Tag: stock market prediction

  • Shiller CAPE Ratio – The Measurement Of Market Valuation

    Shiller CAPE Ratio – The Measurement Of Market Valuation

    Shiller CAPE Ratio – The Measurement Of Market Valuation
    The Shiller P/E or the cyclically-adjusted price-to-earnings (CAPE) ratio of a stock market is a market valuation metric that eliminates change of the ratio caused by the difference of profit margins during business cycles. It is the regular metric for evaluating whether a market is overvalued, undervalued, or fairly valued.

    Shiller CAPE ratio or the cyclically-adjusted price-to-earnings ratio of a stock market is one of the regular metrics if you want to evaluate whether a market is overvalued, undervalued, or fairly valued.

    Shiller CAPE ratio, developed by Robert Shiller, professor of Yale University and Nobel Prize Laureate in economics. This ratio usage increased during the Dotcom Bubble when he claimed the equities were extremely overvalued. And he was right, we know that now. Shiller P/E is actually a modification of the standard P/E ratio of a stock.

    Investors use this Shiller CAPE ratio mostly for the S&P 500 index but it is suitable for any. What is so interesting about the Shiller CAPE ratio? First of all, it is one of several full metrics for the market valuation able to show investors how much of their portfolios should wisely be invested into equities. 

    The ratio is based on the current relationship among the price of equities you pay and the profit you get in return as your earnings.

    For example, if the CAPE ratio is high it could indicate lower returns across the following couple of decades. And opposite, a lower CAPE ratio might be a sign of higher returns across the next couple of decades, as the ratio reverts back to the average.

    Investors use it as a valuation metric to forecast future returns. The metric has become a popular method to get long-term stock market valuations. To be more precise, the Shiller CAPE ratio is the ratio of the S&P 500’s (or some other index) current price divided by the 10-year moving average of earnings adjusted for inflation.
    The formula is:

    CAPE ratio = share price / average earnings over 10 years, adjusted for inflation

    That was the formula but let us explain a bit more how to calculate the Shiller CAPE or also called Shiller’s P/E ratio.
    What you have to do is to use the annual earnings of the company in the last 10 years. Further, adjust the past earnings for inflation.  

    How the Shiller CAPE ratio works

    As an investor, you know that the price is the amount you have to pay, and the value is the amount you get. That’s clear. We have to compare the price to the value and that’s why we have many metrics to do so. One of them is the P/E ratio, read more HERE.

    It is legal that everyone wants to buy a healthy company when the shares are trading at a low P/E ratio. This means you can get lots of earnings for the price you paid. This is valuable for index too. Just take an aggregate price of the shares of the company from, for example, the S&P 500 index for one year and divide that number by the aggregate company’s earnings for that year. You will get an average P/E for the index.

    But it isn’t quite true. For example, during the recession. At the time of the recession stock prices will fall as well as companies’ earnings (okay, they may fall significantly sharper). The problem is that the P/E ratio can rise temporarily. The investors want to buy when this ratio is low but temporary high P/E can send them a fake signal that the market is overpriced. And what is the consequence? Investors wouldn’t buy at the time when it is the best solution.

    So, here is the Shiller CAPE ratio to fix that. Shiller invented a special version of the cyclically-adjusted price-to-earnings ratio to help fix this simple calculation. If we use his CAPE ratio we’ll have a more accurate understanding of the ratio between current price and earnings. This ratio employs the average earnings over the past business cycle, not just one year that may have bad or good earnings.

    The importance of the ratio

    Shiller himself explained this the best. He used 130 years of data and noticed that the returns of the S&P 500 over the next 20 years are fully inversely connected with the CAPE ratio at any observed period. How should we understand this? Well, when the CAPE ratio of the market is high, that means the stocks are overvalued. So, the returns in the next 20 years will be lower. Hence, if the CAPE ratio is low, we can be sure the next 20 years the returns will be satisfying. 

    This is natural and logical. Cheap stocks can increase in price no matter if it is from a growing company’s earnings or a rising P/E ratio. Contrarily, when stocks are expensive and have a high P/E ratio, they don’t have too much space to grow. It is more likely they have more chances to drop when market correction or recession comes.

    How to use the Shiller CAPE ratio

    Shiller warned against using CAPE in short-term trades. The CAPE is more helpful in predicting long-term returns. Siller said in an interview:  “It’s not a timing mechanism, it doesn’t tell you – and I had the same mistake in my mind, to some extent — wait until it goes all the way down to a P/E of 7, or something.”

    But really, you have to combine CAPE with a market diversification algo or some other tool for that. Maybe the most important part is that you never get fully in or fully out of stocks.  As the CAPE is getting lower and lower, you are moving more and more in. We think the CAPE ratio for March this year is 21.12. Check the Shiller P/E ratio HERE

    So, it isn’t super high. We, at Traders-Paradise, think the stocks should be an important part of your portfolio. Don’t get out of the stocks and go in cash because the CAPE is at 21. It is smarter to buy less and expect poorer returns in the next several years. Some experts noted that markets are most vulnerable when the Shiller P/E is above 26 like it was in February this year. Some stats show that investors respecting Shiller’s ratio are doing better.

    Bottom line

    Since Shiller showed that lower ratios signify higher returns for investors over time, his CAPE ratio becomes an important metric for predicting future earnings.

    There are criticisms about the use of the CAPE ratio in predicting earnings. The main matter is that the ratio doesn’t take into account changes in the calculation of earnings. These kinds of changes may turn the ratio and give a negative view of future earnings.

    The CAPE ratio was proved as important for identifying potential bubbles and market crashes. The average of the ratio for the S&P 500 Index was between 15 -16. The highest levels of the ratio have exceeded 31( February 2020). For now, the Shiller CAPE ratio announced market crashes three times during history: Great Depression in 1929, Dotcom crash in 1990, and Financial Crisis 2007 – 2008.

    Opponents of the CAPE ratio claim that it is not quite helpful since it is essentially backward-looking, more than it is forward-looking. Another problem is that the ratio relies on GAAP earnings, which have been changed in recent years. 

    The proponents claim the Shiller P/E ratio is good guidance for investors in determining their investment strategies at various market valuations. 

    Historical data show that when the market is fair or overvalued, it is good to be defensive. When the market is cheap, companies with strong balance sheets can produce great returns in the long run.

  • What to Expect From the Stock Market in 2020?

    What to Expect From the Stock Market in 2020?

    What to Expect From the Stock Market in 2020?
    Create portfolios that will work no matter what the next year is going to bring. The recession will come or not, but your investments have to be protected. 

    By Guy Avtalyon

    What to expect from the stock market in the year ahead? The stock market could correct itself during the early days of 2020. But, despite some dark predictions, the stock market may keep rising over the long run.
    This is the last day (at the moment of writing) of the year during which the market was so unpredictable. At least, it was surprising.
    For example, Uber’s IPO was followed by fanfare, and what happened? Great disappointment.
    But many other stocks hit their highest-ever highs and quickly dropped to the lowest lows. The only truth in the stock market is that there will always be shocks. 

    Okay, that year is behind us so let’s take a look at what to expect in the stock market for 2020.

    The stock market will rise more

    The stock market boomed in 2019. The S&P 500 recorded a gain of 29.2% in 2019. Some analysts already told us the market will be down in 2020 but, to be honest, they could be wrong. Since the stock market rose over 20% in 2019 it is more likely in 2020 to see even greater returns than it was in the previous year.

    What you have to do? the answer is simple. If you had good returns in 2019 and your investment portfolio was doing well, just stay with it. Why would you change the winners? 

    But…

    Nothing related to the stock market is for sure and forever. There is always something to worry about. It’s our money. If you hold cash and not invest in stocks or somewhere else, your money will go anyway. So, don’t be frightened, come back to the market, and invest smartly. The year ahead could be promising. Build your portfolio, mix the assets, and avoid emotions. Yes, the stock market could be more volatile in the next year could since 2019 was much less volatile than the prior year.

    Some unpleasant occasions may arise over the coming year. 

    Firstly, in January due to the January Effect. What is this? The January effect is an increase in stock prices during that month. But is a seasonal increase. Usually, In December,  the stock market records an increase in buying, and the stock price is dropping. In January, stock prices will increase as always. 

    In fact, the January effect is a theory and calendar-related effect. Some small caps could be affected more than any other. But according to history, it was a case until several years ago. Since then, markets seem to have adjusted for it.

    What to expect from the stock market 

    The stock market is pretty much unpredictable, we can only guess. Maybe the right question is what to expect from the investors. So far the majority showed spectacularly bad timing when it comes to stocks. They are selling and buying at the wrong time. Many of them are selling just before rallies or accumulate stocks when they have to sell. 

    If you believe that the market is increasing and that it is a predominant trend, adjust your portfolio for the ups and downs in 2020. But it is the same as always. Your actions will depend on what your expectations are toward the stock market in the next year. Maybe, you will invest more money when the markets are more volatile with the expectation that pullback is temporary, who knows?

    The value stocks will come back

    Yes, stocks are growth or value type. Growth stocks are so attractive and popular. Everyone is talking about them, they are in the headlines, media are paying a lot of attention to them and burn our brains too. The whole world is watching the stocks of Amazon, Facebook, Uber, and many others because the growth stocks are giving great returns, they are well-known companies, famous brands.

    On the other side, we have value stocks. They are mostly companies form the utility industry, or energy or something else less attractive. Such stocks don’t have spectacular prices, the companies are not fast-growing. 

    Yes, the growth stocks are performing better results in growing markets but the value stocks will always do better in down markets.

    To be told, the growth stocks are increasing their value year-to-year and some experts are expecting a reversal in 2020. So, growth stocks may change their prices and decrease.

    A diversified portfolio will be helpful as always. If you hold any of these great players just sell part of it if you follow the experts’ estimations. At least, your portfolio will be less volatile.

    What to expect from the stock market: The bear market is coming for sure

    This prediction was wrong for many prior years. But, maybe the next year may confirm market bears’ expectations. We have a bull market and it showed a great strength over the year. It was faced with a yield curve inverted, trade war, Brexit, the possibility of a recession. Well, to add more pain into your lives, the bull market has to end at some point. Some experts expect that 2020 is that time.

    So, what investors have to do is to hedge the risk and take some profit, of course. As the market motto advises “you will never go broke taking profits.” Maybe it is really time to take some profit from your investment. If you believe the downturn in the stock market will come for sure, be ready to reinvest big gains. What different could you do when the important selloff comes in 2020?

    Will the recession surely come?

    Recession is an element of any business. So, we can expect it to come at any time, sooner or later. It may happen in 2020 or 2021 or 2022, literally anytime. Many circumstances have an influence on it, we are witnesses of some, that’s true. 

    Investors shouldn’t adjust their portfolios based on guessing. However, it is smart to analyze your allocation. Maybe some stocks are out of balance. Let’s say you wanted to hold 50% in stocks but you noticed that suddenly you hold 70%. That would be a clear sign that is clever to exit some positions. Just adjust your portfolio with your risk tolerance and investment goals.

    We all know that the stock market forecasts are useless. No one can predict how the market will perform. But still, we click on them to see and compare them with our opinions. The reduction of difficulties is in the essence of human nature.
    However, investing in the stock market certainly includes difficulties and risks. Seeking out for expert opinions about what to expect from the stock market in 2020 can be the wrong way to lessen risks or uncertainty.
    Investors must do their own examination. If you think the crypto will go up, just buy some of them or parts of them, or if you think Uber is a great investment, just buy some shares of it. A small portion will be quite enough notwithstanding that experts are expecting a big increase.

    One is a-hundred-percent sure, you will make at least one mistake. Take it as certain. But that’s life and also, that’s investing, be prepared for that.
    Just do your best to secure your right calls overpass your wrong ones. 

    Happy New Year!

  • The Stock Market prediction Is Possible or Not?

    The Stock Market prediction Is Possible or Not?

    The Stock Market prediction Is Possible or Not?
    Everyone would like to know everything about this

    By Guy Avtalyon

    Stock market prediction is the intention since the beginning of the stock market. The reason is clear. Every single participant in the stock market aims to gain huge or decent returns and to avoid losses. Sounds logical, indeed. In early days traders and investors were just guessing, to say it simply. Well, frankly, not just guessing. There were some estimations, judgments, listening to the rumors, asking. But today, traders and investors may employ different tools, machine learnings, and AIs to help them in stock market predictions. 

    Is the stock market prediction possible or not? 

    We already learn that past performances can’t show future trends. But is this truth 100%?

    Of course not.

    Watching past performances can help you with a high level of certainty to predict how some stock will act in the future. This is very important because based on that data you will determine and decide what to do with some stocks. Would you buy or sell, would you stay on position or leave.

    The modern stock market prediction is often based on machine learnings and AI technologies varying from very simple to complex ones. Those stock market prediction tools or techniques, whatever would you like to call them may help you a lot to secure your investments. Even the simplest can give you an insight into the future stock market trends. 

    Using robust algorithms has benefits, of course. But not every trader or investor can afford them. Some are very expensive and the result is very often almost the same if you use the simple version or some simple tool.  

    The crucial thing about stock market prediction is to have quite enough historical data to be able to make a conclusion, to have a basic sense of some stock’s nature.

    How to predict the stock market movements?

    The relationship between supply and demand is what dictates the stock price. And this works very simply. If there is in the market more sellers, that means the supply is greater than demand, so the price will decrease. And vice versa. That is the easy part of the stock market. Things become more complicated when you try to understand why some investors like one stock more than the other. But that is another question. We want to know is the stock market prediction possible or not.

    The algos, tools, learning machines deliver their predictions based on historical data. This means that all of them show the prior values of some stock and based on that give the future estimation of stock price action. 

     

    And that is exactly what you need as an investor. To get some info with the highest level of possibility on how some stock will perform in the future. To have that kind of info you don’t need to spend a fortune. Some simple tools may benefit you too. Such a tool must have historical data about prior performances, for some limited time, for example during one year. Based on that info you will be able to check your trading or investing strategy. And that is crucial. The possibility to check your strategy on your own and not to put all in the “hands” of some algorithm, because we want to be honest with you, algos can make fails. Algos, as like your trading strategy, depends on inputs that some other implemented in it. To say simpler, it is based on other people’s knowledge about the stock market prediction and investor expectations.

    Le’s check one example. Let’s say you have a strategy and you want to check how it works on a particular stock.

    How efficient your strategy is?

    If it shows your strategy isn’t good you can easily change the strategy or test it on some other stock. Moreover, the possibility to test different strategies on numerous stocks is extremely important when it comes to choosing the stock to invest in or strategy to employ. What is the main point of trading? To gain a nice return. And how to provide that? You have to find the best possible to take a profit point and stop-loss point.  

    Based on the info you can obtain from such a tool you can easily decide about your future trading. 

    Very simple and very helpful, don’t you think? 

    What Traders-Paradise wants to say is just stay tuned.

  • Is it Possible to Predict Stock Market Movements?

    Is it Possible to Predict Stock Market Movements?

    Predict Stock Market Movements
    How is possible to predict stock market movements. Read to the end.

    By Guy Avtalyon

    Different gurus and many experts try to predict the stock market movements. Actually, they try to explain the stock markets by using many different theories. Sometimes, stock market predictions are more interesting than the last season of GoT which isn’t so hard, right?

    Even if you are not a trader and you never traded stocks, the possibility to predict stock market movements is exciting. Imagine that you can do so. How much it can be beneficial to your financial status?

    Real estate can be failed at its lows, money can be removed from mutual funds, anything can happen.

    What we have to do when the markets start to turn around? 

    Maybe to invest in gold, oil, some other tangible assets? To leave crypto? To sell stocks?

    Yes, when things rise to go bad, relocating money into tangible assets is a benefit. But is it possible to know the danger is ahead before it happens? How to successfully predict the stock market movements consistently over time?

    Do you know the maxim that “past performance cannot predict future success”? The paradox of that saying is that it will come up to you just after your broker tells you how great that investment was acting in the past. 

    Wink-wink, bro! At some point, the future can be similar to the past. Even the same.

    Stock markets go upward, stock markets go down

    Why do stock markets do that? Well, it is easy to explain. When more buyers than sellers are in the market, the prices will go up and vice versa. When more sellers than buyers are in the market the prices will go down.

    What provokes people to buy and sell? More often it is connected to the emotions than to logic. And here we come. The emotions are unpredictable. The stock markets are under the emotional influence, so they are unpredictable too.

    And you may think it’s useless to try to predict stock market movements. Or they are created to be unpredictable. It is a partial truth.

    We found this on investmentwarrior.com:

    “If today’s market is up…there is a 73% probability of tomorrow’s market is being as well, and a 27% probability that tomorrow’s market will close down. 

    If today’s market is down…there is a 62% probability that tomorrow’s market will also be down, and only a 38% probability that the market will close higher. 

    Historically the market has advanced on 58% of all market days, demonstrating its overall historic upward bias.”

    The future of the stocks in the market is a complex problem. Too many variables have to be calculated. Quantitative models, historical patterns, all failed. 

    The best prediction tools are our brains. It is a damn good forecast tool. But a human intellect cannot solve a mathematical equation so fast as a computer can. The human brain isn’t even close to the simple calculator. But the human brain developed powerful tools, machines, and algorithms. They can calculate very fast. Some of them will solve the most complicated formula in a sec. 

    Why predict stock market movements

    Predicting stock market movements is possible. It isn’t a waste of time.

    Experienced traders being a witness of a lot of market’s ups and downs, believe that the market will be equal, one day.  

    Let’s go back to the predicting tools.

    There is something called “algo trading”. With AI you practically can have the possibility to make a profit almost for sure. How successful will you be, depends on the inputs you add to algo. 

    Can you predict how the bulk of traders would respond to some events? It can indeed be completely unpredictable.

    Who want to predict stock market movements 

     

    They need to be sure they are investing in safe assets. Also, they have to know they will have fast and huge returns.

    Here we come to algorithms. How? The historical data are extremely important for trading and investing, for predicting the stock market movements. Are you ready to spend days, weeks, or months to gather valuable results? Why would you torture yourselves? Instead, you can use some good stock predicting tool, very fast and reliable to calculate the final result, to show you where to invest, when to enter, and when to exit the trade. 

    Traders-Paradise is preparing – Find the Best Exit Strategy Algorithm

    Traders-Paradise chooses to develop this tool because the exit strategy is maybe more important than anything in your trade. How is that? While you have many strategies and choices to enter the trade, the exit of trade can be done in only two ways: with lost or with profit.

    To know when to exit your trade you will need a lot of data. The tool like mentioned one is the easiest way to obtain them. Also, at the same time, similar tools are going to help you to predict the stock market movements. This tool will estimate how far the price will move and ensure that your profit potential exceeds your risk.  Without that data, it is impossible to predict when to exit the trade.

    Traders-Paradise is preparing something for you from that field. You will see it soon and you’ll be able to use it. It is very useful and impressive. But, the best news comes last. You have to wait for a while but stay tuned

Traders-Paradise