landmark should be reached by the spring.
Shortly thereafter, the stormy currents of the summer will as usual throw the market for a
loop. Despite the tempest, though, DIA is slated to waddle higher by a modest amount. In
that case, the peak for the summer should arise around the $198 level.
After reaching the vertex, however, the Diamonds are unlikely to hold onto the summit.
Instead the market will fall back and flail around for a few months.
Unfortunately, the outlook is not much better as we move into the second half of the year.
For one thing, the market has a habit of floundering during the dog days of summer then
flopping with the gusty winds of autumn. More precisely, the bourse will enter its weakest
stretch of the year as September rolls around.

One negative factor for the stock market springs from the mien of the Federal Reserve in
the current environment. As a backdrop, the central bank decided in October 2014 to wrap
up the third and last round of quantitative easing. The act of partial restraint in money
printing will ratchet up the cost of credit in the financial forum as well as the real economy.
The step-up of interest rates should begin by the third quarter.
In line with earlier remarks, the Dow index faces a monumental block at the 20,000 level.
Once the benchmark reaches the blockade, the market is bound to break down. The
crack-up that ensues should amount to a mini-crash from peak to trough.
In the most likely scenario, the market will bump up against the landmark a couple of times
before breaching it on the third try. The travails of the Dow will of course be mirrored by the
labors of the Diamonds which will have to grapple with their own hang-up at the $200
mark.
The next hurdle lies in the perennial spate of upheaval in the autumn. Thanks to the
heaving and shoving of the madding crowd at this time of year, the Diamonds are destined
to trip up and fall flat by way of another near-crash.
After that knockout, the ground will be cleared for a push to the upside in the final stretch
of the year. After punching through the roadblock at $200, the next milestone lies a tad
higher at $210. The latter figure stands around 18% beyond the closing value of $177.88
notched at the end of last year.
Turning to the political front, 2015 happens to be the run-up to a Presidential election in
the U.S. As the winter rolls around, the air will crackle with the platitudes and promises of
politicos about the need to create jobs and lift incomes, furnish handouts and bolster
business.
The resulting spurt of busywork coupled with the bluster will kindle a wisp of hope across a
large swath of voters and imbue them a warm, fuzzy feeling. Moreover a spree of wanton
spending should in fact give the economy a boost over the short run despite the crushing
cost to be paid by the entire society over the medium range as well as the long haul.

As a rule, the financial forum anticipates the course of the real economy. For this reason,
the bourse in particular is poised to head higher this year.
The buoyant tone of the pre-election year, coupled with the sturdy uptrend of the bourse in
recent years, is a godsend for the investor. As a result, the Dow yardstick could end up
surpassing the projected target of 18% by a goodly amount. In that case, the gain in
percentage terms could reach well into the 20s.
On the downside, though, the main argument against a huge advance is of course the
precarious state of the economy. The chains of production and distribution were bent
severly out of shape during the riot of speculation in real estate prior to the financial crisis,
followed by the orgy of government spending and money printing in the years to follow.
Given the breadth and depth of the disruptions, the economy is only now starting to take
the first steps toward recovering in earnest from the abuse it received at the dawn of the
millennium.
A second reason for caution involves the fact that the stock market is already puffy and
overpriced to some degree. In particular, the average ratio of price to earnings for the
stocks within the Dow index has been lounging on the high side for years on end.
On the other hand, a pricey market can become even more pricey before it regains its
equilibrium. For this reason, the Diamonds could well enjoy a giddy ride to the upside by
this time next year.
In addition to the circle of 30 titans tracked by the Dow index, another leading benchmark
lies in a troupe of 500 heavyweights monitored by the Standard & Poors company. The
yardstick is tracked by an index fund which runs under the banner of SPY.
Meanwhile the third benchmark of the bourse deals with the Nasdaq market. On this
exchange, a broad-based yardstick known as the Composite Index is widely reported by
the financial media. On the other hand, a subset comprising a hundred giants is the
vehicle of choice from a pragmatic stance. The tracking vehicle for the latter touchstone
lies in QQQ.

This report examines the special aspects of SPY and QQQ which distinguish their
prospects from the outlook for DIA. Moreover a detailed forecast of each of the broader
benchmarks is provided.
To sum up, the trio of touchstones for the U.S. bourse will tramp onward and upward
through a series of zigzags as usual. The story will unfold in a similar fashion for the other
stock markets round the globe.
Although there are plenty of exceptions, the bourses in the budding regions often advance
roughly twice as much as the Diamonds or Spyders. In that case, an upswell for DIA
should accompany a strapping payoff for the emerging markets.
On a negative note, though, the feisty markets also tend to be the most flighty. To bring up
another bogey, the mass of investors remain somewhat skittish. As a result, the
international crowd may refrain from moving with gusto into the sprouting markets until the
end of the year or even later.
The task of forecasting this year poses a case study of uncommon complexity. For
starters, the forces at work include a host of routine drivers as well as wayward factors. An
example of a commonplace theme lies in fundamental facets such as business conditions
and monetary policies, or technical features as in multiyear trends and seasonal patterns.
To add to the muddle, though, a bunch of issues crop up only once in a few years or even
decades. An example of the former is the hefty impact of the political theater on the stock
market in the run-up to a Presidential election in the U.S. Meanwhile an instance of the
latter is the psychic barrier posed by a towering landmark that emerged in the midst of an
epic bubble on the eve of the millennium.
On the upside, the hoopla on the political front will infuse hordes of investors with hopeful
views regarding the prospects for the real economy along with the stock market. On the
downside, though, a gauntlet of mental roadblocks will hamper the madding herd and
prevent the market from gaining its stride.

As we noted earlier, an example lies in a hulking barrier for the Dow index at the 20,000
level. Another sample is a dual blow against the Nasdaq benchmark due to its historic
peak at 4,816.35 points formed at the height of the Internet craze, followed by a mental
block at the hulky landmark of 5,000 points.
Due to the lineup of blockers, the stock market is destined to thrash around even more
than usual during the second half of the year. Along the way the leading benchmarks of the
bourse will encounter a flurry of mini-crashes. The repercussions will of course be worse
for the minor leagues such as bantam stocks and emerging markets.
From a larger stance, the throng of international investors will continue to fret over the icky
conditions in the mature economies. An example involves the quagmire in Europe resulting
from the housing bubble, followed by a slew of witless policies ranging from the rescue of
braindead banks from their own rabid bets to the riotous spree of money printing by central
banks.
As we noted earlier, the buoyant forces that lend an upward tilt to the U.S. bourse will be
negated in part by a cluster of mental blocks. For this reason, part of the effervescence
should spill over into foreign markets. One beneficiary will be the European market whose
dire straits will be offset to some degree by an influx of funds from local investors as well
as foreign sources.
Another recipient will be the budding markets that have faltered for half a decade in the
wake of the Great Recession. On the upside, the emerging regions generate the bulk of
economic growth for the world as a whole. Sooner or later, a tidal wave of money will pour
into the lively countries in line with their superior performance in the real economy.
The inrush of mint could well begin this year. In that case, the bourses of the sprouting
regions will snap out of the funk of recent years and revert to their usual habit of outpacing
the benchmarks in the mature countries.
* * *

Keywords:
Forecast, Stocks, Financial, Markets, Economy, Investing, Investment, ETF, Exchange
Traded Funds, Outlook, Prediction, DIA, SPY, QQQ, Nasdaq, USA, Emerging, Europe,
Benchmark

10

* * *
A comparison of the top index funds lays the groundwork for an orderly approach to
investing in the stock market. For this purpose, the first step is to size up the leading
benchmarks of the bourse; namely, the Dow Jones Industrial Average, the Standard &
Poors Index of 500 titans, and the Nasdaq yardstick of roughly 100 heavyweights.
From a practical stance, the companies listed in the stock market earn their living within
the economy at large. That much is true even in the case of virtual outfits such as online
retailers, brokerage houses, and mutual funds. Regardless of the industry, the aggregate
level of economic output plays a vital role in the flow of earnings for the companies and
thus the fortunes of their equities on the bourse.
In terms of recent trends, the outlook for the marketplace as a whole has not changed a
great deal over the past few years. A deep-seated cause of the malaise lies in the
stumbling blocks thrown up by a host of governments in the wake of the financial crisis of
2008.
Since the financial flap along with the Great Recession, the politicians of the West have
gone out of their way to buttress the distortions in the housing sector. A second, and
related, botch lay in the prop-up some of the biggest and most unproductive firms in the
economy.
In this caper, trillions of dollars were squandered in the form of bailouts for a passel of
oversized banks. The insolvent firms were the very clods that had fomented the financial
crisis in the first place, then had fallen on their own swords after gorging on mounds of
mortgage-based assets.
To make matters worse, the struts put in place by the pols have prevented the property
market from casting off the mountain of blubber it had amassed during the berserk rampup of real estate prior to the financial bust. Under normal conditions, the housing sector is
11

a prime engine of growth for the economy at large. Unfortunately, the throng of misguided
politicos have thrown up a heap of fetters designed to support the bulge of real estate.
For this reason, the shackled market has been unable to shed in full the grotesque flab it
had accumulated during the orgy of speculation in the run-up to the financial flap.
Not surprisingly, the economy as a whole has been unable to toss off the deadweight and
regain its vitality. As a result, the growth rate will remain stunted well into the 2020s.
Needless to say, the outlook for the year to come reflects the feeble health of the blighted
regions. As a direct offshoot, the pulse of economic output will scarcely budge from the
anemic levels seen last year.
On a positive note, though, the slowdown in the emerging regions has largely run its
course. As an example, China should play a larger role in expanding the global economy
in 2015 than it did last year.
In line with earlier remarks, however, the prospects for the industrial nations are tepid at
best. For this reason, the budding regions of the world will have to plod onward amid the
general weakness in the global marketplace.
To sum up, the outlook for the world economy has improved slightly compared to the
turnout last year. More precisely, we can expect the rich nations of the world to putter
along and crawl ahead by about 2 percent after adjusting for inflation based on the official
figures trotted out by government agencies.
In gauging the standard of living, however, the increase in economic output ought to take
account of the growth of the population due to net immigration into the wealthy countries.
For instance, a representative figure is an upturn in head count of roughly 1 percent a year
in a raft of countries including the U.S. In that case, a step-up of 2% for the economy in
toto comes out to a crumb of just 1% per person.
On the upside, though, the sprightly nations of the world are poised to fare much better. A
case in point is China or India, which will advance several times faster than the rich
nations as a group.
12

Thanks to the bloom of the real economy, however modest, the stock market is slated to
follow suit. The cheery outlook shows up in the upward slant of the top index funds over
the course of the year.
In the sections to come, we begin with a quick survey of forthright techniques for
forecasting the stock market. The vehicles in the marketplace respond to a slew of factors
ranging from the course of the economy to the mood of the investors. In that case, a lucid
approach to prediction ought to combine a multitude of driving forces in the real economy
as well as the financial forum.
The second item on the agenda involves a brief survey of the history and nature of the
leading benchmarks of the bourse. A couple of yardsticks have established themselves as
household names while other gauges are less familiar to the general public.
Our third task deals with a backward look at our forecasts from last year. A number of
predictions turned out pretty much as envisioned, while some others were off the mark.
A fourth function is to examine the outlook for the real economy over the next couple of
years. The realm of tangible goods and services serves as the background against which
the widgets in the financial forum play out their respective roles.
The fifth topic concerns the role of the central bank in revving up the real economy and
shoring up the stock market. The spree of money creation has a huge impact on the
prospects in the marketplace including the bourse.
The sixth aim is to examine the prospects for the index funds that track the leading
benchmarks of the stock market. In particular, each of the surveys maps out the likely
pathway over the course of this year and beyond.
The last section talks about the dangers of patchy and faulty information in the vale of
exchange traded funds. In a field racked by rapid change, the thoughtful player has to take
extra steps in order to scrounge up a smattering of trusty data to support a trenchant
program of investment.
13

Upward and Downward Modes of Forecasting


The techniques for forecasting the stock market fall into two broad groups: fundamental
and technical. Either type of methodology can be used to assess the prospects for the
panoply of instruments ranging from solitary stocks to compound benchmarks.
The fundamental approach deals with the commercial aspects of the business standing
behind a stock, along with their impact on the value of the equity. For this purpose, the vital
factors span the spectrum from the health of the economy in general to the outlook for
earnings for the firm in particular.
By contrast, the technical approach relies solely on the information available in the
financial forum. In this light, the primary factors lie in the history of prices along with the
volume of transactions.
Most of the players in the arena rely chiefly or entirely on one type of approach or the
other. On one hand, the fundamental approach is most useful for gauging the prospects for
the market over the long range. By contrast, the technical scheme is best suited for
predictions over the near term.
At a basic level, a share of stock represents a slice of ownership in the underlying firm.
The shareowner has a claim on the trove of current assets as well as the intake of future
profits. For this reason, the value of a share over the long haul depends for the most part
on the lot of the company in the real economy.
The prospects for a business tend to vary slowly over time. On the other hand, its equity is
apt to thrash around a great deal. For this reason, the fundamental approach is of limited
help in sizing up the prospects for a stock over the near term.
In many cases, the action in the stock market depends more on the mood of the investing
public than the outlook for the corporate sector. An extreme example crops up in the frothy
valuation of stocks at the height of a bubble or the firesale prices at the depth of a panic. In
14

between, the bourse has a way of flopping around in response to the shifting sentiments of
the madding crowd.
So what type of methodology should a serious player take up? The answer depends on
the individual circumstances of the decision maker. A case in point is the length of the
planning horizon along with the holding period for an asset under consideration.
On one hand, a gamer who plans to buy a stock and hold it for a handful of years or a
couple of decades can largely ignore the antics of the market over the short run. In that
case, the fundamental mode is the methodology of choice.
On the other hand, a punter who intends to take advantage of the gyrations of the market
over the span of a few days or weeks need not worry overmuch about the fundamental
factors behind a stock. Instead, the main concern should be a fitting choice of vehicle to
ride the transient waves in the marketplace.
In the process of evaluation, one crucial trait lies in the robustness of a candidate vehicle.
That is, the vessel should be a hardy rig that has a negligible chance of going bust all of a
sudden.
A second issue concerns the nature and extent of the swings in price. In the case of a
short-term trade, for instance, the asset should exhibit large swings to the upside and
downside in a regular fashion.
As it happens, myriads of players fall in the middle category between the hyperactive
trader and the aloof investor. A showcase is found in the part-time gamer who plans to hold
a stock for a handful of months or a couple of years at most.
On the downside, though, the middling range is also the most challenging portion of the
planning horizon. To explain the nature of the quandary, the simplest approach is to begin
with a couple of counterpoints.
For starters, we consider a stock index which has advanced at a blistering pace over the
past quarter. After the giddy move, the benchmark is a lot more likely to swoon rather than
15

surge even further over the next couple months. For this reason, it doesnt take a rocket
scientist to issue a downbeat forecast for the near future.
We can also cite a counterexample toward the long end of the time scale. For instance, a
market benchmark is far more likely to rise than to fall over the course of a couple of
decades no matter what where it happens to loiter today. In that case, a soothsayer can
safely predict a move to the upside without having to examine the entrails of birds or read
any tea leaves. The cheery outcome will almost surely come to pass regardless of the
vicissitudes of the market in the intervening years.
By contrast, foretelling the market over the middling range is the toughest task of all: there
are no pat answers that can be whipped out with abandon. On a positive note, though, the
intermediate stretch is the bailiwick of the fundamental approach as well as the technical
mode.
To recap, a forecast over the middling range is the most challenging of all. Unfortunately,
the middle ground is precisely where myriads of investors find themselves.
For the bulk of actors, then, the wholesome approach is to combine the fundamental and
technical modes of analysis. In that case, the next question is how best to merge the
divergent techniques.
To this end, we can identify two kinds of schemes: upward versus downward modes of
integration. The former approach begins with a microlevel analysis of the conditions in the
marketplace then moves upward in order to incorporate the high-level aspects. By
contrast, the latter tack begins with a broad scan of the big picture and drills down to the
nitty-gritty of a specific vehicle.
Either strategy involves a fusion of the fundamental and technical methods. As an
example, consider the bottom-up approach. The upward thrust could begin with the
outlook for earnings for a given company. This appraisal can then be combined with the
technical features of the price action the stock market in order to figure out the best point
of entry for acquiring a position.

16

By contrast, the top-down approach is spotlighted by the analysis of a specific stock


starting from the general tendency of the market as a whole to climb higher in recent
years. The broad picture can then be combined with other marcrolevel factors such as the
current policy of the central bank in expanding or contracting the pool of money sloshing
around the financial system.
The wide-angle view then sets the background for gauging the prospects for a given stock
in terms of the outlook for corporate profits. Another instance of a microlevel trait lies in the
latest reading of public sentiment regarding the candidate equity in particular, as in the
case of a falling price in spite of a rising stream of earnings for the firm.
In these ways, the top-down scheme can integrate sundry aspects of the fundamental as
well as technical schemes. The story is similar for the bottom-up approach to fusion.
In the sections to come, we will have occasion to employ the fundamental as well as
technical modes of analysis along with a combo of both. In the process, we will take up
both the upward and downward methods for blending the two types of techniques.

Showcase for Prediction


The task of forecasting this year poses a special challenge due to the rich mixture of
routine drivers as well as special factors. An example of a generic feature lies in the course
of economic growth or the impact of monetary policy. Meanwhile an instance of an
wayward facet involves the influence of a historical landmark or the import of a psychic
watershed.
As a point of departure, the stock market will respond to the usual array to forces in the
marketplace ranging from seasonal factors over the course of the year to hardy trends
lasting over lengthy spells. On the other hand, the bourse faces a bunch of unusual
outcrops as well. Due to the mixup of common aspects and distinct facets, the
benchmarks of the market are bound to exhibit generic features as as well as exceptional
aspects.

17

In particular, the yardsticks will display common behaviors along with divergent moves
amongst themselves over the course of the year. The story is similar in terms of their
turnout this year in comparison to their usual habits in years gone by.
In this messy environment, the lucid player can take a couple of approaches to forecasting
the stock market. One straightforward tack is to consider the outlook for corporate profits
over the year to come. This gob of insight can be used in tandem with the tendency of a
stock in the financial forum to move in tune with the earnings per share for the business
within the tangible economy. If the income level were to rise, for instance, then the price of
the stock is apt to move higher as well.
Unfortunately, the matchup of price and earnings comes with a number of snags. One
drawback lies in the crank-out of a single figure that marks the likely price at the end of a
sizable block of time such as a quarter or a year.
On the other hand, the players in the ring are more concerned about the highs and lows of
the price action on the bourse. The focus on peaks and troughs applies to the agile trader
riding the short-term waves in the market as well as the sedate investor timing the points
of entry and exit for a position held for a lengthy spell.
To bring up a counterexample in the case of the earnings technique, consider a forecast of
net income for a stock at $3 per share over the course of the year to come. That bodement
could cause the price of the equity to rise, fall or stand pat depending on the sentiments of
the investing public.
More generally, the ups and downs of the financial forum depend more on the whims of
the participants as they react with varying degrees of lucidity to the barrage of news
streaming out of the financial bazaar as well as the real economy. In other words, the
sequence of highs and lows depend mostly on the mood of the madding crowd as they
respond in their flighty fashion to the welter of fundamental forces such as business
conditions along with technical factors as in price patterns.
In order to thrash out a cogent forecast for the market, we need to make good use of the
entirety of crucial factors that play hefty roles in shaping the outcome. The resulting chain
18

of zigzags in price can then pave the way for tapping into the dynamics of the stock
market.

Top Exchange Traded Funds for the Stock Market


At the dawn of the millennium, the United States continues to play the starring role in the
world of finance. On one hand, the sway of the primo in the global economy has shrunk a
great deal since the heady days right after the close of the Second World War.
On a positive note, though, the main reason for the comedown happens to be a hearty
rather than dismal cause. The decline of the colossus in a relative sense on the global
stage stems not from the shrinkage of the U.S. economy but rather the upgrowth of the
other markets.
Despite its waning clout, however, the U.S. still serves as the standard bearer in the global
arena. When the stock market in America sags, for instance, the bourses in other countries
tend to droop even more.
Given the dominance of the colossus on the financial front, the mass media round the
world routinely report on the goings-on in the U.S. market. In this context, the best-known
benchmark of the stock market is none other than the American icon known as the Dow
Jones Industrial Average (DJIA).
The yardstick was created in the twilight of the 19 th century in order to serve as a proxy for
the U.S. bourse as a whole. In its current form, the index is a simple average of the stock
prices for 30 heavyweights listed in the local market. The renowned names within the
pantheon run the rainbow from McDonalds and Wal-Mart to IBM and Boeing.
The DJIA is tracked by an index fund known as the SPDR Dow Jones Industrial Average.
The latter pool, launched in 1998, trades on the U.S. bourse under the ticker symbol of
DIA. The tracking fund is also known by the nickname of Diamonds.

19

In spite of its popularity, the Dow index suffers from a couple of drawbacks. One handicap
involves the fact that the yardstick covers only a small slice of a stock market that happens
to contain a myriad names.
To bring up a second weakness, the composite index is calculated as a simple average of
the stock prices. For this reason, a fractional change in the value of a high-priced equity
has a bigger impact on the benchmark as a whole compared to a relative shift of similar
size for a stock trading at a lower price.
As an example, a rise of one-tenth for an equity which trades at $200 at the outset
amounts to $20. By contrast, a similar move for a stock priced at $20 comes out to $2. In
that case, the pricey issue will have 10 time times the impact on the Dow index as its lowpriced counterpart.
In the larger scheme of things, however, the price level depends a great deal on the
number of shares outstanding which is merely a matter of administrative choice rather
than commercial significance. In other words, the price per share does not by itself reflect
the intrinsic worth of the company, nor its true heft in the real economy or the financial
forum. Even so, the Dow yardstick in effect acts as if the raw price does play a weighty
role.
In order to address these flaws, a novel benchmark was concocted in the summer of the
20th century. The index, drummed up by a service provider named Standard & Poors,
covers 500 of the leading companies listed on the bourse. The numeric value of the
yardstick is a weighted average of the stock prices. In the formula, the weights denote the
relative heft of the securities in terms of their total valuations on the bourse.
The benchmark covers many of the biggest names in the U.S. market. The members of
the circle run the gamut from Apple and Microsoft to Exxon and Pfizer.
In the financial community, a popular label for the Standard & Poors 500 index is found in
SPX. A notable exception applies to Yahoo Finance the most popular portal amongst the
investing public which likes to refer to the index as GSPC.

20

The exchange traded fund for SPX index came to life in 1993 under the nickname of SPY.
The tracker is also known to its friends as the Spyders or Spiders.
In contrast, a couple of storied benchmarks deal only with the stocks listed on the Nasdaq
exchange. The latter market entered the mainstream of culture in the throes of a bubble in
Internet stocks during the late 1990s. Amid the gale of hype and hoopla, the price action
on the virtual nexus quickly turned into a staple of the evening news all across the planet.
When the mass media report on the status of the Nasdaq bourse, they usually refer to a
broad-based benchmark of the market. In this light, the Nasdaq Composite Index covers a
multitude of common stocks as well as uncommon widgets.
Among the latter are exchange traded funds and limited partnerships. Another kind of
vehicle lies in the American Depository Receipt (ADR), a security which represents a
dollop of equity in a company that happens to be based abroad. In tracking the motley
types of instruments, the Composite benchmark comprises more than 3,000 components.
In short, the Nasdaq Composite Index is a broad measure of the equities listed on the
virtual exchange. This yardstick is the usual benchmark reported by the financial media
throughout the planet.
On the other hand, a tracking fund would be hard-pressed to keep track of thousands of
stocks, many of which come and go in short order. The bulk of the equities on the Nasdaq
exchange belong to small companies that pop up and die out within a matter of years. For
this reason, tracking the Composite Index would entail a heavy load in the form of
administrative overhead as well as transaction costs, not to mention the endless run of
whops due to the complete wipeout of stocks all of a sudden.
A leaner alternative lies in a compact benchmark that covers roughly 100 of the leading
names on the Nasdaq exchange. In computing the yardstick, the average price depends
on a set of weights determined by the relative worth of the companies within the stock
market.

21

The Nasdaq 100 index includes outfits that are based outside the U.S. In this way, the
benchmark differs from the stance taken by the DJIA.
A second distinction lies in the fact that financial firms are excluded from the Nasdaq 100
yardstick. As a result, the texture of the benchmark differs from that of the DJIA as well as
the SPX.
In the financial community, a common abbreviation for the Nasdaq 100 index is found in
NDX. Meanwhile, the tracking fund for NDX came on stream in 1999 under the call sign of
QQQ. The latter vehicle is also known as the Qubes.
Over the short term, the trio of benchmarks for the stock market may move independently
of each other. For instance, the Dow index and its tracking fund might creep upward over
the course of an hour while the other two yardsticks and their offspring funds happen to
slide lower.
On the other hand, the three benchmarks tend to move in unison over longer spells lasting
a few days or more. The linkage of the yardsticks of course shows up in the parallel
movement of the tracking funds, whether to the upside or downside.
Despite the joint heading, though, the extent of the moves can differ by a goodly amount.
As a rule, the stocks of large companies tend to fluctuate less than those of their smaller
brethren. Since the Dow index covers 30 of the biggest names on the bourse, the tracking
fund is wont to be more demure than the others.
As we noted earlier, the SPX keeps track of 500 beefy stocks. Even so, the junior
members within the troupe are compact firms that lie closer to the class of middleweights
than the circle of titans. As a result, the Spyders tend to be a bit more flighty than the
Diamonds.
Meanwhile the Nasdaq 100 index covers the biggest companies listed on the namesake
exchange. On the other hand, some of the these concerns are not that huge.

22

From a different slant, the Nasdaq exchange contains a host of technology-based firms.
On the whole, the equities of the technical sort are prone to be more volatile than average.
For these reasons, the Qubes tend to undergo wilder swings than the Spyders which in
turn are more jumpy than the Diamonds.
These hallmarks of the tracking funds are visible in the relative performance of the
benchmarks in recent years. The chart below, courtesy of Yahoo Finance
(finance.yahoo.com), covers a stretch of half a decade ending at the onset of this year.

Chart 1. Performance of QQQ since its inception relative to DIA and SPY.

To serve as a baseline, the red curve portrays the path of DIA throughout the interval.
Meanwhile, the green arc depicts the course of the Spyders over the same stretch.
The behavior of the two vehicles is representative in terms of the overall performance
throughout the period as well as the action along the way. As an example, we can see
from the left side of the graphic that SPY fell more than DIA over the course of 2011, but
surged higher than its rival over the next few years.

23

The behaviors are similar, except more so, for the blue curve that depicts the course of
QQQ. To bring up a stark example, the Qubes climbed nearly twice as much as the
Diamonds over the entire span of half a decade.
We will make use of this information later on as part of a supplmentary method for
forecasting any of the rival benchmarks in terms of one or more of the others. In particular,
we will project the likely outcomes for SPY and QQQ after sizing up the outlook for DIA
over the year to come.

Sway of Market Benchmarks and Index Funds


For the general public round the globe, the Dow Jones Industrial Average serves as the
icon of the stock market. The benchmark is widely reported in the financial sections of
general newspapers and evening broadcasts.
To a lesser extent, the story is similar for the Nasdaq market. As we noted earlier, the
usual yardstick reported by the press happens to be the Composite metric rather than the
Nasdaq 100 index. Even so, the ups and downs of the stock exchange are reported widely
in some form or other by the mass media not only in the USA but round the world.
By contrast, the S&P 500 benchmark is nowhere close to being a household name. The
yardstick lingers in the shadows, far removed from the consciousness of the society at
large.
That preceding lineup corresponds to the visibility of the chief benchmarks amongst the
general public. On the other hand, the impact of the index funds happens to vary inversely
with the fame of their namesake yardsticks. More precisely, the Spyders play the dominant
role, followed by the Qubes then the Diamonds. The order of prominence shows up in
terms of the total value of the assets under management as well as the daily volume of
trading.
From this standpoint, then, DIA is of lesser import than its main rivals. If a single index fund
had to be crowned as the top dog, then SPY would win the title hands down.
24

From a different angle, the dominance of the Spyders is consistent with the central role
played by the underlying index within the financial community. For the bulk of professionals
ranging from fund managers to academic researchers the most popular benchmark is
found in the S&P index.
From the standpoint of the genuine investor, however, the choice of one vehicle over
another does not make a great deal of difference in one sense. The main reason lies in the
allied motion of the underlying benchmarks along with their tracking funds.
As an example, the Diamonds tend to move in unison with the Spyders. For instance, DIA
is prone to travel in the same direction, and by a comparable amount, when SPY rises or
falls by a single percent. In that case, a forecast for SPY is for the most part a redundant
exercise in a survey that happens to feature DIA as well.
Due to the tie-up of the index funds, an efficient course of action is to sketch out the path
of the Diamonds then use the mapping as a starting point for the Spyders as well as the
Qubes. The outcome for the latter two vehicles is apt to mirror to a high degree the relative
changes in price for DIA.
To recap, the lot of the Diamonds is linked closely to the fortunes of the Spyders. That is,
DIA tends to travel in the same direction, and by a comparable amount, when either vessel
makes a sizable move. In that case, a forecast of the Spyders is for the most part a
superfluous exercise within a survey that happens to feature the Diamonds as well.
For these reasons, we will focus chiefly on DIA in this report. The turnout for the Spyders
will mirror to a high degree the relative motion of the Diamonds. The same applies to the
Qubes, although the extent of the moves tends to be greater.
On a cheery note, the Diamonds are composed of 30 of the biggest and most stable
names on the bourse. By contrast, the Spyders comprise 500 of the largest stocks, some
of which are worth only a few billion dollars on the stock market and are thus closer to
middleweights than heavyweights.

25

The diversity of sizes applies as well to the firms within the Nasdaq 100 Index along with
their disparate valuations. Moreover the bulk of the Nasdaq benchmark is made up of
techonology firms whose stocks tend to be highly volatile.
Given this backdrop, the Spyders and Qubes bounce around more than the Diamonds in
response to the passing whims of the madding crowd. As a result, DIA is a bit easier or
more precisely, less difficult to predict than its major rivals. For this reason, we will use
the venerable benchmark as the main vehicle for forecasting the stock market.
In short, the overall behavior as well as the punch line do not vary a great deal amongst
the chief benchmarks. As a result, a portrait of one is in general tantamount to a sketch of
the other from the standpoint of the genuine investor.

Hits and Misses over the Past Year


A year ago, we presented a bunch of forecasts dealing with the top benchmarks of the
stock market over the course of a year and more. On one hand, the accuracy of the
longish predictions remain to be seen.
On the other hand, we can review the turnout for the year-long predictions. Taken as a
whole, the calls turned out to be fairly right yet somewhat lacking.
The mainstay for forecasting was the tracking fund for the Dow Jones Industrial Average.
The primal index behaved pretty much as we had envisioned.
Meanwhile the secondary benchmarks took the form of SPY and QQQ. The prospects for
the broad-based yardsticks were obtained largely by using the primary forecast as a
starting point.
As a backdrop, the trio of beacons tend to move in parallel, whether to the upside or
downside over all times scales ranging from less than a day to more than a year. In that
case, the peaks and troughs in price are prone to occur around the same time as well.

26

Looking at the big picture, the overall return on SPY over the course of the year differed
from the presaged value by a handful of percent. By contrast, the Qubes for the most part
stuck to the defaut path charted in advance and ended up within a few percent of the
envisaged target.
Amongst the professionals in the financial ring ranging from the practitioner in the pits to
the researcher on the sidelines the most popular benchmark of the stock market lies in
the S&P index of heavyweights. This yardstick covers 500 of the largest companies on the
U.S. bourse. Despite the listing on an American exchange, however, many of the firms
obtain a hefty chunk of their profits from far-flung operations round the globe.
As we expected a year ago, the U.S. economy turned in a subdued but tolerable
performance in the midst of a modest advance by the global economy as a whole. Thanks
to the benign environment, the earnings of the firms covered by the S&P benchmark
expanded as well.
In line with our expectations, the income level did continue to climb higher. From a larger
stance, the profits of the companies within the index have risen at a measured pace
following a hairy plunge in 2009 in the throes of the Great Recession.
As a point of reference, consider the net income for the stocks within the S&P index on a
12-month basis. At the beginning of 2009, the average earnings came out to an annual
sum of $13.31 per share, after adjusting for inflation and fixing the amount in terms of
constant dollars at the price level for November 2012.
A year onward, the corresponding figure soared to $57.68 per share. By the beginning of
2011, the intake swelled to $82.24 per unit and continued to grow throughout the year.
Meanwhile the pertinent figure for January 2012 was $88.85.
In fact, the earnings had hit rock bottom at $7.42 per share back in March 2009. After that
flop, the profits climbed steadily over the years to follow. A notable exception along the way
was a small hiccup in March 2012 when the intake slipped by 14 cents compared to the
prior month (Multpl.com, 2013).

27

Based on an annual sampling of the data, however, the only blot in the picture was a small
dip in January 2013 when the earnings slipped a bit to $86.89. By September the same
year, however, the profit stream regained its vigor and climbed to $92.79 (Multpl.com,
2014).
As things turned out, March 2009 was also the point at which the stock market had hit its
nadir. The S&P 500 index plumbed a low of 666.79 points while its tracking fund fell to
$67.10.
Based on the last few paragraphs, we can see that the stock market turned around
precisely when the profit level started to recover. In other words, the investing public was
simply keeping up with the ongoing flow of earnings for the companies covered by the
S&P benchmark. So much for the fanciful notion that the stock market always moves in
advance of the real economy.
To recap, the profits of the companies within the S&P index have been rising steadily since
the financial crisis of 2008 along with the worldwide recession. The earnings per share on
a yearly basis hit a low of $13.31 in January 2009 but climbed higher to reach $89.66 by
June 2012, with further gains to come.
In this way, the stock market has been slogging higher despite the occasional flare-up of
jitters in the financial community. A showcase of the latter was the crash of the stock
market in autumn 2011. Looking in the forward direction, we can expect an upturn in
performance from a raft of bourses round the world which have wallowed in a funk over
the past several years.
A big reason for the stunted progress of the emerging markets lay in the worries of the
investing public over a slowdown in China in tandem with knock-on effects throughout Asia
and the rest of the world. As usual, though, the severe angst of the madding crowd has
turned out to be largely groundless.
As we noted earlier, the politicians of the West have opted to strangle their economies by
propping up the hulking distortions in the real economy caused by the rage of speculation

28

in real estate during the run-up to the financial crisis of 2008. Under normal conditions,
however, the housing sector acts a primary engine of growth for the entire economy.
The same is of course true in the inverse direction. If the property market is bound up in
chains, then the rest of the economy can at best merely limp along.
In the absence of a wholesale change in policy, the bulk of Western markets will continue
to gnash and grind well into the next decade (Kim, 2011, 2012). In that case, the real
economy as well as the stock market will be hard-pressed to make much headway.
On the other hand, there is no good reason for the sprouting regions of the world to
behave in a similar fashion. For one thing, the emerging markets can and should trade
with each other in greater volumes and thus ensure their mutual growth.
As a happy consequence, the upsurge of the spry regions will lead to the uptake of imports
from Western countries in greater volumes. The products in demand span the gamut from
luxury cars and designer jeans to blockbuster films and cross-border tourism. As a result,
the groundswell of growth will help to bolster the blighted nations of the West despite their
litany of self-inflicted wounds and counterproductive schemes.
A year ago, our main task was to thrash out a medley of forecasts for the trio of index
funds that track the leading benchmarks of the stock market. In the process, we began
with a projection for the Diamonds, then moved on to the Spyders followed by the Qubes.
There were several reasons for starting out with DIA rather than its rivals. For one thing,
the Diamonds keep tabs on the Dow Jones Industrial Average, which boasts the longest
track record by far.
A second, and related, reason involved the fact that the Dow index happens to be the
leading icon of the stock market for myriads of investors as well as observers. The beacon
holds sway not only in the U.S. but throughout the world.
To bring up a third feature, the Dow tends to be more stable than either of its main rivals.
The reason is that the benchmark covers 30 of the biggest names in the marketplace.
29

By contrast, the Nasdaq yardstick spans a broader array of the top 100 firms within its
compass. Meanwhile the S&P index keeps track of a larger troupe of 500 stalwarts. As a
result, each of the expansive benchmarks contains a welter of firms that are closer to the
status of middleweights rather than heavyweights. In line with the norm in the stock
market, the smaller contenders tend to be more flighty than their larger brethren.
Although exceptions can arise, the Dow index tends to be more demure than its younger
siblings. An extreme example arose in the throes of the Internet bubble of the late 1990s,
when the Dow did not come close to joining the manic upspurt of the stock market as a
whole.
Meanwhile, an example closer to the usual state of affairs cropped up during the ramp-up
of the bourse in the second half of 2013. A mini-bubble in the U.S. was mirrored by the
antics of SPY and QQQ, which raced higher with scarcely a pause.
In line with the norm, however, the Diamonds eased up and took a few months to catch its
breath. More precisely, the resting point turned out to be a milepost in the $157 zone.
On the other hand, the Spyders and Qubes kept dashing higher. As a result, the crispness
of the milestone for the Diamonds which showed up as a horizontal line on the price
chart for DIA turned into a smeared zone in the case of SPY as well as QQQ.
The resulting image looked as if the last portion of the chart for each of the Spyders and
Qubes had been stretched upward so that the horizontal stripe had morphed into a mushy
ramp sloping upward. In other words, there was no landmark to speak of merely a
muddled blotch.
For a variety of reasons, then, the Diamonds have their attractions as the mainstay for
charting the course of the bourse going forward. A forecast for DIA can then serve as a
springboard for plotting the future of SPY as well as QQQ.

30

Performance of DIA
When the previous set of forecasts was published a year ago, we noted that the U.S.
bourse had swollen too much too fast over the preceding few months (Kim, 2014). Due to
the froth in the marketplace, the bourse was poised to suffer a hefty breakdown over the
weeks to come. When the prediction was made, the prevailing price of the Diamonds was
sliver below the prior peak of $165.29, which also turned out to be the high point for
January.
A couple of weeks later, the DIA fund touched a low of $153.12 (Yahoo, 2015a). The
smackdown turned out to be a plunge of 7.4% from high to low. Put another way, the
blowout amounted to nearly half the downcast of 15% that marks the lower limit of a fullblown crash of the stock market.
In the same briefing, we noted that the Diamonds were slated to rise but not get very far
during the first half of the year. That much turned out to be true. The peak during this
period was formed in June at the $169.58 level. The latter value lay only a couple of
percent beyond the closing price of $165.47 at the end of the previous year.
We also foresaw a major roadblock at the $178.22 level. Moreover, this milestone was
likely be reached by the beginning of the summer. The barrier itself was pretty much on
target, although the Diamonds did not reach the general vicinity until the autumn. The
tracking fund managed to reach $173.32 in September, which lay within a couple of
percent of the blockade.
After a plunge over the month to follow, DIA surged to a high of $178.69 in November
folowed by a peak of $180.71 in December. Finally, the tracker closed out the year at
$177.88. Each of the latter three values lay within 1.4 percent of the major landmark that
we had foreseen at $178.22.
We opined a year ago that the outlook for the second half of 2014 was not much better
than the first half. That much was also true.

31

Moreover, the bourse was apt to suffer a breakdown of middling size. The slump would
likely amount to a halfway trip to the threshold of 15% that marks the low end of a fullblown crash in the U.S. In that case, the upset should result in a knockdown in the ballpark
of 7 or 8 percent.
In gauging the extent of the breakdowns, we can turn to Chart 2. The graphic, courtesy of
Stockcharts (stockcharts.com), displays the price action for DIA over the course of 2014.
For each stick figure in the diagram, the vertical stroke depicts the range of values from
low to high during a single day of trading, while the horizontal tick denotes the price level
at the close of the day.

Chart 2. Path of DIA during 2014.

For starters, we can see that the Diamonds reached a high of $162.01 around the end of
2013. Then the tracking fund crumpled over the weeks to follow and touched a low of
$150.01 in February. The smashup amounted to a plunge of 7.2%.
32

After bouncing around for half a year, DIA touched a high of $169.48 in July before
tumbling to $161.55 a couple of weeks later. In this way, the market fell below its initial
level from the beginning of January.
The market then recovered over the next month, touching a high of $172.35 in the middle
of September according to the chart. The next act was to suffer a crushing fall, ending at
$157.39 a month later. Once again, the latter price lay below the initial price at the
beginning of the year. Moreover the smashup amounted to a cutdown of 8.7%
In these ways, the takedowns of the Diamonds popped up in line with our expectations at
the beginning of the year. In particular, DIA suffered a couple of breakdowns in excess of a
halfway trip toward a full-blown crash of the market.
For the sake of good form, we should also take a look at a pair of big flops last year
suffered by the S&P index that is the yardstick of choice for the professionals. At the
outset, the flagship benchmark peaked at 1,850.84 points in January before tumbling to
1,737.92 units a few weeks later. The takedown amounted to a drop of 6.5%.
In the autumn, the same index touched a high of 2,019.26 before plunging to 1,820.66 a
month later. The wipeout amounted to a smashup of 9.8%; that is, roughly two-thirds of the
way toward a full-bodied crash of the stock market.
We now return to the main subject of this section: the performance of the Diamonds. The
blue ovals in the foregoing chart spotlight the surge in trading volumes that accompanied
the blowups of the winter and the autumn.
On a positive note, the spates of panic were helpful in squeezing out some of the froth in
the market, and thus paving the way for further progress down the line. As an example, the
tracking fund recovered smartly from the mini-crash in October before taking another dive
of modest size in December.
According to Chart 2, DIA reached a zenith of $180.71 before closing out the year at
$177.88. The latter value was 7.5% higher than the baseline of $165.47 marked out at the
33

end of 2013.
By way of comparison, the initial milestone of $178.22 that we foresaw at the beginning of
last year lay 7.7% beyond the closing value of DIA in 2013. In other words, the actual
return fell short of the envisaged landmark by just 0.2 percent.
In our forecast last year, we averred that the summer and autumn would be a good time
for the cautious investor to stay clear of the stock market. After that stage, the bourse
would regain its footing and tramp upward once more during the last quarter of the year.
Thankfully, there were no big surprises along these lines.
To bring up an abortive streak, however, we also mentioned that the trend line over the
previous couple of years could perhaps persist in 2014. In that case, the ramp-up over the
year would be a hike of 21.6% which corresponds to a milepost at $190.91. The latter
marker for 2014 would represent a gain of some 15.4% over the price of $165.47 recorded
at the end of 2013.
On the other hand, the secondary scenario did not come to pass. If it had, we would have
to worry right now about the heaving froth in the stock market, along with the frightful
consequences for a thumping bust as this year unfolds.
For the most part, the winds of fortune have been blowing as they should. Granted, the
market has been a tad on the puffy side. Where the Diamonds are concerned, for
instance, the market advanced by 7.5% in 2014 on top of a hefty surge over the previous
year.
To sum up, the stock market is a bit foamy at this juncture. On the other hand, the bourse
is not so frothy as to pose a severe threat to further progress in 2015.

34

Outcome for SPY and QQQ


In addition to the Diamonds, the chief benchmarks of the stock market consist of the
Spyders and Qubes. We noted last year that SPY is prone to head in the same direction
as DIA but advance somewhat more in relative terms.
The story has been similar for the Nasdaq market. The main difference lies in the tendency
of QQQ to display even larger swings in price than SPY, let alone DIA.
A year ago, we predicted that both the Diamonds and Spyders would turn in a restrained
performance over the course of 2014. For one thing, the two pacers had already passed
their all-time peaks and were now plowing into unknown terrain. In line with the augury, the
advance of the stalwarts was less torrid last year compared to their upsurge over the
course of 2013.
Even so, the Nasdaq market had ample room to advance before it regained its historic
peak formed at the height of the Internet rage. As a result, we foresaw a brighter future for
QQQ compared to SPY. And in fact the Nasdaq tracker did outrun both the Spyders and
Diamonds by a solid margin.
As for the numeric target, we noted that the final milestone for SPY in 2014 should lie
around 17 percent higher than its closing value at the end of the previous year.
Unfortunately, the beefy figure turned out to be rather optimistic.
The chart below has been adapted from Yahoo Finance (finance.yahoo.com). From the
purple curve, along with the shaded number on the right side of the image, we can see
that SPY rose by 11.29% over the span of a year ending in 2014. Based on the latter pair
of returns, the actual performance fell short of the anticipated value by nearly 6%.
On the upside, though, the forecast for the Qubes met a better fate. A year ago, we
predicted that QQQ would rise by 19.8% over the course of 2014.

35

We can see from the turquoise curve that the Nasdaq fund managed to surge by 17.38%.
The actual performance fell only a couple of percent short of the augured target marked
out at the beginning of the year.
At this juncture, we take a step back in order to scan the big picture. As a point of
departure, we note that the Qubes reached a price of $87.96 at the end of 2013.

Chart 3. Performance of DIA last year


compared to SPY and QQQ.

At that point, the closing price was a far cry from the zenith of $232.88 touched in March
2000. To be fair, the latter figure has to be halved due to a 2-for-1 stock split that occurred
in the second half of March 2000. For this reason, the pertinent price a year ago came out
to $116.44.
The latter figure lay within easy reach of the last milestone of $105.38 that was projected
for 2014. Spurred by the experience of the past, the mass of investors would do their
darnedest to shove the Qubes up to their all-time high. And if the central bank were to print
up enough money to accommodate the push, the madding crowd could well succeed.

36

As things turned out, QQQ did dash ahead at a giddy rate. Even so, the final outcome was
fell short of the historic landmark. Even so, the Qubes closed out the year within a short
distance of the airy peak formed at the height of the Internet bubble.

Turnout for Dynamic Markets


When the stock market in the U.S. is on a roll, the other bourses of the world tend to
follow. In that case, the rest of the planet should on average have turned in a peppy
performance over the course of 2014.
Sadly, though, the usual result did not come to pass. Instead, the bulk of markets round
the world turned in a lousy showing throughout the year.
In the realm of budding markets, a pioneer is found in a tracking vehicle known as the
iShares MSCI Emerging Markets fund; the touchstone trades in the U.S. under the ticker
symbol of EEM. Meanwhile, a second beacon lies in the Vanguard FTSE Emerging
Markets ETF which runs under the banner of VWO.
The chart below, adapted from Yahoo Finance, covers the period from the debut of VWO
in spring 2005 until the end of 2014. The graphic displays the relative performance of the
trackers for the emerging markets in the form of VWO and EEM, in addition to other
beacons as in the case of DIA and SPY.
Another feature on the chart concerns a tracking fund for smallcap stocks. In this arena,
the leading yardstick is an index of 2000 bantam names compiled by a service provider
named Russell Investments. The benchmark is tracked by a communal pool which trades
on the U.S. bourse under the call sign of IWM.
As we can see from the left side of the exhibit, the emerging funds rose more than twice as
much as SPY and DIA until the end of 2007. Then the saplings fell roughly twice as hard
during the stormy spells before and after the financial crisis of 2008.

37

After that stage, the dynamos again rose around twice as much as the American
benchmarks over the next couple of years. Then the budders crumpled once more in their
usual fashion around the time the U.S. bourse crashed in the autumn of 2011.

Chart 4. Performance of VWO since its launch


relative to EEM, DIA, SPY, QQQ and IWM.

On a positive note, small stocks have fared better than the emerging markets in recent
years. On the downside, though, we can see from the yellow curve in the chart above that
the Russell fund suffered a crushing blow before, during and after the financial crisis of
2008. Even so, the midgets tracked by IWM did not fare much worse than the giants in the
form of DIA and SPY.
The small fry took another big plunge when the stock market as a whole crashed in 2011.
Since then the minnows have fared better than most of their counterparts appearing on the
chart.
On a cheery note, the Nasdaq market has fared even better. As a point of reference, the
breakdown of QQQ during the Great Recession was comparable to those for DIA and
SPY. The Qubes suffered modest takedowns in 2010 and 2011, but surged ahead
38

afterward. As a result, the technology-laden benchmark has in recent years turned in a


rousing performance compared to its rivals appearing on the chart above.
From a larger stance, the U.S. serves as a bellwether within the real economy as well as
the financial forum. In particular, the industrial nations of the world have a custom of
following the pacesetter. On the other hand, the standard pattern has for the most part
failed to take hold over the past few years.
The aberrant state of affais is reflected in the sappy performance of mature economies
such as Canada, Britain and Germany. The standard bearers for these markets are found
in a trio of index funds known as iShares MSCI Canada (EWC), iShares MSCI Germany
(EWG), and iShares MSCI United Kingdom (EWU).
The chart below spans the same time frame as the foregoing graphic. The main difference
is that EEM, DIA, QQQ and IWM have been replaced by EWC, EWG and EWU.

Chart 5. Performance of VWO since its launch


relative to SPY, EWC, EWG and EWU.

The blue line shows the relative peformance of the VWO fund. The communal pool
bounced around a great deal but has gone nowhere over the past four years.

39

Based on historical data from Yahoo Finance, the tracking vehicle was valued at $41.00
per share at the end of 2009. Five years onward, the deadbeat slid to a price of $40.02 at
the close of 2014.
Meanwhile, we can see from the red curve that the Canadian vehicle has for the most part
followed the course of VWO in recent years. For instance, EWC has flailed around without
making much headway over the past couple of years.
A key reason for the crummy performance lies in the concerns of the investing public over
the pulse of global growth. As it happens, Canada is a major exporter of raw materials as
well as a financial center for the mining industry round the world. For these reasons, the
fate of the local bourse depends a great deal on the pose of the general public regarding
the outlook for economic growth in the budding regions along with the demand for natural
resources.
In casting a glance at Europe, we see that the British market bounced around but made
scant progress over the past couple of years. One reason for the dismal showing lies in
the fact that the bourse in London hosts a raft of companies focused on the production and
distribution of natural resources. Moreover a hefty portion of the market consists of the
financial sector that has yet to recover from the excesses of the housing bubble, despite
the gobs of bailouts and other favors bestowed by the politicians. A third factor is the plight
of the economy in Europe, which continues to wobble on the verge of slipping back into
recession. Given this backdrop, the stunted performance of EWU reflects the jitters of the
international crowd over the global economy in general and the European theater more
keenly.
On the bright side, though, the London bourse also contains scads of firms in diverse
sectors ranging from retailing to infotech. As a result, Britain could and should fare better
than many of its counterparts on the Continent over the next couple of years.
Another aspect of the chart is the trace for Germany. From the arc shown in light purple,
we can see that EWG formed a crest in 2011, then thrashed around and ended up pretty
much at its prior peak at the end of 2014.

40

On a positive note, Germany is a powerhouse of global trade that exports mounds of


products to neighboring countries as well as emerging regions. The goodies shipped
abroad span the rainbow from luxury cars and capital equipment to medical tools and
transaction software. For this reason, EWG is destined to gain traction and forge ahead as
the global economy regains some of its usual verve over the next year and beyond.
In the modern era, the bulk of growth in the gross world product springs from the emerging
countries. In that case, the stock markets in the lusty regions ought to flourish in like
fashion.
Yet the swarm of international investors has been wary of stepping with gusto into the
vibrant markets. Over the past couple of years, in particular, the fear of volatility in the
emerging regions has kept the huddled masses at bay.
The glut of angst will of course fade away sooner or later. When that happens, the budding
markets should surge by leaps and bounds as they make up for lost time.
To sum up, a host of stock markets round the world have trailed far behind the U.S. bourse
over the past couple of years. Even so, the laggards are slated to pick up the pace before
long.
An example lies in the lurching markets of Europe which are likely to fare better over the
year to come. In a similar way, the emerging regions are sure to come to life and spread
their wings, thus outshining the benchmarks of the U.S. in due course.

Facing Forward
For the world as a whole, the outlook for growth over the next couple years is roughly in
line with the usual slant since the financial crisis of 2008 in tandem with the Great
Recession. As a backdrop, the global economy expanded by a mere 2.6 percent in 2014,
up slightly from 2.5% during 2013.

41

On the bright side, the World Bank expects the gross world product to expand by 3.0% this
year after adjusting for the official rates of inflation followed by 3.3% in 2016 (World,
2015). Meanwhile the Conference Board foresees a slightly higher pace of growth
amounting to 3.4% this year (Conference, 2014).
In recent years, the total volume of economic activity in the emerging regions has been
comparable to the output churned out by the mature countries. Given the higher rate of
growth in the sprouting markets, the lusty countries will generate the bulk of the increase in
global income.
More precisely, the developing regions are slated to surge by 4.8% in 2015, followed by
5.3% a year later. By contrast, the rich countries will creep ahead by a mere 2.2% this year
before crawling up to 2.4% in 2016 (World, 2015).
From a different angle, the earnings of the companies listed in the stock market form a
solid bridge between the real and financial markets. To begin with, the intake of profits in
the corporate sector depends largely on the vigor of the tangible economy. In addition, the
flow of earnings plays a pivotal role in a popular gauge watched by the investing public;
namely, the ratio of the stock price to the earnings per share.
In this way, the income stream has a hefty impact on the fortunes of the stock market. For
this and other reasons, the lot of the companies in the real economy has a decisive impact
in the fortunes of their equities on the bourse.
On the upside, the real economy is slated to fare better in 2014 than it did last year.
Although the gains will be moderate, the mass of investors can look forward to a dose of
healthy gains even so.
By contrast, the stock markets in far-flung countries are likely to show mottled results. On
the downside, the buoyant bourses in the U.S. and some other countries are bound to
grind higher at a labored pace while they take some time to digest the beefy gains racked
up last year.

42

Even so, the buildup of the real economy in the emerging regions will nudge up the local
bourses as time goes by. Sooner or later, the swarm of international investors will shake off
the jitters and return to the sprouting markets as the hotbeds of economic growth. In that
case, the lagging markets of Asia and other regions should begin to feel the positive vibes
by the end of this year.

Impact of Money Printing


A prominent source of economic data in the U.S. is found in the St. Louis Fed, a branch of
the central bank. According to the latest figures conveyed by this organ, the Consumer
Price Index (CPI) rose at an annual rate of 0.7% over the course of 12 months ending in
December 2014 (Federal, 2015a).
The same outfit declares that the gross domestic product (GDP) slumped by a couple of
percent during the first quarter of 2014, then surged by 5.0% on an annual basis over the
course of a year ending in the third quarter. The latter value was suppsedly the real rate
of growth after adjusting for the bane of inflation based on official figures published by the
government itself.
On the other hand, the World Bank begs to differ. According to the international agency,
the latest tally was a growth rate of 2.4% for the U.S. over the course of 2014 (World,
2015). The latter estimate is reckoned in terms of the purchasing power of the greenback
in 2010; in other words, after taking inflation into account. The slim figure is a lot more
credible than the fat number of 5% touted by the Federal Reserve.
On the financial front, a standard measure of the money supply deals with the stockpile of
cash along with near-cash assets. In this context, a yardstick known by the clunky term of
Money Zero Maturity (MZM) refers to the volume of liquid assets which can be turned at
once into hard cash.
In other words, the maturity date for such an asset is zilch. The fluidity of a liquid asset
stands in stark contrast to the inertness of many other items such as time deposits or real

43

estate. Simply put, MZM denotes the pool of money which is readily available for spending
and consumption in the real economy as well as the financial forum.
By contrast, a broader definition of money focuses on the role of the currency as a medium
of exchange. As an example, a customer could pay for a bag of groceries by handing over
some cash or writing a check.
In this light, M1 denotes the stockpile of physical money in the form of coins and bills in
addition to virtual funds contained within demand deposits. An example of the latter is a
checking account. Another sample is a Negotiable Order of Withdrawal (NOW) account at
a commercial bank; this type of setup offers a modicum of interest payments on the cash
balance, yet permits the customer to write drafts against the amount held on deposit.
The purpose of the M1 yardstick is to track the amount of money that is more or less in
active circulation. For this reason, the metric does not include conventional forms of
savings accounts.
A broader definition of money is found in M2, which covers the components within M1 as
well as other forms of near-cash. The liquid assets in the latter category include the
balances in savings accounts as well as money market funds plus time deposits of
moderate size. On one hand, a constrained asset of this sort is less handy as a medium of
exchange. Even so, each form of wealth can be converted into cold cash in short order.
Suppose that an individual moves a wad of $1,000 from a checking account into a money
market fund. From the standpoint of the saver, the amount of cash available for spending
has hardly changed since the transaction can be reversed at will. In fact, the owner could
well treat the cash in the money market fund as a demand deposit if the account comes
with a packet of checks. As a result, the transfer of cash from one type of account to
another has resulted in no material change in the eyes of the saver.
On the other hand, the transfer of funds out of the checking out reduces the trove of
money according to the M1 measure. By contrast, the overall amount reckoned by M2
remains unchanged. In view of this distinction, the latter yardstick represents a better
measure of the amount of money available for spending by consumers from a practical
44

stance. Given this backdrop, M2 is arguably the most popular measure of money used by
the economist.
In recent decades, however, the constrained metric of MZM has come to play a growing
role in gauging the scope of the money supply. For these reasons, we will take up this duo
of yardsticks in sizing up the volume of money sloshing around the marketplace.
The precise rate of money creation of course varies over time. Even so, an example or two
will highlight the dizzy pace at which the stockpile has been diluted and the currency thus
weakened.
As a starting point, consider the pool of MZM in the aggregate. Around the end of 1999,
the narrow measure of money stood at $4.341 trillion dollars after adjusting for seasonal
variations. By the time of the latest tally in December 2014, however, the stockpile had
ballooned to $12.919 trillion (Federal, 2015b).
In simple terms, the money supply nearly tripled over the course of 15 years. The buildup
came out to a compound rate of annual growth of just over 7.5%.
Meanwhile the story did not differ much from the standpoint of the M2 yardstick. At the end
of 1999, the broader gauge amounted to $4.617 trillion dollars after seasonal adjustments.
By December 2014, the corresponding figure had soared to $11.632 trillion (Federal,
2015c). In that case, the compound rate of growth came out to nearly 6.4% a year.
In recent years, we have been told that the real economy has been growing by a couple of
percent a year at most after adjusting for inflation according to official estimates of the
increase in the cost of living. In that case, what happens to the tall tale when we learn that
the supply of money has surged by some 7% a year according to the MZM yardstick, and
slightly less in terms of the M2 metric?
The dollar is breaking down chop-chop, thats what. The only consolation of sorts for
Americans is that the currencies in Europe have been crumbling even faster than the
greenback.

45

The euro and other European currencies form the bulk of a currency benchmark known as
the U.S. Dollar Index. Given the swift collapse of its European rivals, the Dollar Index has
been soaring since the summer of 2014.
On one hand, a good fraction of the upsurge in the money supply gets stashed away in
bank vaults. After the near-death experience of the financial flap of 2008, the folks in the
banking industry have balked at doing their jobs. That is, the banksters are now loath to
lend money not only to berserk speculators but to sane and healthy companies as well.
On the other hand, neither MZM nor M2 includes the cash tucked away in the depths of a
bank vault. In other words, each of the yardsticks keep track of the heap of dough that
people can put to ready use in order to buy goods and services.
In that case, one portion of the upsurge in the money supply will naturally trickle into the
housing sector. Not surprisingly, the property market has been creeping upward in recent
years without any good cause.
From a different standpoint, the median level of income in the U.S. has stagnated or even
declined over the past decade. Meanwhile, the cost of living has surged far beyond the
piffling figures trotted out by the governments of the West. Given the cutdown of wealth by
way of lower income as well as higher outgo for the general public, the average dwelling is
still grossly overpriced thanks to the misguided schemes of the politicians in propping up
the property market.
Due to the plethora of contrived schemes, the housing sector will not recover its health in
full nor regain its stride until the 2020s. As a result, the economy as a whole will also have
to limp along for another decade or so (Kim, 2012).
Now what happens to the rest of the money pumped out by the central bank? The obvious
destination lies in the financial forum especially in the form of stocks and bonds. As a
direct outgrowth, the leading benchmarks of the bourse have been dashing higher in
recent years.

46

The inrush of money pumped into the financial system by the central bank has to go
somewhere. As a consequence, the mass of investors have been eager to jump on any
excuse, whether real or imagined, to pile into the stock market.

Roundup of Trends in the World Economy


Over the next couple of years, the global economy is slated to chug along as it has done in
the recent past. On the upside, though, the outlook at this stage is a tad better than it has
been of late.
According to a preliminary estimate by the World Bank, the global economy grew by 2.2%
over the course of 2013. Better yet, the growth rate is expected to rise to 3.0% during the
year to come, followed by an upturn of 3.3% in 2015.
In line with the general upturn, the U.S. economy should expand by 2.8% this year,
followed by 3.0% in 2016. By way of comparison, the increase last year was a slender
2.0%.
In brief, the outlook for the year to come is a shade better than the turnout over the past
couple of years. The advance of the real economy should be a tonic for a host of stock
markets, many of which missed out during the upsurge of the U.S. bourse over the past
half-decade.

Impact of Money Creation


In late 2014, the central bank decided to ease up on its latest spree of quantitative easing
(QE). The latter term, fancy as it may sound to a newcomer, is simply double-talk for an
abnormal way to print up gobs of money and pump the dough into the financial system.
Under normal conditions, the standard ploy of the central bank in expanding the money
supply is to print up a heap of cash out of thin air then use the stash to purchase the debt
churned out by the executive branch of the government. In the case of the U.S., for

47

instance, the Federal Reserve conducts operations in the open in the credit market in
order to buy the bonds that have been issued by the Treasury Department.
The purchase of a security by the central bank provides the former owner with a dollop of
money that can be used to procure goods and services in the real economy. In a
transaction of this sort, the bondholder could take a variety of forms such as a solitary
investor or a corporate concern, a mutual fund or a sovereign state.
It makes scant difference whether the seller of a bond uses the proceeds at once in order
to pay their bills, or opts instead to hold onto the cash. Sooner or later, the bulk of the
money thus obtained ends up as a cash deposit in a bank account.
In a healthy economy, the banks holding the deposits would put the funds to use by
lending them out. On the opposite side of the transaction, the borrowers could use the
loans to finance additional expenditures by way of consumption or investment.
In the aftermath of the financial crisis, however, myriads of commercial banks have chosen
to hoard the cash in their vaults rather than lend it out. As a result, a standard method of
the central bank for pumping money into the marketplace has been closed off.
As an alternative, the national bank has taken to buying up scads of financial widgets
churned out by commercial firms. For instance, the purchase of commercial paper and
mortgage-based bonds expands the pool of participants that get their hands directly on the
fresh moola stamped out by the central bank.
In buying up gobs of bonds in the credit market, the central bank shores up the prices of
the purchased assets and by extension all manner of debt securities. Meanwhile, a lofty
price corresponds to a low yield on the stream of dividends thrown off by the buoyed
instruments. In other words, the effective rate of interest turns out to be paltry.
For a representative figure, we turn to a renowned source of information on personal
finance. According to Bankrate, the average rate of interest in the U.S. on certificates of
deposit issued by banks and maturing in one year came out to a measly rate of 0.27% at
the beginning of 2015.
48

Meanwhile the corresponding figure on a five-year security came out to an annual rate of
0.85%. Moreover, the average rate of interest on money market accounts across the
nation amounted to a pitiful 0.09% per year (Steiner, 2015).
From a different angle, the interest rates did not come close to matching even the stunted
rates of inflation proclaimed by the government. Moreover, the piddling payouts were a
joke compared to the actual hike in the cost of living faced by the mass of consumers.
No wonder the investing public has been desperate to put their money to work in some
way or other. Since the stock market seems to be on a roll, the eager beavers have
chosen to jump on the bandwagon. Whether the upswell of the bourse can be justified on
rational grounds is of scant concern to a restive crowd driven to distraction.
On the glum side, easing back on the torrent of money printing means that there will be
less fresh cash to shore up the shindig in the circus of finance. In particular, a wind-down
of the QE program is a downer for the stock market.
Even so, the hopeful herd has opted to interpret the change in monetary policy as a sign
that the central bank no longer needs to prop up the financial forum in order to rev up the
economy. Thats got to be a good thing, right?
In response to the latest decree by the Federal Reserve, the mass of investors shed their
inhibitions and shoved the bourse to newfound heights in the weeks to follow. In this way,
the flood of money rushing into the financial bazaar will continue to pump up the stock
market over the months to come.
From a larger stance, the end of quantitative easing does not mean that the creation of
fresh money will come to halt. Rather, it only means that the central bank will refrain from
buying up trillions of dollars worth of commercial debt in the private sector.
But fear not, the custom of printing money like mad will continue to prevail. That is, the
Federal Reserve will revert to its usual scheme and rely solely on scooping up Treasury
bonds to the tune of trillions of bucks in order to drown the economy in a sea of money.
49

Outlook Based on Price and Earnings


The purpose of a stock is provide the investor with a share in the assets and earnings of
the corporation. The current stockpile of assets for a public company is in general a known
quantity, at least to the precision usually specified by the accepted principles of
accounting.
By contrast, the net change in assets going forward will depend mostly on the capacity of
the firm to rake in further profits. In that case, any change in the intrinsic value of the equity
depends largely on the earnings to come.
The income stream of course depends on the performance of the company in the tangible
economy. For this reason, the earnings level happens to be a fundamental factor.
Moreover the income level in the past can be gauged with a decent level of accuracy. For
a sizable company with a long track record, the earnings stream over the next year or so
can also be forecast with a fair level of accuracy.
Given the dominant role of the income level in the innate worth of the equity, the price of a
stock in comparison to its income per share is a key trait watched by the investing public.
We note that the ratio of price to earnings is a hybrid factor in which the former component
is the epitome of a technical trait in the financial forum while the latter item is a
fundamental feature in the real economy.
The price of a stock going forward is of course fiendishly difficult to predict. Even so,
legions of players in the stock market pay heed to the price/earnings quotient. In general,
the sober folks tend to shy away from the market when the price is extremely high relative
to the earnings, and move in when the ratio is abnormally low.
As a result, the hybrid factor usually hovers within a range of modest size. This tendency
can serve as the basis for a rough forecast of the price level down the road.

50

Prediction based on Profit Trends


The ratio of price to earnings gives some idea of the appeal of stock amongst the investing
public. A high value signifies an equity in vogue, while a low value marks a stock out of
favor.
In this light, the current price (P) of the equity is divided by the earnings (E) of the business
after adjusting for the number of shares available to investors of all stripes. In the basic
form of the ratio, the trailing earnings (Et) refers to the net income per share garnered over
the past year. The latter timespan is also known in the trade as the trailing twelve months
(TTM).
We note that the trailing value of the price/earnings ratio looks in the backward direction.
The current price can be observed right now while the past earnings is available as part of
the historical record. On the other hand, we can also look in the forward direction.
In catering to the financial community, public companies have a custom of providing
guidelines for the income stream they expect to chalk up over the year to come. The corps
of financial analysts pore over the announced figures then provide their own assessments
of the net income going forward.
After that stage, a gaggle of information providers take the mean value of the guesstimates
provided by a band of analysts whose selection criteria are rarely explained. The resulting
tally is known as an estimate of forward earnings (Ef).
If the earnings downstream were to rise, then the price of the stock will also have to
advance if it is to maintain a stable ratio of price to income. For this reason, the estimate of
future profits can serve as a basis for predicting the direction as well as the magnitude of
the likely shift in price.
We will refer to the ratio of price to earnings in the forward direction as Rf. In algegraic
form, we have Rf = P/Ef.

51

In a similar way, we denote the price/earnings gauge in the backward heading as Rt. In
that case, we can express the relationship as: Rt = P/Et.
If we divide the trailing ratio by the forward version, we obtain
Rt / Rf = ( P / Et ) / ( P / Ef ).
After canceling out the price P and tidying up the right hand side, we obtain Ef /Et. In other
words, the scale of backward to forward ratios is equal to the scale of forward to backward
earnings.
As a rule, the stream of profits tends to increase as time goes by if only to counteract the
bloat of inflation that waters down the purchasing power of the currency. For this as well as
other reasons, the scaling factor for the earnings quotient is usually greater than 1.
Given this backdrop, the use of the price/earnings ratio for forecasting is equivalent to the
role of the earnings levels in an inverse fashion. In that case, we can use the relative
change in either gauge as the groundwork for fixing up a forecast of the stock price down
the line.
The same type of analysis may be performed for a portfolio of stocks. As an example, the
price/earnings ratio for a market index can be computed as the average value of the
individual ratios for the components. In that case, the usual practice is to weight the
contribution of each entry in terms of the relative valuation of the underlying security in the
stock market.

Outlook based on Earnings Growth


At the beginning of this year, the observed value of the price/earnings ratio for the Dow
Industrial Average was 16.49. We recall that the trailing ratio of price to earnings refers to
the current price as a multiple of the sum of earnings over the past year. From an intuitive
stance, the mass of investors have been willing to pay $16.49 on average for every dollar
of earnings racked up by the stocks within the index over the past year.
52

As usual, the latter quotient did not differ a great deal from its counterpart a year ago. To
be precise, the price/earnings ratio last year came out to 16.95.
A similar ratio can be calculated from the expected flow of earnings over the year to come.
As we saw earlier, the estimate comes in part from the guidance of the respective firms as
each company offers the best educated guess of the net income to come.
In the case of the Dow index, the forward ratio comes out to 15.71. We note that the latter
number is lower than the trailing value of 16.49. Since the current price happens to be
known and fixed, the smaller value of the forward ratio means that the earnings level is
expected to rise over the coming year.
Suppose that the current value of the trailling ratio were to remain the same a year down
the line. In that case, the price level would have to rise to match the increase in earnings.
To be precise, the upturn required happens to be the trailing ratio as a fraction of the
forward value; that is, 16.49/15.71 which comes out to nearly 1.05. In other words, the
Dow index is apt to rise by about 5%.
The same type of analysis can be performed for the S&P index. The trailing value of price
to earnings at the onset of this year was 19.37. As a point of comparison, the
corresponding ratio a year earlier was 18.88. Meanwhile the forward ratio for the year to
come is 16.50.
In that case, the quotient of the trailing and forward values for this year happens to be
19.37/16.50; that is, a mire over 1.17. By this reckoning, the flagship benchmark is slated
to rise by some 17%.
Turning now to the Nasdaq 100 index, the trailing value of price to earnings at the
beginning of this year was 24.25 while the corresponding number a year earlier came out
to 21.65. Meanwhile the forward ratio for the coming year was 18.95 (Wall, 2015).

53

The ratio of the trailing and forward figures amounts to 24.25/18.95, which is equal to a jot
under 1.28. In that case, the Nasdaq index would have to rise by some 28 percent if the
price/earnings ratio were to remain the same over the course of the year to come.
The foregoing figures provide some idea of the prospects in store; namely, the likely
changes in the price levels over the year to come. On the other hand, a forecast based on
the P/E ratio has a number of limitations as well.

Postive and Negative Aspects of the Cue


On the upside, the outlook for profits is a handy way to divine the prospects for a stock.
Since public companies routinely provide guidance on the likely level of earnings for the
year to come, its a simple matter to figure out the prospective change in the value of the
stock.
On the downside, though, the earnings approach comes with a number of limitations as
well. For one thing, the folks in charge of providing the guidance tend to err on the
conservative side rather than the liberal one. In other words, the guesstimates tend to fall
short of the actual earnings down the line.
The reason for understating the estimates is plain enough. Like other folks in general,
managers prefer to look like heroes by surpassing the expectations of the investing public
rather than incur their ire by falling short of their targets.
The story is similar for the forecasts drummed up by the analysts. On the upside, a mature
company can nudge up its earnings with a fair degree of confidence from one year to the
next.
On the other hand, a stock can blow up for any number of reasons ranging from the recall
of a faulty product by a vendor to a recession in the economy at large. In that case, the
equity could well take a huge hit.

54

In the positive direction, an analyst will look a bit foolish if the actual earnings happen to
surpass the predicted profits by a modest amount. In the negative heading, though, the
same herald will seem grossly incompetent if the ensuing earnings fall short of the
proclaimed target by a huge margin.
In this way, the market displays an asymmetry in terms of the magnitude of the errors likely
to arise from botched forecasts to the upside versus the downside. The predicament is
similar for the penalties dished out to all manner of participants be they investors or
anyone else in the wake of a muffed call. For these reasons, financial analysts act like
corporate executives in their tendency to err on the side of caution in sizing up the
prospects for earnings down the line.
Due to the lopsided pattern of mulcts along with the bias at work, a forecast of forward
earnings should be regarded as an estimate on the low side. In that case, the same caveat
applies to the outlook for the underlying stock based on the flow of profits going forward;
and likewise for the ratio of price to earnings.
A second needler relating to the income stream concerns the fact that the ratio of price to
earnings can vary a great deal as time goes by despite its penchant for lounging within a
band ranging from 10 to 20 or thereabouts. As an example, the quotient can soar in the
midst of a bubble in the market then plunge in the depths of a panic.
Worse yet, the fallout in the wake of a bombshell could differ entirely. For instance, the
market price of the equity could buckle by one-half in the throes of a recession while the
income stream shrinks to less than half its prior value. In that case the ratio of price to
earnings will increase rather than decrease in spite of the devastation in the real economy
in tandem with the bustup of the stock market.
To bring up a concrete example, the average value of the price/earnings ratio for U.S.
stocks soared to 32 in the heat of the Internet craze. When the bubble burst, the price level
plunged but the earnings of the firms in the real economy flopped even more. The
smackdown of profits resulted in a price/earnings level 46.5 at the end of 2001 (Wikipedia,
2015).

55

By way of comparison, the usual value of price to earnings for U.S. stocks hovers in the
mid-teens. Naturally, the precise figures differ from one period to another and one study to
the next. Even so, a representative tally is an average value of price to earnings in the
vicinity of 15 (Blumenthal, 2015).
A case in point is a survey of the U.S. market between 1872 and 2012. The mean value of
the price/earnings ratio over this stretch came out to 15.4 (Shiller, 2015).
More generally, the price/earnings ratio serves as a rough guide rather than a precise tipoff. Sadly, though, the signal can go haywire at any time.
To bring up a third point, the total return over the year to come tells us nothing about the
antics of the bourse in the interim. The stock market could easily thrash around in a
wanton fashion, or trundle along at a measured pace, or display a combo of both.
Over the short term, the gyrations of the market depend more on the mood of the investor
in response to the technical features in conjunction with breaking news. As we have noted
elsewhere, though, the reaction to the news depends more on the state of mind of the
investing public than its inherent import. In other words, a couple of similar bulletins can
easily prompt a surge of the market in one case but a swoon in another instance. In short,
the main driver behind the price action over the near term lies in the whims of the madding
crowd in tandem with technical factors.

Detailed Forecast for DIA


While the future depends on the past, the linkage does not hold in equal measure across
all time frames. As an example, the current environment is apt to have a greater impact on
the slant of the market over the near future rather than the long range. Looking in the
opposite direction, the flow of recent history should play a larger role than the run of the
distant past in swaying the course of events going forward.

56

As a result, the import of any lessons gleaned by looking backward tends to dwindle as the
window of appraisal moves further away from the current setting. The story is similar for
the moxie of any projections in the forward direction.
Given this backdrop, the adroit planner has to trade off the wholesome view of a sweeping
vista against the greater relevance of a compact window focused on recent events. In
particular, the wealth of information contained in a long history of prices must be balanced
against the punch of a short record dealing with the recent past.
For our purpose here, a fitting compromise between the opposing factors lies in a span of
a couple of years or so. In order to present a balanced picture, the interval ought to include
an upsurge as well as a smackdown of the stock market.
An example in this vein is a mini-crash of the bourse in the autumn of 2014. As we can see
from the right side of Chart 2, the Diamonds plunged from a peak of $172.35 in September
to $157.39 a month later. The smashup wiped out nearly 9% of the value of the DIA.
Happily, though, the stalwart bounced back promptly and staked out brand-new highs in
December.
From a larger stance, the leading benchmarks of the stock market face a series of big
challenges over the year to come. Some of the stumpers have nothing to do with the
substance and reality of the marketplace yet everything to do with the perception and bias
of the actors involved.
As an example, the Dow index will run into a colossal roadblock lying at the nice, round
figure of 20,000 points. As things stand, this barrier should crop up by the summer.
There are of course other currents which run in the upward as well as downward
directions. For instance, we examined a welter of large-scale drivers in depth in earlier
sections.
At this stage, we turn to a pointed forecast of the Diamonds over the year to come. To this
end, a helpful aid lies in a graphic display of weekly data for DIA over the course of 3 years

57

ending in early January 2015. The exhibit below has been adapted from StockCharts
(stockcharts.com), a standard resource for serious investors of a technical bent.
Given its target audience of savvy users, the online portal offers a plethora of schemes for
carrying out diverse forms of technical analysis. Despite the diversity of tools on hand,
however, we will require nothing by way of fancy tricks.
Instead, a simple scheme based on visual cues will meet our needs. In fact, the lean and
plain approach taken here should turn out to be at least as informative for the genuine
investor as a convoluted probe based on a heap of arcane techniques.
The backbone of the chart below lies in a series of stick figures, each of which is known as
a bar. An icon of this stripe depicts the extreme values of the price action over a given
timespan.

Chart 6. Weekly data for DIA over the past two years.

In the exhibit above, each slot of time spans a single week. Over this timespan, the critical
points consist of the Open, High, Low and Close (OHLC) values of the stock price during
the interval.
58

On a given bar, the top and bottom ends of the vertical stroke correpond to the maximum
(High) and minimum (Low) readings of the price level over the course of the week.
Meanwhile a stub on the left side of the same stake depicts the value at the beginning
(Open) of the period. In a similar way, a tick to the right side of the rod denotes the price at
the end (Close) of the week.
If the terminal value for the week happens to be lower than the initial figure, the entire bar
is colored in red. Otherwise the widget is rendered in black.
From a larger stance, there is of course no guarantee that the movements of the market
downstream will resemble the experience of the past. Even so, the history of prices does
illustrate the scope of behavior to date and provides an inkling of the potential outcomes.
In the foregoing chart, the golden ramp depicts the ascent of DIA over the past couple of
years. Moreover the green line portrays a prior milestone around the $171 level while the
blue stroke marks a watershed in the ballpark of $162.
As is often the case at the beginning of the calendar, the market is slated to thrash around
more than press ahead during the months of January and February. After the splash of
turmoil, however, the bourse should muster enough energy to climb higher in earnest.
From the right side of the chart, we can see that the latest peak cropped up last December
at a price of $180.71. This landmark showed up three months after the prior crest at the
$172.35 mark.
The difference between the two prices comes out to $8.36. If we add the increment to the
latest peak of $180.71, the result is $189.07.
The latter figure represents the next milepost for the Diamonds. Based on the currents in
the marketplace, the marker should be reached by the spring.

59

Shortly thereafter, the stormy currents of the summer will as usual throw the market for a
loop. In spite of the tempest, though, the Diamonds are slated to waddle higher by a
modest amount.
We note that the gap between the blue and green strokes in the graphic comes out to
about $9. We can add the latter figure to the likely peak of $189.07 for the spring. As a
result, the high for the summer should come out to roughly $198.
After reaching this landmark, the Diamonds are unlikely to hold onto the gains. Instead the
market is apt to fall back promptly then flail around for a few months.
Unfortunately, the outlook is not much better for the second half of the year. For one thing,
the market has a general habit of floundering during the dog days of summer then flopping
in the gusty winds of autumn. To be precise, the bourse will enter its weakest stretch of the
year as September rolls around.
One negative factor for the stock market springs from the mindset of the Federal Reserve
at this juncture. As a backdrop, the central bank decided in October 2014 to wrap up the
third and last round of quantitative easing.
On a positive note for the stock market, the sea of money that has been pumped into the
financial system will not vanish any time soon. Rather, the floodwater will start to recede
only when the Federal Reserve soaks up some of the slosh by paring down its inventory of
debt securities. The sale of bonds involves the transfer of money from the hands of the
general public to the vaults of the central bank.
The selloff of oodles of bonds in the open market is sure to weigh on the credit market.
The takedown of prices for debt securities means that an investor can now secure a given
stream of dividend payments while putting up less capital than before. As a result, the
effective rate of interest for the newfound bondholder turns out to be higher.
In addition, the dumpage of bonds by the central bank has a palpable impact on the real
economy. To wit, the drainage of money from the financial system means that less moola
is available for lubricating commercial transactions by consumers as well as producers.
60

In these ways, the mop-up of surplus moola nudges up the cost of credit in the financial
forum as well as the real economy. According to the bulk of economists, the step-up of
interest rates is likely to begin sometime in 2015 (Coy, 2014). Most likely, the operation will
begin by the end of the third quarter.
In line with earlier remarks, the Dow index faces a monumental wall at the 20,000 level.
Once the benchmark reaches the barrier, the market is slated to break down. The crack-up
should result in a plunge of 8% or more; that is, more than halfway to the threshold of 15%
that marks a full-blown crash of the stock market in the U.S.
In the most likely scenario, the market will bump up against the barrier a couple of times
before breaching it on the third try. The travails of the Dow will of course be mirrored by the
labors of the Diamonds which will have to grapple with their own hang-up at the $200
mark.
The next hurdle comes up with the perennial spate of volatility in the autumn. Thanks to
the heaving and shoving of the madding herd at this time of year, the Diamonds are fated
to take a spill and suffer another mini-crash.
At that stage, the ground will be cleared for a push to the upside in the final stretch of the
year. After punching through the blockade at $200, the next milestone lies a tad higher at
$210. The latter figure lies about 18% beyond the closing value of $177.88 attained at the
end of 2014.
Looking at the big picture, 2015 happens to be the run-up to a Presidential election in the
U.S. As the winter rolls around, the air will crackle with platitudes and promises as an army
of politicians rises to the call of beguiling voters and ranting about the desperate need to
create jobs and lift incomes, boost business and lavish favors on one and all.
Sadly for the ranters but happily for the populace, the crushing overhang of debt in the
public sector will prevent the demagogues from squandering immense amounts of
additional resources by way of pork barrels. Even so the wanglers will do their best to put

61

on a good show, shuffling money around from one feckless program to another in a
charade of doing something worthwhile.
The spurt of activity along with the bluster will kindle a spark of hope within a large swath
of the populace and imbue the listeners with a warm, fuzzy feeling. Moreover a binge of
wanton spending is apt to give the economy a boost over the short run in spite of the
crippling cost to the society over the medium range as well as the long haul.
In short, the contrived schemes of the pols will fritter away mountains of resources ranging
from capital equipment and raw materials to office space and human labor. The
boondoggles will hobble the economy and crimp productive output over the years to come.
Despite the aftershocks in store, however, the political agenda will call for a binge of
spending in order to pump up the economy as 2016 comes into view.
As a rule, the financial forum anticipates the course of the real economy. For this reason,
the bourse in particular is poised to head higher as the year unfolds.
The upward slant in this phase of the political game is spotlighted by a survey of the Dow
index from 1897 to 2011. Throughout this period, the pre-election year by itself produced
nearly half of the overall gains garnered by the benchmark over the course of the election
cycle that spans four years (Speck, 2015).
The buoyant feature of the pre-election year, coupled with the sprightly trend in recent
years, is a godsend for the stock market. As a result, the Dow yardstick could end up
surpassing the projected target of 18% by a goodly amount. In that case, the gain in
percentage terms could reach well into the 20s.
On the downside, though, the main argument against a huge windfall is of course the
precarious state of the economy. The chains of production and distribution were bent
severly out of shape in the riot of speculation during the housing bubble prior to the
financial crisis of 2008, followed by the orgy of government spending and money printing in
the years to follow. Given the breadth and depth of the trauma, the economy is only now
starting to take the first steps toward recovering in earnest from the monstrous abuse it
received at the dawn of the millennium.
62

A second reason for caution involves the fact that the stock market is already puffy and
overpriced to some degree. In particular, the average ratio of price to earnings for the
stocks within the Dow index has been lolling on the high side for years on end.
On the other hand, a pricey market can become even more pricey as time goes by. In that
case, the Diamonds could well enjoy a giddy ride to the upside come next winter.

Equivalence of Price and Time


In the previous section, we laid out a forecast for the Diamonds in terms of the price level
as well as the time frame for each turning point. On the other hand, the two factors of price
and time happen to be somewhat redundant from a pragmatic stance.
The plainest way to explain the tie-up is to take up a simple example. Consider a stock
named Alpha whose price at the beginning of the year happens to be $20. Moreover, this
widget is likely to climb higher in a steady fashion until it reaching a price of $28 at the
beginning of May. After touching the peak, the stock is slated to crumble by $7 or so over
the course of the summer.
Given this roadmap, an investor could pick just one of the key factors as a guide to
decision making. As an example, suppose that the price level is taken up as the yardstick
of choice.
In that case, the gamer ought to unload some or all of their holdings of Alpha when the
price level advances beyond the mid-20s. As an example, the threshold for unloading the
shares might be $26 or $27.
In fact, a busy investor who has precious little time to fiddle with their portfolio could put in
a standing order far in advance of the landmark on the horizon. For this purpose, the apt
mechanism is a limit order which remains valid unless and until it is canceled or executed.

63

For instance, the proactive order could be issued at the beginning of the year in order to
sell the equity if and when the price level reaches $26.50 or more. After placing the order,
the investor need not pay any further attention in the interim.
From a different angle, the same player could focus on the timeline rather than the price.
In that case, the investor may ignore the stock market until the day of reckoning draws
near.
On the other hand, only a daredevil would wait until the very last moment before making a
move. As a rule, a stock plods along at a measured rate in the upward direction, but has a
way of plunging headlong during a flop to the downside. For this reason, its better in
general to be a whole lot early than a little bit late in unloading a stake and leaving the
market.
In line with this motto, the prudent player could move into action around the beginning of
April or thereabouts. That would be a good time to exit the position in Alpha before its likely
peak at the beginning of the following month.
In selling the stock, the current price does not play much of role for the shrewd player
focused on the schedule of milestones. If the actor still believes that a top will form at the
onset of May, then they should quit the position in hand regardless of the current price.
As an example, it makes no difference if the stock happens to be trading at $21, or $38, or
some other value in early April. If the equity is set to tumble over the course of the
summer, then now is a great time to quit the ring.
Given this backdrop, it makes scant difference whether the player keeps track of the
market in terms of price or time. In a pragmatic sense, one approach is equivalent to the
other.
Time-Price Equivalence. From a practical stance, a forecast of the market by price
is equivalent to a presage by time.

64

In view of the precept above, a prediction by time as well as price happens to be


redundant in a strictly logical sense. By saying this, we of course do not mean that a dual
forecast is wholly pointless.
The financial forum resembles life in general in that some things are more likely than
others even though nothing is certain. For this reason, a dual approach in terms of time as
well as price has a lot to recommend itself.
Put another way, the redundancy of a temporal forecast serves to bolster the confidence in
a price target; and vice versa. And thats the reason why the previous section has
presented both types of forecasts.
In the larger scheme of things, the price level for each asset differs in general from the
corresponding figure for any other vehicle. Even so, a lot of widgets in the stock market
tend to move together.
As an example, a peak for SPY is apt to be a turning point for DIA as well as QQQ. And
the story is similar at the low end of the cycle, as the benchmarks of the bourse touch a
bottom and turn the corner in unison.
For this reason, an augury for SPY in a temporal sense is largely redundant when a
forecast of DIA has been provided. The story is similar for QQQ.
Moreover, the rule of Time-Price Equivalence means that it makes no real difference what
the price level happens to be at each turning point. If the next major move is downward,
then the proper tack is to get out of the market. If the next sizable move runs in the upward
direction, then the gamer would do well to step into the bazaar.
In line with these principles, the wise investor opts to unload any holdings in SPY or QQQ
when DIA appears be forming a top. Conversely, the best time to acquire a fresh stake in
one or more of the index funds is when DIA is slated to advance in earnest.
In addition, we know that the size of a move for the Spyders tends to be similar to that of
the Diamonds, albeit a bit more hefty. Furthermore, the Qubes are prone to shift even
65

more than either of its weighty rivals. As a result, a forecast of a change in price for DIA is
in large measure tantamount to the preview of a move for SPY or QQQ.
To sum up, the chief benchmarks of the stock market tend to travel in unison around the
major bends; namely, the turning points that mark out the bounds of sizable moves to the
upside or downside. For this reason, a forecast of a top or bottom for one yardstick
corresponds to a like call for the others.

Rough Calls for SPY and QQQ via Stretch Factors


Our forecast for the Diamonds stemmed from a multiplex review of technical and
fundamental factors ranging from the behavior of prices in the stock market to the outlook
for growth for the real economy. We could of course perform a similar analysis for any
other benchmark such as the Spyders or Qubes.
As a rule, though, a detailed analysis for the secondary benchmarks happens to be largely
superfluous. For one thing, the main yardsticks of the bourse tend to move in unison.
In the preceding section, we saw that a forecast for SPY is pretty much redundant when a
projection is already available for DIA. And likewise for QQQ.
For this reason, we will forgo an in-depth probe of the ups and downs in store for the
secondary benchmarks. Instead, we will take a breezy look at the milestones on the
horizon.
In Chart 1, we saw a representative sample of the behavior of the three top benchmarks.
For starters, the trio of pacers were wont to rise and fall in tandem. On the other hand,
SPY tended to move more than DIA during each rise or fall; and QQQ even more so.
Over the entire stretch, DIA advanced by 67.69%. Despite the hazy patch on the image,
the actual figure for SPY on the original display was 79.19%. Meanwhile, QQQ roared
ahead by 121.10%.

66

The ratio of the foregoing numbers for SPY and DIA is 79.19/67.69, which comes out to
1.17. Put another way, a step-up of 1% in DIA has been accompanied on average by a rise
of 1.17% for SPY.
We can obtain a similar quotient for QQQ. The result is a scaling factor of 121.10/67.69, or
1.79.
We can see from Chart 1 that the benchmarks have moved in tune with their usual habits
over the past few years. Moreover, we have no reason to expect any sizable deviations
from the norm over the next year and more. In that case, the generic properties of the
touchstones can be used to predict any one of the touchstones against its peers.
On the downside, though, this type of analysis has a glaring drawback. As in the case of
prediction via price/earnings ratios, the appraisal tells us nothing about the ups and downs
of the stock market over the course of the year.
Even so, before we go further, we ought to compare the foregoing approach with a popular
scheme in financial circles. The subject at hand happens to be the standard gauge of
relative motion between a lonesome security and the broader market.

Beta for Short-term Movements


One aspect of risk lies in the flutter of a given security in relation to the market as a whole.
In the parlance of financial wonks, the beta factor refers to the relative movement of a
particular stock compared to the bourse at large.
As an example, consider a beta value of 2.0. The latter figure means that the stock at hand
tends to move by 2%, in the same direction as the entire market, for every step of 1% to
the upside or downside by the bourse as a whole. In this context, the usual proxy for the
market at large is the S&P 500 index.
Moreover we know that the latter benchmark is tracked by the Spyders. For this reason, it
should come as no surprise that the value of beta for SPY turns out to be 1.00.
67

By contrast, the beta for DIA based on the historical record over the past three years
happens to be 0.96 (Yahoo, 2015b). On the other hand, the corresponding value over the
past five years is 0.90; and likewise for the past decade. These numbers show that the
Diamonds are less flighty than the Spyders; moreover, the two vehicles have tended to
move more closely in unison in recent years.
By contrast, the beta value for QQQ has been 1.05 (Reuters, 2015). Based on the latter
value, we can infer that the Qubes were prone to budge by a mere 5% more than the
Spyders to the upside or downside.
Given this backdrop, the beta values differ quite a bit from the stretch factors that we
computed earlier. One reason for the divergence springs from the block of time used in
calculating the scaling factor. In particular, the custom in financial circles is to compute the
beta metric based on short-term shifts such as the change in price over the span of a
single day, week or month.
On the other hand, a prolonged trend can arise regardless of the dance of prices in the
short run. In other words, the jitters over the near term say nothing about any drift over the
medium range or the long haul.
To bring up an example, consider a demure stock which hardly budges over the short span
and thus sports a beta value close to zero. Yet the same asset could slowly creep higher
from one year to the next, whether the market as a whole happens to be rising, falling or
stagnant. In that case the piffling value of beta has no real link to the vigor of the stock
over the longer range.
Given this backdrop, the value of beta might be useful for the restive trader who holds a
position for a few months at a time at most. But the same parameter has scant bearing on
the genuine investor who holds a stake for years at a time or even decades on end.
At this stage, we turn to a concrete example by looking at the action in the stock market
over the past 5 years ending in early 2015. The interval is a representative stretch of time

68

in the sense that it contains a breakdown of the bourse as well as an upsurge; namely, the
crash of 2011 followed by a hefty upturn in the years to follow.
In the chart below, the blue curve shows the path of the standard index in the form of the
S&P 500 benchmark. The latter beacon is branded as ^GSPC by Yahoo Finance.
Meanwhile the red arc portrays the progress of the Qubes.
From the right side of the chart, we can see that the S&P touchstone chalked up a return
of 91.07%. By contrast, QQQ roared ahead by 143.66%. The difference in performance
comes out to 52.59%.
From a different slant, we can also take the ratio of the returns for the Qubes versus the
standard benchmark. In that case the effective value of beta is 143.66/91.07, which comes
out to a jot under 1.58.
The latter quotient lies quite a ways from the beta value of 1.05 reported by the financial
media. To be precise, the contrast boils down to the difference between the Qubes
outpacing the standard index by 58% rather than 5%.

Chart 7. Performance of the S&P benchmark versus QQQ


over 5 years ending in early 2015.
69

Based on a similar chart (not shown here), the Spyders notched up a return of 90.86%
over the same timespan. As an aside, we can compare the latter figure to the gain of
91.07% for the S&P index itself.
The ratio of these payoffs gives rise to a beta value of some 0.998 for SPY. In that case,
we conclude that the capital gain for the Spyders fell short of its quarry by a mere 0.2%
over the span of half a decade.
Suppose that a casual investor had opted at the outset to rely on the reported values of
beta; that is, 1.05 for QQQ and 1.00 for SPY. In that case, the punter could have inferred
that the gains in store for the Qubes would not differ a great deal from the returns for the
Spyders.
In view of the modest difference in prospective gains, the misguided player could well have
opted for the calmer ride on offer from the Spyders rather than the Qubes. By taking this
tack, the investor would in due course have earned 90.86% rather than 143.66%. In other
words, the flub would have resulted in a forfeit of 52.8% in capital gains.
To bring up an alternative viewpoint from a pragmatic stance, suppose that we use the
reported values of beta for QQQ and compare the hypothetical outcome to the actual
turnout for SPY. We recall that the putative values for the Qubes and Spyders are 1.05 and
1.00 respecively.
In view of the payoff for the Spyders, the Qubes should have advanced by the following
amount over the same timespan: 1.05 x 90.86 percent, which comes out to about 95.4%.
As we know, however, the Qubes in fact surged by 143.66%. The difference between the
last two payouts is a stark example of the gap between the reality of the marketplace and
the mirage built up by the fancy models of orthodox finance.
Here is another showcase of the aptness, or lack of such, of the conventional wisdom for
the genuine investor. If a heedless player were to rely on the touted values of beta, they
could have presumed that it makes scant difference whether they invest in DIA, SPY or
QQQ. Sadly, though, the rash decision would have cost them plenty in due course.
70

To sum up, the astute player has to be wary of the values of the beta factor reported by the
financial media. In general the touted numbers do not provide much useful information for
the earnest investor bent on sound growth over the medium range or the long haul. In fact,
the dope dished out can easily mislead the heedless player even in the context of a
compact timespan that covers only a single year or so. The pitfalls in store showed up in
the foregoing example that made use of a graphic display as well as numeric data for the
recent past.
In this and other ways, the reality can differ a goodly amount from the illusion painted by
the canons of financial theory (MintKit Core, 2015b). For this reason, the hard-nosed
investor has to take the voodoo of financial theory with a grain of salt.
From a larger stance, the beta factor focuses solely on the price action on the bourse while
glossing over the dividend stream thrown off by a stock. On one hand, the price level does
take account of the payout of dividends. In particular, the value of a stock drops by a like
amount when a dividend is issued.
On the other hand, the beta factor does not deal explicitly with the benefit to the
shareholder provided by the dividend stream. For this reason, the sage investor has to
consider the dividend yield in addition to the capital gain.
As a respresentative figure, the dividend yield for SPY at the onset of 2015 came out to a
little under 2% on an annual basis. Meanwhile the corresponding value for QQQ was a tad
over 1%.
The difference in payouts, amounting to less than a single percent, means that the
distinction in general plays only a minor role compared to the gap in returns due to capital
gains. For this reason, the difference in dividend yields does not alter any of the key
conclusions presented in this section.

71

Stretch Factor for Longish Positions


As we have just seen, the beta factor reported by the financial media can be misleading
and problematic for the genuine investor. For this reason, we will rely on the actual values
of the scaling factor over a fitting timespan rather than rely on the touted values of the beta
coefficient.
As we saw in Chart 3, the Diamonds snagged a return of 7.50% over the course of 2014.
Meanwhile the corresponding figures for the Spyders and Qubes were 11.29% and
17.38% respectively.
Based on the first pair of numbers, the scaling factor for SPY compared to DIA was
11.29/7.50, which comes out to about 1.51. By contrast, the effective value of beta for
QQQ was 17.38/7.50, or around 2.32.
In that case, the default location of the final milestone for SPY in 2015 lies around 51
percent higher than the closing value of DIA. We noted in an earlier section that the mostly
likely landmark for the Diamonds lies 18% beyond its value at the end of last year. As a
result, an advantage of 51% means that the corresponding target for the Spyders is an
annual gain of a mite over 27% by the end of this year.
We can perform a similar calculation for the Qubes. The product of 18% for DIA and the
scaling factor of 2.32 for QQQ comes out to nearly 42%.
On one hand, the latter value does lie within the realm of possibility. Even so, the lofty
target seems far-fetched in view of the barricades along the way. As we saw earlier, an
example in this vein is a mental block at the towering peak formed at the height of the
Internet craze round the turn of the millennium.
In the throes of the digital bubble, the Qubes formed a peak at a nominal price of $232.88.
On the other hand, the latter price has to be halved due to a 2-for-1 stock split in the

72

second half of March 2000. In that case, the corresponding price today happens to be
$116.44.
The latter figure lies within a stones throw of the second milestone of $105.38 that we
calculated for the Qubes. In view of the historic peak, the mass of investors will do their
darnedest to push the index fund toward its all-time high.
Although the central bank has renounced its aberrant scheme known as quantitative
easing, it could still whip up a sea of money using the age-old ploy of buying up Treasury
bonds. And if the Federal Reserve spews out enough money, the madding crowd could
succeed in shoving the Qubes way beyond their historic apex.
As for the benchmark itself, the Nadaq 100 Index reached an all-time high of 4,816.35
points in spring 2000 before breaking down and losing more than 80% of its value over the
next couple of years. That summit now serves as a holy grail for the investing public.
In the language of chaos theory, the glaring peak acts as an attractor: a point toward which
a system within the vicinity tends to move. The landmark has beckoned the benchmark
since the trough it formed in 2002. Partly as a result, the Nasdaq market has been rushing
toward the airy summit at a breathless pace over the past few years.
When the looming target is reached, the landmark will then continue to act as an attractor
in a negative sense by posing a huge barrier to further progress. For this reason, the
Nasdaq will fall back by a hefty amount after regaining its historic peak.
The antics of the benchmark will of course be mirrored by its tracking fund. As a result, the
Qubes will soar toward their prior peak during the first half of this year but are unlikely to
breach the barrier in earnest anytime soon.
In these ways, the trio of index funds for the U.S. bourse will tramp onward and upward
through a series of zigzags as usual. The story will unfold in a similar fashion for the other
stock markets round the world.

73

Although there are plenty of exceptions, the bourses in the budding regions often advance
roughly twice as much as the Diamonds or Spyders. As an example, an upturn of 15% for
DIA should result in an uplift of 30% or so for the sprouting benchmarks.
On a negative note, the vibrant markets also tend to be a lot more volatile than their
American counterparts. Meanwhile the mass of investors remain somewhat skittish at this
stage. As a result, the international crowd is likely to hold back on moving in force into the
nascent markets before the winter arrives.

Comparison of Beta versus Gearing


As we have seen, the scaling factor refers to the relative gain between a couple of
markets. An example is the linkup between the return for a solo stock versus the payoff for
the bourse at large. Another sample is the matchup of fractional gain for an exchange rate
on the currency market versus the relative shift of gold bullion in the commodity patch.
For the sake of brevity, we will also refer to the scaling factor as the gearing between a
pair of markets. At an abstract level, the gearing is similar to the beta factor beloved by
financial jocks. In particular, the latter gauge denotes the linkage between a stock and the
bourse as a whole. Moreover the theory as well practice in invoking beta focuses on the
price action over short spells such as a day or a month.
The tacit assumption is that the relative movements over the near term are applicable to
the investor over all time scales. In reality, however, the premise is questionable in
conception as well as application.
Before we proceed further, we should bring up another concept that lies at the heart of
financial theory. The alpha factor deals with the return on an asset on its own merits, after
adjusting for risk, while ignoring the impact of system-wide behavior by the market as a
whole. In this setting, the risk-free return is taken as the average rate of interest earned on
short-term government bonds

74

Put another way, the alpha value is the excess payout beyond the risk-free rate due to
a livelong trend for the asset in question. In this way the drift of prices over time, whether
to the upside or downside, gives rise to the bonus to the investor for holding a risky asset.
As a rule, the beta factor is stipulated over shorts blocks of time such as a day or a month.
For the sake of compatibility, the alpha coefficient has to be defined in like fashion.
As an example, consider an interval during which the stock market as a whole forms a
peak, then falls back before regaining the summit a year later. Moreover, suppose that an
exceptional stock bagged a return of 27 percent over the same timespan.
In this scenario, the bourse at large has gone nowhere. For this reason, the gyrations of
the stock market which in general are amplified by the beta factor plays no role in the
overall return for the lively stock. In that case, the upward march of the firebrand happens
to be the sole driver behind its performance; that is, a compound rate of growth of a jot
over 2.0% per month on average.
Suppose that the risk-free rate of interest over this timespan has been 0.1% per month. In
that case, the alpha factor is the difference between the last two numbers; namely, around
1.9% per month.
All that is fine and good. On the other hand, the alpha value is a derived quantity that is
obtained by taking the capital gain over the entire stretch then chopping it up into monthly
chunks. For this reason, the resulting value of alpha has no direct relevance to the genuine
investor focused on sound growth over the long range. The story is similar for the beta
component.
Looking at the big picture, the savvy player has two main concerns. First of all, what is the
likely value of the total return over the investment horizon? Secondly, what is the risk in
terms of the the maximum cutdown along the way? Yet, neither alpha nor beta answers
either of these crucial questions in a forthright fashion.
The total return of course comprises the sum of the capital gain plus the dividend yield. In
many cases, however, the change in the price of an asset dwarfs the gain due to the
75

income stream. In that case, the total return boils down for the most part to the capital
gain.
In tackling the second question, we note that the risk at hand is the maximum drawdown in
value, from peak to trough, over any stretch of time within the holding period. For instance,
suppose that a stock at one stage crumples by one-quarter in tandem with a crash of the
bourse as a whole; in that case, the pullback comes out to 25%. To bring up another
sample, a hedge fund that blows up and conks out results in a wipeout of 100% of the
value of any stake held at any time by each of the hapless clients.
From a different angle, the beta factor provides no direct information on the risk to the
wary player. To cite a simple example, suppose that a stock has a beta factor of 1.2. In that
case, the investor should infer that the equity will fall by 1.2% percent on average for every
percentage drop of the stock market in the throes of a crash. Yet that factoid by itself tells
the decision maker nothing about the full risk in terms of the total threat due to a blowup of
the market, whether by way of the price action in the past or the prospective turnout in the
future.
To recap, the canny investor needs meaningful information on the total return in store over
the holding period, as well as the maximum drawdown likely to arise along the way. But
neither the alpha nor beta factors provide direct answers to these key questions.
On the upside, though, the scaling factor does take into account the overall payoff to be
expected over the entire stretch going forward. Moreover, a graphic display of relative
performance provides a clear and intuitive grasp of the maximum drawdown in the recent
past as a groundwork for mapping out the prospects downstream.
The alert reader will note that the scaling factor in general incorporates the solo trend for
the asset at hand as well as the coupled shift due to the correlation with the target market.
In other words, the gearing takes account of the alpha and beta factors over the entire
timespan.

76

In short, the alpha and beta coefficients espoused by financial wonks may be useful for
short-term trading but not for long-run investing. Instead, the scaling factor is better suited
to the worldly investor bent on sound growth over the long haul.

Outlook for Benchmarks through a Broad View


The stock market is driven by a cocktail of chronic forces jumbled with acute factors. An
example of a persistent streak is an uptrend in price due to the bloat of inflation, or the
impact of seasonal drivers over the course of the calendar. Meanwhile an instance of an
freaky event lies in a natural disaster or a monstrous war.
Pretty much by definition, a big suprise is hard to predict. A bolt out of the blue could take
any number of forms in terms of its nature and import, timing and impact.
To add to the muddle, a one-off event could cast a long shadow going forward by tangling
with hardy factors as well as fleeting events. To compound the challenge of forecasting, a
single bombshell could have distinct effects on the motley benchmarks of the market.
A showcase cropped up with the Internet frenzy of the late 1990s, which would cast a
shadow for a couple of decades. Moreover the upheaval had divergent effects on the
sedate Diamonds versus the jumpy Spyders not to mention the berserk Qubes in the
throes of the digital frenzy as well as the reverberations in the wake of the blowout.
Given this backdrop, the deft investor has to consider the disparate aftershocks in order to
thrash out a cogent picture of the markets. In this section, we examine the gist of the price
action since the turn of the millennium in order to divine the outlook for the top benchmarks
over the course of 2015 and beyond.

Long Reach of Hulking Landmarks


To borrow the words of an English bard, whats past is prologue for the morrow. In order to
peer into the future in a lucid way, we need to start by looking in the backward direction.

77

For this purpose, the first step involves a fitting survey of the big picture. We begin with the
course of the top index funds since the eve of the millennium.
The figure below adapted as usual from Yahoo Finance shows the price action for the
trio of touchstones for the stock market. The blue curve depicts the relative performance of
SPY from its inception in 1993 until the onset of 2015. Meanwhile the red and green
squiggles portray similar paths for DIA and QQQ following their respective rollouts in 1998
and 1999.
The horizontal gold line near top of the image marks the peak level for SPY formed at the
height of the Internet craze in 2000. We can see that the landmark was reached once
again in the throes of the housing bubble in 2007. On the other hand, it was not until 2013
that the Spyders mustered enough energy to punch through the barrier posed by the lofty
record set back in 2000.

Chart 8. Paths of SPY, DIA and QQQ


since their debuts until the onset of 2015.

78

By contrast, the Diamonds managed to escape the worst excesses of the Internet frenzy
as we can see from the purple line in the foregoing chart. The stalwart formed a crest at
the height of the digital madness, then crumpled along with the rest of the bourse over the
next couple of years.
On the bright side, the juggernaut gained traction once more and rumbled past the initial
peak several years later in the throes of the housing bubble. Even so, the powerhouse hit
the deck along with the rest of the bourse during the financial crisis of 2008.
In this way, the Diamonds notched a higher peak in the autumn of 2007 before buckling in
stages and hitting the trough in spring 2009. In the winter of 2013, however, the slugger
managed to tramp past the previous summit forged amid the housing hoopla.
On the whole, the Spyders followed a similar path over the same timespan. The main
difference for SPY involved the delayed reaction in zooming past the epic ceiling set
during the cybercraze at the turn of the millennium.
Instead of breaking through the previous peak it had formed in spring 2000, the index fund
bumped into the barrier and fell back a couple of times. After the abortive attempt in 2007,
the pacer broke down in stages until it hit rock bottom a couple of years later.
Then the go-getter pushed forward once more. In spring 2013, the comeback kid finally
managed to run past its prior peak.
On the other hand, the story differs a great deal for the Qubes. The Nasdaq fund soared to
absurd heights in the heat of the Internet craze. When the bubble popped, QQQ took a
couple of years to come down to earth. By the time the index fund hit bottom in autumn
2002, it had lost more than 80 percent of its value.
Since then, the Qubes have been trudging upward more or less in tandem with its older
peers. The live wire formed a local peak in autumn 2007 before crumpling in a ragged
fashion till the depths of the Great Recession in spring 2009.

79

Then the hustler recovered in stages over the next couple of years. In early 2011, the
Qubes bumped against its minor peak set in autumn 2007. Unfortunately, the benchmark
did not get very far before it broke down during the crash of the stock market in autumn
2011.
On the upside, though, QQQ pushed past its secondary crest in a decisive fashion in early
2012. After that point, the benchmark has been dashing higher at a lively pace.
On a negative note, QQQ still has some way to go before it reaches the giddy heights
scaled at the height of the Internet madness. That zenith will pose a hulking barrier to
further progress for the returnee.
To recap, the Diamonds set a record in the midst of the digital craze then relinquished the
title over the next couple of years. The steamroller forged ahead even higher in the heat of
the housing bubble several years later before falling back once again. Before long, though,
the titan took another stab at the latest peak then trudged past the summit in a decisive
fashion in the early 2010s.
By contrast, the Qubes have had a rough time trying to regain their all-time high. During
the housing bubble, QQQ did not come close to breaking its record set in 2000. Even
today, the Nasdaq fund hovers within striking distance of its historic record but has yet to
reclaim the title.
In these ways, the landscape formed in the heat of the Internet craze continues to cast a
long shadow. On one hand the Diamonds have moved past their historic peak, as have the
Spyders. On the other hand, the Qubes still loiter within the sphere of influence of the epic
landmark formed at the turn of the millennium.

Panoramic View of the Senior Benchmark


As we noted earlier, the Diamonds have largely broken free of the gravitational pull of its
historic apex formed in 2000. For this reason, we can focus on its behavior in recent years

80

without paying close attention to previous decades. The chart below shows the path of DIA
over the course of 5 years ending at the onset of 2015.
Following the trough plumbed in spring 2009 in the throes of the Great Recession, the
stock market began to recover in fits and starts. But the bourse broke down again a couple
of years later, resulting in a crash in the autumn of 2011.

Chart 9. Path of DIA over 5 years until the onset of 2015.

After that smashup, the market has been clambering higher once again. Based on the
milder slope of the green line compared to the orange stroke on Chart 9, the speed of
advance appears to have eased somewhat.
That much is to be expected after a whopping debacle such as the financial flap of 2008
followed by the market crash of 2011. As a rule, the bourse recovers quickly at first from a
mindless plunge as the goblin of fear recedes into the background. After that stage,
though, the market has to move ahead largely on its own merits at a measured rate,
without the extra boost due to the lightening of mood from abject fear to wonted greed.
The main point here is that the Diamonds have been trudging ahead at a steady pace over
the past couple of years in spite of the inevitable chain of upsets and backtracks along the

81

way. For this reason, a lean prediction based on the recent past makes more sense rather
than an in-depth survey of historic landmarks. In other words, there is not much more to be
said beyond the detailed forecast for DIA provided earlier in this report, along with the
numeric targets.
The story is similar for the Spyders. On the other hand, the setup differs entirely for the
Qubes. For the Nasdaq fund still lies squarely within the ambit of its historic peak forged in
the fury of the Internet craze.

Prospects for Jaunty Benchmarks


In line with earlier remarks, the Spyders and Qubes tend to be more frisky than the
Diamonds. As a result, the zippy funds are slated to surpass the senior benchmark over
the year to come.
On the whole, the turning points for the Spyders will coincide with the ups and downs of
the Diamonds. For this reason, we will present a concise rundown of the milestones for
SPY rather than explain the full reasoning behind each rise and fall of the market in store.
To begin with, a notable difference between the duo of heavyweights stems from the
distinct roles played by their respective histories. In particular, the advance of the Dow
index will be checked by a psychic barrier at the 20,000 level.
By contrast, the S&P index has already passed a bulky roadblock in the 1,500 zone where
historic peaks were formed in the heat of the Internet bonfire followed by the housing
bubble. In line with earlier remarks, the flagship benchmark touched a high of 1,552.87
points in March 2000. The climax was duly followed by a crash of the stock market along
with a recession in the real economy.
The S&P benchmark soared for a second time in the midst of the housing frenzy. The apex
reached on this romp came out to 1,576.09 points. Once again, the wild spurt was followed
by a thumping bust of the real and financial markets.

82

On the next rally, the touchstone tramped past its prior peak in April 2013 and continued to
climb higher in spite of the usual run of minor setbacks along the way. In this way, the
yardstick displayed an oft-seen pattern on the bourse by breaking through the mental
block upon its third attempt.
After that coup, the flagship index ran into another big roadblock at the 2,000 level in the
autumn of 2014. Not surprisingly, the stock market freaked out at once and plunged into a
mini-crash a few weeks later.
Since then the pacer has struggled mightily to pull free of the snare. The benchmark
formed a higher peak beyond the 2,000 level in December, then performed an encore in
January. Each time, though, the yardstick fell below the barrier within a matter of weeks.
On the upside, though, the S&P index should gain some traction and pull free of the
quagmire over the months to come. In that case, the tracking fund will also summon the
mojo required to advance once more at a decent pace.
The chart below depicts the path of the Spyders over the course of two years ending in
early 2015. The golden ramp sketches out the uptrend for SPY during this period.
Meanwhile the green line portrays the watershed at the $200 level while the blue stroke
marks a milepost in the vicinity of $188.
In line with the norm around the beginning of the year, the market is slated to thrash
around more than press ahead during the months of January and February. After the
splash of turmoil, however, the bourse should muster the strength to climb higher in
earnest.
We can see from the right side of the chart that the latest peak occurred last month at a
price of $211.80. By contrast, the previous crest popped up last September at $200.79.
The difference between the two tops comes out to $11.01. If we add the increment to the
latest summit at $211.80, the result is $222.81.

83

The latter figure represents the next milestone for the Spyders. Based on current trends,
the landmark should be reached by the spring.
After that stage, SPY will fall back toward its prior peak at $211.80. Then the market will
face the rough winds that buffet the market in the heat of the summer.

Chart 10. Weekly data for SPY over two years ending in early 2015.

The blue line at the $188 level happens to lie $12 below the watershed at $200. We can
add the latter increment to the likely peak of $222.81 sketched out for the spring. In that
case, the next summit looming on the horizon comes out to $234.81.
After this target is acquired, it will as usual be released shortly afterward. At that stage, the
market is poised to break down as the bourse enters its weakest stretch of the year with
the onset of September.
During the usual spate of turbulence in the autumn, the market is sure to take a nosedive.
In that case, the default target to the downside lies at the prior milepost of $222.81.

84

After that knockdown, the ground will be cleared for a healthy push to the upside. After
punching through the landmark at $234.81, the next milestone lies $12 higher in the
ballpark of $246.81. The latter figure lies around 20% beyond the closing value of $205.54
at the end of 2014.
As we noted earlier, 2015 happens to be the run-up to the Presidential elections in the
U.S. next year. For this reason, the politicians will do their best to paint a rosy picture of
the future while spending what money they can in order to pump up the economy. Thanks
to the hullabaloo, the mass of voters and investors will get a warm fuzzy feeling along with
the fond hope that the good times will roll once more as they did in days of yore.
As a result, the actual return on the Diamonds could surpass the base target of 14% by a
hefty margin. In fact, the payoff could be closer to double the primary figure. If the
Diamonds race ahead, then the Spyders and Qubes will of course fly even higher.

Chart 11. Trace for QQQ from its inception


in 1999 to the onset of 2015.

Over the past couple of years, the Qubes have been riding a nice channel to the upside,
as shown by the orange and mauve lines in the graphic above. Moreover, the pipeline has
85

another half-year or so before its top edge reaches the epic barrier lying a jot beyond the
$120 level that corresponds to the height of the Internet bubble. After that stage, however,
the most likely move is a thumping flop for QQQ.
In talking about the all-time high for the Qubes, we need to take account an accounting
event that had no real impact on the true value of the equity; namely a stock split of twofor-one in March 2000. At that point, each shareholder received an additional share for
every unit they happened to own. The upshot was to halve the price of the stock without
affecting the value of any position held by any investor.
One way to sidestep the logistic event is to talk about the underlying benchmark rather
than the tracking fund. In this light, we note that the latest peak of 4,347.09 points reached
by the Nasdaq 100 index in November 2014 lingered nearly 10 percent below the 4,816.35
mark it notched at the peak of the digital fad in March 2000.
The historic high formed at the turn of the millennium poses a major barrier to further
progress. But theres more to the story.
The Nasdaq index will run into another hulky barrier at the nice, round number of 5,000
points. In that case, the bouncy benchmark has to contend with the double whammy of a
historic peak and a mental block over the year to come.
Naturally, the travails of the index itself applies as much to its tracking fund. Even so, the
Nasdaq market has more room to run before it slams into the massive wall formed by its
all-time high back in 2000.
In line with earlier remarks, the Qubes touched a peak of $232.88 in March 2000. In the
same month, the stock underwent a 2-for-1 split. As a result, the historic peak corresponds
to a price of $116.44.
The closing value of the Nasdaq index at the end of 2014 was 4,236.28 points. In that
case, the watershed at 5,000 represents an increase of 18%. In general, an upturn on that
scale lies fully within the capabilities of the benchmark over the course of a year.

86

We note that the Qubes closed out the year at a price of $103.25. In that case, a rise of
18% will bring the tracking fund to about $121.84. The latter number, as prosaic as it may
seem at first glance, corresponds to the towering marker of 5,000 points for the underlying
index. As this example shows, the unequal significance of respective milestones is a good
reason for keeping track of a benchmark in its original form as well as its tracking fund.
Upon reaching the massive milepost, the Nasdaq index as well as its namesake fund are
destined to break down. That is one reason for the muted prospects for the Qubes in spite
of their usual vitality over the past half-decade and more.
But we are getting ahead of ourselves. As is often the case shortly after the New Year, the
Qubes are slated to thrash around more than forge ahead during the months of January
and February. With the advent of spring, however, the go-getter should come to life once
more.
Last September, the Qubes formed a top at $100.56. That milepost also served as a
support during the mini-crash last December.
The next summit cropped up in November at the $106.25 level. The difference between
the last pair of prices comes out to $5.69.
If we add the latter increment to the crest formed in November, the result is $111.94. In that
case, the next target to the upside lies in the neighborhood of $112. The latter zone is
likely to be reached during the spring.
As the summer rolls around, the markets will thrash around in their usual fashion. After the
squall of the summer, the nasty currents of the autumn will make an appearance. Amid the
tumult, the Qubes are apt to give up the bulk of the gains they racked up during the first
half of the year.
After that phase, the market is slated to rev up for the final stretch of the year. In that case,
the Qubes will race toward the all-time high scaled at the height of the Internet craze. In
other words, the second and last landmark for the year is $116.44 which corresponds to
the historical peak for QQQ.
87

By way of comparison, we note that the Qubes closed out the past year at a price of
$103.25. In that case, the year-end milestone lies a mere 12.8% beyond the closing value
for 2014.
In the subsection titled Stretch Factor for Longish Positions, we noted that the relative
edge the Qubes came out to 2.32. By multiplying the latter factor by the likely gain of 18%
for the Diamonds this year, the corresponding figure for QQQ turns out to be nearly 42%.
On the other hand, the latter figure does not take into account the mental blocks that will
hamper the advance of the Nasdaq market this year. The mindful forecast of 12.8% that
we cranked out a little earlier stands in stark contrast to the leap of 42% based on a
straightforward rundown of the price action on the bourse in the recent past.
To sum up, the Qubes raced ahead at a lusty pace over the course of 2014. A key reason
for the zesty performance was the lure on the horizon of the all-time peak set at the turn of
the millennium.
Once the airy objective is reached, however, the Qubes will run out of steam in a big way.
After grasping the target, the tracking fund will fall back and mope around before it musters
enough energy to breach the barrier.
Moreover, once it breaks through the roadblock, QQQ will fade out and keel over once
more. The tracker is bound to crumple toward the $120 zone before it gains sufficient
strength to head higher once more.
As a result, the advantage of QQQ compared to its rivals will be modest once its historic
peak has been reclaimed. Beyond that point, the shrewd investor would do well to stay
clear of the Qubes until the fund has moved beyond the threshold in a decisive fashion.
Once the Qubes break out of the $120 zone in earnest, it will face a tough slog after the
rapid advance of the past few years. As we noted earlier, the tracking fund will encounter a
blockade at a price of $121.84 or so in parallel with a hulking barrier of 5,000 points for the
Nasdaq index itself.
88

For this reason, the benchmark along with the tracker will retreat to their previous summits.
Moreover, each vehicle is apt to run into the roadblock several times before it can punch
through the barrier in a serious way.
After that stage, another hefty barrier lies at the psychic milepost of $130, which stands
nearly 26% above the closing value of $103.25 reached at the end of 2014.
On a negative note, the Qubes will be hard-pressed to hold the latter quarry or even reach
it for the first time over the year to come. On one hand, the picture could change
dramatically if the economies of Europe as well as the emerging regions were to cast off
their doldrums and spring to life with gusto. But a zippy turnout of this sort is not in the
cards at this juncture.

Prospects for Dynamic Markets


As a rule, the junior sections of the stock market tend to surge when the senior ranks
tracked by the leading benchmarks of the bourse clamber higher. The dynamic niches of
this breed include bantam firms as well as emerging markets.
On one hand, the bourses in the budding countries took a severe beating during the Great
Recession of 2007 to 2009. The smackdown of the stock market was followed by a prompt
recovery over the year to follow. After that stage, however, the nascent regions have
bounced around for half a decade without making any headway.
The turnout was similar for bantam stocks shortly before, during and after the financial flap
of 2008. In the wake of that watershed, the small fry soared and plunged for half a decade
as the big fish swam higher through a series of upswings and downstrokes. On a cheery
note, though, the shrimps tracked by IWM have outpaced the whales in the form of DIA
and SPY by a decent margin.
The divergent outcomes between the titans and the midgets were depicted clearly in Chart
4 as we saw earlier. For starters, the decent performance of the heavyweights over the
89

past five years showed up in the paths traced out by the Diamonds, Spyders and Qubes.
Meanwhile the midgets in the form of IWM performed a good better than the giants.
On the other hand, the emerging markets portrayed by VWO and EEM turned in a lousy
showing. The fireballs bounced around but went nowhere over the past half-decade.
As a backdrop, the real economy in the U.S. has in general been creeping along at a
couple of percent at most each year since 2010. In that case, the measly upturn did not
come close to justifying the massive surge of the top benchmarks over the entire stretch.
Granted, a growing share of the profits for the giants listed on the U.S. bourse comes from
foreign markets. But the global economy in toto has expanded by only a few percent per
year in the recent past.
Given the contrast of the real and financial markets, we can infer that a big reason for the
surge of the U.S. bourse lay in the ocean of money pumped into the economy by the
central bank. On top of the usual spree of money printing, the Federal Reserve engaged in
three rounds of quantitative easing, a euphemism for conjuring a sea of money out of thin
air.
Over the course of six years starting in late 2008, the central bank flooded the economy
with freshly minted dough. This was done by scooping up and paying for mounds of debt
securities in the private sector amounting to a historical record of $4.48 trillion (Kearns,
2014). And all that money spewed into the financial system had to go somewhere.
When the issuers of the bonds spent the money they obtained, the gobs of dough made
their way to individuals as well as institutions ranging from individual employees to
corporate treasuries. The recipients in turn had to spend the money they received or find
someplace to stash their cache.
One impact of the schemes in the public sector was to buttress the housing sector. Within
the tangible economy, the boondoggles by the government included a slew of public
guarantees for private mortgages. In the financial realm, the follies of the central bank

90

included the prop-up of real estate through the purchase of mortgage-based securities to
the tune of billions of dollars at a stroke.
Thanks to the raft of artificial crutches, the property sector continues to limp along, unable
to cast off its bloat and deflate fully from the loony levels seen at the height of the housing
craze. The plight of the homebuyer is spotlighted by the frothy prices in the marketplace,
fueled in large part by the glut of money coupled with the paltry rates of interest on housing
loans. Despite the modest burden of carrying a mortgage, one in five housing markets in
the U.S. were less affordable in late 2014 than their historic average as the price level
bubbled higher in places ranging from New York to San Francisco (Gopal, 2014).
More generally, the rabid purchase of bonds by the central bank has led to inflated prices
for the securities which in turn correspond to trifling rates of interest. As a result, the
investing public has been unable to keep up with the ravage of inflation by turning to the
bond market as a repository of wealth.
Under these conditions, an obvious recourse for the investor is to take refuge in the stock
market. For one thing, many a stalwart on the bourse offers a dividend yield which
exceeds the income stream from bonds and in addition comes with the prospect of a
dollop of capital gains.
On the other hand, there are limits to the willingness of investors to pile into the U.S.
bourse despite the dearth of alternatives for the sea of money sloshing around the
financial system. Sooner or later, the investing public will turn to foreign markets.
In an earlier section, we saw the turnout in recent years for a medley of beacons for the
global marketplace. As an example, Chart 4 portrayed the course of the emerging markets
in the form of VWO since its inception. Meanwhile the Spyders served as a proxy for the
U.S. bourse.
Another feature lay in a selection of advanced markets. In Chart 5, the fortunes of Canada,
Germany and the United Kingdom were portrayed respectively by EWC, EWG and EWU.

91

In the exhibit, the blue line showed the relative motion of the VWO fund. The communal
pool bounced around a good deal but went nowhere over the past half-decade.
Meanwhile the red curve showed that the Canadian benchmark has mostly followed the
course of VWO in recent years. In particular, EWC has merely bounced around without
making much headway over the past few years.
As we noted earlier, a key reason for the lousy performance lies in the concerns of the
investing public over the pace of global growth. As it happens, Canada is a major exporter
of raw materials as well as a financial center for the mining industry throughout the planet.
For these reasons, the fortunes of the local bourse depend on the expectations of the
general public regarding the outlook for economic growth in the budding regions along with
the demand for natural resources.
To cast a glance at Europe, the British market has fared somewhere between the lively
upgrowth of the bourse in the U.S. and the crummy turnout of the laggers including
Canada. On one hand, the bourse in London does harbor a raft of companies focused on
the production and distribution of natural resources.
On the other hand, the local market also contains a multitude of firms focused on the
financial sector as well as other branches of the economy ranging from retailing to
infotech. Given this backdrop, the stunted performance of EWU reflects in large part the
jitters amongst international investors regarding the weakness of the global economy as a
whole.
The flaky behavior of the herd shows up in the contrasting turnout for Germany. From the
arc colored in light purple, we can see that EWG has on the whole fared as well as SPY
since the beginning of 2012.
Despite the dismal conditions in the regional economy, the investing public has adopted a
sanguine view of the earnings downstream for German firms in general thanks to their
ability to sell mounds of goods throughout the spry countries in the emerging regions. In
this light, the products on the move span the rainbow from fancy cars to capital equipment.

92

On one hand, Chart 5 is too sketchy to distinguish the precise payoffs for the tracking
funds. Even so, the display reflects the fact that VWO thrashed around but lost a tad over
2% over the course of five years ending in 2014.
Over the same timespan, EWC crept higher by nearly 10%. Meanwhile EWU did a bit
better thanks to its upturn in excess of 11%. Better yet, EWG chalked up a return of more
than 22% over the same stretch.
On the other hand, these numbers are dwarfed by the gain of 84% racked up by SPY.
Clearly the rival markets of the West enjoyed only a pinch of the largesse bestowed upon
the U.S. bourse by the investing public.
On the other hand, the lopsided view of motley markets will not last forever. For one thing,
the bulk of economic growth for the world at large comes from the emerging regions. In
that case, the sprouting markets should soar when the U.S. bourse climbs.
At some point, the mass of investors will stop fretting over the emerging regions. At that
stage, the budding markets will come to life with a vengeance.
As we can see from the left side of Chart 4 as well as Chart 5, VWO can outrun SPY by a
factor of 2 or more when the stars are aligned in its favor. And this could well be the year
when the madding crowd decides to pile into the sprightly markets of the world.
In line with earlier remarks, the top benchmarks made up of the big fish will encounter a
wild ride over the course of 2015 for a medley of reasons. As a result, the feisty niches
such as the emerging regions and bantam stocks should undergo even bigger swings in
price.
Moreover the bulk of investors may decide that its time to venture beyond the relative
safety of the U.S. bourse. In that case, the feisty funds such as VWO and IWM could well
chalk up returns amounting to twice the gains for the chief benchmarks of the stock
market.

93

To sum up, the bulk of global growth comes from the emerging markets. For this reason,
the companies in the budding countries are sitting in the drivers seat. In that case, the
stock markets of the sprouting regions ought to flourish in a similar fashion.
Yet the swarm of international investors has been wary of stepping into the vibrant
markets. Over the past couple of years, in particular, the fear of volatility in the emerging
regions has kept the madding crowd at bay.
The jitters will of course subside sooner or later. When that happens, the budding markets
will enjoy a powerful surge as they make up for lost time.
In brief, a host of bourses round the world have trailed far behind the robust performance
in the U.S. over the past few years. Even so, the setup is apt to change dramatically over
the next year or so.
An example lies in the lagging bourses of Europe which are slated to fare much better over
the year to come. In a similar way, the emerging markets are sure to regain their stride and
forge ahead faster than the benchmarks of the U.S. in due course.

Showcase of Forecasting
To take a step back, the forecasting exercise this year poses a case study of uncommon
complexity. For starters, the factors at work include a heap of routine drivers as well as
wayward features. An example of a commonplace concern lies in fundamental facets such
as business conditions and monetary policies, or technical pointers as in multiyear trends
and seasonal patterns
To compound the muddle, a bunch of factors crop up only once in a few years or decades.
An example of the former is the hefty impact of the political sphere on the stock market in
the run-up to a Presidential election in the U.S. Meanwhile an instance of the latter is the
psychic barrier posed by a colossal landmark formed in the throes of an epic bubble in the
stock market on the eve of the millennium.

94

On the upside, the hoopla on the political sphere will infuse hordes of investors with
sanguine views regarding the prospects for the real economy along with the stock market.
On the downside, though, a gauntlet of mental roadblocks will stymie the madding crowd
and prevent the bourse from gaining its stride.
A case in point is a hulking barrier for the Dow index at the 20,000 level. Another sample is
a dual blow against the Nasdaq benchmark due to its historic peak at 4,816.35 points at
the height of the Internet craze, followed by a mental block at the hulky landmark of 5,000
points.
Due to the blockers, the stock market is destined to thrash around even more during the
second half of the year. In that case a barrage of mini-crashes will pelt the benchmarks of
the bourse. The consequences will of course be worse for the small fry ranging from
bantam stocks to emerging markets.
From a larger stance, the battered economies of the mature countries will continue to
gnaw at the nerves of international investors. A case in point is the turmoil in Europe in the
aftermath of the housing bubble that led to the financial crisis of 2008, in tandem with a
slew of toxic policies ranging from the rescue of braindead banks from their own reckless
schemes to a riotous spree of money printing.
As we noted earlier, the bubbly forces that lend an upward tilt to the U.S. bourse will be
negated in part by a clutch of mental roadblocks. For this reason, part of the effervescence
should spill over into foreign markets. On beneficiary will be the European market whose
sad plight will be countered in part by a fresh influx of mint from local investors as well as
foreign players.
Another major recipient will be the host of budding markets that have faltered for roughly
half a decade. In reality, though, the emerging regions generate the bulk of economic
growth for the world as a whole. Sooner or later, a torrent of money will pour into the
downcast markets in line with their status as the main engines of global growth.

95

The inrush of mint could well begin this year. In that case, the bourses of the sprouting
regions will snap out of the funk of recent years and revert to their usual habit of outpacing
their peers in the mature economies.

Practical Thrust of the Forecasts


The array of forecasts in the preceding sections differs in a vital sense from the mass of
predictions issued by the talking heads in the financial media. At the onset of a new year,
the usual call involves the terminal value of the benchmarks at the very end of the
calendar year.
An augury of this sort has the advantage of being simple to express and easy to explain to
the viewing audience. On the other hand, the bodement suffers from a couple of
drawbacks.
For one thing, a bare-bones forecast of this sort is directly relevant only to the small subset
of investors who happen to revise their portfolios precisely once a year, and at the
beginning of January at that. On the other hand, an aloof player of this sort has scant
choice but to remain committed to the stock market at all times.
As a counterexample, its hard to imagine a lucid investor who says something like the
following: What, is the benchmark going to rise by a mere 9 percent this year? Thats less
than the minimum threshold of 14.3 percent that I demand. So Im not going to put any
money into the stock market at all this year.
Instead of staying clear of the bourse, the gamer who tends to their account only once a
year has little choice but to remain engaged at all times. For this reason, any effort to
outpace the benchmarks of the market has to rely solely on the deft selection of stocks.
That is, the vehicles within the personal portfolio will have to outpace the market averages.
In that case, a precise forecast of the market is largely pointless. As an example, a
forecast of growth amounting to 8% rather than 15% will have scant bearing on the choice
of a lively stock over a sluggish one.
96

For these reasons, the usual parade of predictions trotted by the financial media is of little
use to the bulk of investors. If the calls are to have some practical import, then a better
scheme by far is to talk about the highs and lows over the year to come.
The advantage of picking out the major landmarks along with the turning points lies in the
practical edge for the investor who is willing to update their portfolio more than once a
year. In other words, a position in a particular asset may be initiated or terminated in tune
with the ups and downs of the stock market at large.
To bring up a simple scenario, suppose that the bourse has been rising for several months
and is nearing its next milestone. If the investor agrees with the forecast of the turning
point, then the gamer ought to trim their sails. An example in this vein is to sell off the most
risky assets within a retirement portfolio. Another sample is to wait until the next trough
before committing a fresh dose of cash into the stock market.
In these ways, an inkling of the turning points in the marketplace is a lot more helpful than
a rigid forecast of the final destination at the very end of the calendar year. And the nimble
tack is the approach we have taken in this survey.

Scope of Market Forecasts


The future is an outgrowth of current conditions coupled with prior events. For this reason,
the sage planner looks in the backward direction as a prelude to mapping out the
prospects going forward.
On one hand, a long view of the past can provide a heap of data for a sweeping analysis.
On the downside, though, the distant past tends to have less of an impact than do recent
events on the course of the future.
Given this backdrop, the seer has to balance the richness of a bulky database against the
clarity of a compact picture. As a rule of thumb, a long history is most apt for sketching out

97

the major outcrops lurking on the distant horizon. On the other hand, a data set of modest
size befits a forecast of the near future.
For our purpose here, a window of 3 years seemed like an apt compromise in gauging the
prospects over the year to come. The timespan is a fitting tradeoff between the opposing
factors of excessive clutter versus skimpy data.
The lineup of forecasts given in the previous sections represents the most likely course of
events over the coming year and beyond, based on the action to date in the real and
financial markets. On the other hand, the default pathway could of course be derailed by
any number of flukes.
The sideswipes of this sort can take the form of natural disasters as well as human
actions. An example of the former is a freakish snowstorm that knocks out the power grid
throughout the eastern seaboard of the United States, thus throwing the regional economy
for a loop. Meanwhile an instance of the latter is a software virus that wreaks havoc on the
financial networks of the world.
For these reasons, any forecast has to be taken with a grain of salt. This remark is not
meant to downplay the importance of prediction in the vale of finance nor anywhere else.
Quite the opposite, in fact.
The reign of chance and luck is a reason for planning with more care rather than less.
While nothing is certain, some things are more likely than others. Moreover a cogent plan
laid out in advance is sure to boost the odds of success in bringing forth a favorable result.
In the absence of any big surprises, the markets round the planet are on track to press
ahead in 2014 along the lines described earlier. Better yet, the outlook for the years to
follow is a bit brighter still.

98

A Caveat on Exchange Traded Funds


Since the eve of the millennium, the field of exchange traded funds has expanded at an
explosive rate. The popularity of the vehicles springs from a number of factors ranging
from the ease of handling and the efficiency of transactions to the diversity of offerings and
the survivability of the vehicles.
On the upside, the profusion of index funds is a godsend for the mass of investors due to
the convenience and affordability of participating in a multitude of markets round the world.
On the downside, though, the jejune field suffers from a clutch of teething problems that
beset any domain in its infancy.
A prime example lies in the difficulty of obtaining solid information on the slew of offerings
in the arena. In this effort, the woeful investor faces a heap of snags in dealing with the
deluge of confounding data.
One type of stumper lies in the sheer number and diversity of the products clamoring for
the investors attention. Another bogey lies in the dish-out of sham data on exchange
traded funds from otherwise respectable sources of information (MintKit Core, 2015a).
In seeking out the best vehicles for investment, a first step is to sort the population of index
funds in terms of their target markets along with the prospects in store. Within each group,
a stalwart can serve as a baseline for comparison and perhaps even the vehicle of choice.
From a different angle, a cogent way to deal with conflicting information is to compare and
contrast the data provided by the leading portals. A related tack is to review the nuggets of
information from a particular source and determine whether the facts appear to be
internally consistent.
In addition, the thoughtful investor ought to review the price record over time in a graphic
format in order to obtain an intuitive grasp of the action in the marketplace. Another
recourse is to confirm whether the visual plot appears to be consistent with some key

99

pieces of numeric data. An example of the latter lies in the maximum level or the terminal
value of a chain of stock prices.
As in any domain racked by rampant growth, the vale of exchange traded funds is
hamstrung by a shortage of telling and trusty information. On the upside, though, the din
and smog in the field will doubtless clear up with the passage of the years and decades.
In the meantime, though, the prudent investor has to contend with the bustle and the
muddle by drawing on personal reserves of pluck and judgment. Given the ample
attractions of exchange traded funds, a modicum of extra effort is surely justified in order
to muster the proper information needed to build up a sound program of investment.

References
Blumenthal, S. Stock Markets High P/E Suggests Lower Returns Ahead. 2014/6/18.
http://www.forbes.com/sites/greatspeculations/2014/06/18/stock-markets-high-pesuggests-lower-returns/ tapped 2015/1/19.
Conference Board, The. Global Economic Outlook 2015. Nov. 2014.
http://www.conference-board.org/data/globaloutlook tapped 2015/1/19.
Coy, P. The Hawaiian Tropic Effect: Why the Feds Quantitative Easing Isnt Over.
2014/10/29. http://www.businessweek.com/articles/2014-10-29/the-feds-quantitativeeasing-is-not-really-ending tapped 2015/1/19.
Federal Reserve Bank of St. Louis. FRED Feature / At a Glance.
http://research.stlouisfed.org tapped 2015a/1/19.
Federal Reserve Bank of St. Louis. MZM Money Stock (MZMSL). 2015b/1/16.
http://research.stlouisfed.org/fred2/series/MZMSL/downloaddata?cid=30 tapped
2015/1/19.

100

Federal Reserve Bank of St. Louis. M2 Money Stock (M2SL). 2015c/1/15.


http://research.stlouisfed.org/fred2/series/M2SL/downloaddata?cid=29 tapped
2015/1/19.
Gopal, P. Brooklyn Worst in U.S. for Home Affordability. 2014/12/4.
http://www.bloomberg.com/news/2014-12-04/brooklyn-worst-in-u-s-for-homeaffordability.html tapped 2015/1/19.
Kearns, J. Feds $4 Trillion Holdings to Boost Growth Beyond End of QE. 2014/10/24.
http://www.bloomberg.com/news/2014-10-24/fed-s-4-trillion-holdings-keep-boostinggrowth-beyond-end-of-qe.html tapped 2015/1/19.
Kim, S. Charade of the Debt Crisis: From Buffoonery to Tragedy in the Debt Folly and
Euro Farce. MintKit.com: MintKit Press, 2012. Available at http://www.mintkit.com/lib.
Kim, S. Forecast of Top Index Funds for Equities 2014 and Beyond. 2014/1/20.
http://onhub.blogspot.com/2014_01_01_archive.html tapped 2015/1/14.
Kim, S. Forecasting the Next Crash of the Stock Market. 2011/11/23.
http://w.mintkit.com/2011/11/forecasting-next-crash-of-stock-market.html tapped
2015/1/23.
MintKit Core. Cruddy Information on Exchange Traded Funds: Guide to Choosing
Exchange Traded Funds in Spite of Shifty Information. http://www.mintkit.com/cruddyinformation-exchange-traded-funds tapped 2015a/1/23.
MintKit Core. Myths versus Mistakes: Riot of Passive Muffs and Active Goofs in Financial
Markets. http://www.mintkit.com/myths-vs-mistakes tapped 2015b/1/4.
Multpl.com. S&P 500 Earnings. http://www.multpl.com/s-p-500-earnings/table tapped
2013/1/1.
Multpl.com. S&P 500 Earnings by Year. http://www.multpl.com/s-p-500-earnings/table
tapped 2014/1/8.
101

Reuters. Powershares QQQ Trust Series 1 (QQQ.OQ).


http://www.reuters.com/finance/stocks/overview?symbol=QQQ.OQ tapped 2015/1/24.
Shiller, R. U.S.Stock Price Data, Annual, with Consumption, Both Short and Long Rates,
and Present Value Calculations. http://www.econ.yale.edu/~shiller/data/chapt26.xls
tapped 2015/1/19.
Speck, D. Dow Jones Election Cycle.
http://www.seasonalcharts.com/zyklen_wahl_dowjones4j.html tapped 2015/1/10.
Steiner, S. National CD rates for Jan. 15, 2015.
http://www.bankrate.com/finance/cd/rate-roundup.aspx tapped 2015/1/19.
Wall Street Journal. P/Es & Yields on Major Indexes.
http://online.wsj.com/mdc/public/page/2_3021-peyield.html tapped 2015/1/8.
Wikipedia. PriceEarnings Ratio. http://en.wikipedia.org/wiki/Price
%E2%80%93earnings_ratio tapped 2015/1/19.
World Bank. Global Economic Prospects. Table 1.1. Jan. 2015.
http://www.worldbank.org/content/dam/Worldbank/GEP/GEP2015a/pdfs/GEP15a_web_full
.pdf tapped 2015/1/19.
Yahoo Finance. SPDR Dow Jones Industrial Average ETF (DIA) Historical Prices.
http://finance.yahoo.com/q/hp?
a=00&b=20&c=1998&d=00&e=18&f=2015&g=m&s=dia&ql=1 tapped 2015a/1/18.
Yahoo Finance. SPDR Dow Jones Industrial Average ETF (DIA) Risk as of Dec 30,
2014. http://finance.yahoo.com/q/rk?s=dia+Risk tapped 2015b/1/25.
* * *

102