This Market-Timing Model Nailed the 2022 Meltdown: A ‘Dead Cold Sell’ Warning for Investors

Understanding VLMAP and Its Significance

Value Line’s Median Appreciation Potential (VLMAP) has emerged as a critical tool for investors navigating the volatile landscape of stock markets. Recently, this little-known market-timing indicator has issued a “dead cold sell” signal, raising alarm bells among investors. The VLMAP, compiled from the insights of analysts tracking approximately 1,700 mid- and large-cap stocks, provides projections on stock prices over a three to five-year horizon.

Renowned economist Daniel Seiver, who holds Emeritus status at Miami University (Ohio) and currently teaches at California Polytechnic State University in San Luis Obispo, California, was one of the early advocates of VLMAP’s market-timing prowess. He made a case for the model in his book, “Outsmarting Wall Street,” and has actively employed it in his investment newsletter, The PAD System Report. Seiver posits that a VLMAP reading of 100 represents a compelling buy signal, indicating a potential doubling of stock prices over the following years.

The Current State of VLMAP

In April 2020, following a considerable downturn in the market due to the onset of the COVID-19 pandemic, VLMAP readings soared to the 100 mark. Since then, the S&P 500 has achieved impressive annualized returns of 21.9%, significantly exceeding its historical average. However, the outlook is starkly different today; VLMAP currently stands at a lowly reading of 35, which in Seiver’s analysis flags a sell signal.

Historical context adds weight to the current reading, as VLMAP was similarly low during the market peak in late 2021, just before the 2022 bear market unfolded. While investors often tend to extrapolate recent trends into the future, a contrarian approach, as suggested by Seiver, may provide more reliable insight for decision-making.

The Return Predictions Based on VLMAP

Seiver’s analysis indicates significant disparities in market performance tied to VLMAP readings. The following table summarizes predicted returns based on VLMAP levels:

The findings indicate that when VLMAP drops to 35 or below, the S&P 500 tends to underperform, while readings at or above 100 correlate with much higher future returns. Notably, VLMAP’s consistent track record speaks volumes about its predictive power over the years, maintaining accuracy even decades since its introduction by Value Line in the 1960s.

Market Timing Insights from Experts

Bob Kargenian, President of TABR Capital Management, also observes the VLMAP closely and has established his own threshold for buy signals. While Seiver considers a reading of 100 as a buy, Kargenian opts for an 85 reading. In a recent communication, he emphasized what he dubbed a “high probability” bet, suggesting that investors who sell now might find even more advantageous buying opportunities when the indicator rises again to at least 85.

Kargenian’s strategy hinges on the notion that current market conditions, reflected by the low VLMAP reading, may offer a precarious investment environment. This viewpoint aligns with Seiver’s analysis, as both expert opinions suggest caution in navigating the current trajectory of the stock market.

Conclusion: What Lies Ahead for Investors?

As the VLMAP flashes a forthright “dead cold sell” signal at a reading of 35, investors are urged to weigh this insight carefully against other market indicators and their own investment strategies. Given the historical context and predictive integrity of VLMAP, understanding its implications may prove pivotal in shaping investment decisions.

While exuberance about potential future returns can cloud judgment, adopting a contrarian perspective—backed by the solid foundations of historical performance—is prudent for achieving long-term investment success. Investors must navigate the complex landscape ahead with both caution and informed strategies, keeping a keen eye on market trends and valuations as they unfold.