The Forecasting Systems Letter
Jeffrey Mishlove

As of today, the S&P 500 index stands at 1311, down from the high in May, but still up about 60 points for the year.

The first forecast that I will present is based on Nirvana Systems OmniTrader 2006 program. This is a fascinating, and highly rated, software package that evaluates numerous technical indicators, and trading approaches, against particular price charts. The version that I use is augmented by neural network artificial intelligence to optimize trading signals, based on a vote of the best performing indicators. Below is an OmniTrader chart showing the S&P 500 futures contract -- which, itself, is a predictor of the S&P 500 index:

One can clearly see that prices have been steadily rising, in an upward trend since the July low. The OmniTrader signal suggests that prices will continue and will probably test the highs of last May.

Below is another forecast that clearly supports the bullishness of OmniTrader. I subscribe to a relatively new system, developed by forecasting wizard Tom Joseph (creator of the highly acclaimed Advanced GET) called Dynamic Trend Profile. This system contains proprietary forecasts of the overall stock market using different time frames or "rooms" -- as diagrammed below. They range in size from 30-60 minutes (the DA "room" on the far right) to 4-10 months (the PC "room" on the far left):

The chart at the top shows the price of the S&P futures contract, with buy and sell signals from Dakota, during approximately the past year. The red oscillator in the middle is the actual Dakota trading signal. The green line at the bottom shows the overall equity from trading. This Dakota signal yielded over 318 points trading this contract during the past year.

But, not all forecasters will agree with this buy signal.

According to the Financial Forecast Center, by January 2007 the index will be down more than 3% to 1267. The graph provided on their website suggests a steady downhill slope for the rest of the year. The website states: "All forecasts are generated in-house using artificial intelligence. The forecast models are 100% quantitative and use a global, long-range dataset....And becauise the Financial Forecast Center has no ties to other companies or institutions, our products and services are completely independent. The Financial Forecast Center is a service of Financial Forecast Center, LLC. FFC LLC is a m=smally, privately owned Texas corporation located in Houston, Texas, USA." Kyle Atkinson is the FFC's founder and CEO.

Are there other confirmations of this negative projection? The index of leading economic indicators is down from it's high in January 2006, suggesting a slight business slowdown.

Richard Russell, author of  Dow Theory Letters,  notes that the Dow Transports have been moving down for the year, while the Dow Industrials are moving up. This divergence suggests a lack of clear direction in the markets. Overall, Russell believes that we are still in a primary bear market.

What are investors, in general, saying about the market? Below are the charts showing the bullish and bearish sentiments, surveyed by the American Institute of Individual Investors, from among their own members:

As you can see, the bearish sentiment is down dramatically from its peak in July, and the bullish sentiment is, correspondingly, up (albeit moderately) from its trough in July. Ironically, these sentiment statistics are often used by traders in a contrarian manner, reflecting the fact, I suppose, that individual investors are often wrong about market direction. Not much in the way of a clear signal here.

Now, let's compare the sentiment of individual investors with that of professional investment advisors. Below is the data as tracked by Investors Intelligence:

Here we see much clearer trends with bullish sentiment showing a decline since the beginning of the year, while bearish sentiment is on a corresponding increase. The shifts since the July turning points are less dramatic than with the individual investors. What are we to make of this? There are two schools of thought (naturally, representing the two different camps). One of them goes by the maxim that "individuals who serve as their own investment advisors have fools for clients." The other school of thought (to which I am generally inclined) suggests that individual investors actually outperform investment advisors. It would seem that if we view the investment advisor sentiment readings as a contrarian indicator, we would be more bullish today than we were at the beginning of the year.

In any case, it strikes me that the software systems above -- Nirvana OmniTrader, Tom Joseph's Dynamic Trend Profile, and Biocomp Systems Dakota are all far more useful than either investor sentiment or investment advisor sentiment.

How would I synthesize all of these various signals, sentiments and opinions? In spite of many grave reservations (which, perhaps, I shall report on in a future Forecasting Systems Letter), I am bullish for the time-being.

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