Four Major Lines of Metrics

Ritholtz: There are four major lines of metrics that we’ll look at when we’re talking about the overall market. We’ll look at valuation, which is as much art as science because a lot of valuation is based on future earnings expectations. As an aside, this is why the so-called Fed model is worthless – its so idiotic – because you can’t say, “Based on these forward estimates, here’s what’s the value of the stock is.” Well, what if the estimates are wrong? And those estimates have been wildly wrong for the past year! So true valuation – not Wall Street’s worst guesses – is one thing we look at.

We look at sentiment measures, which for the most part, are most significant when they hit extremes. Sometimes they hit dramatic extremes and then they’re very, very significant – like we have seen recently.

Third, we look at technical measures – overbought and oversold, trend, institutional ownership, short interest – which is a combination of factors. I know that the fundamentalists’ their eyes glaze over when I discuss trend and relative action to trailing moving averages and a whole bunch of other things. But its objective data, not subjective, and therefore is more reliable to us.

Finally, everything is relative to monetary policy and interest rates. If the Fed is tight and rates are high, valuation almost doesn’t matter as much because there’s only going to be so much going on from the macro economic perspective.