Bear Market Probability Model

Smart Money Confidence is a model that aggregates indicators reflecting sentiment among investors that tend to use the stock market to hedge underlying positions. Or, they're just contrarian investors who prefer to sell into a rising market and buy into a declining one.

Time Frame: Long-Term | Update Schedule: Monthly | Source: Goldman Sachs, SentimenTrader

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Construction:

This is a model outlined by Goldman Sachs using five fundamental inputs - the U.S. Unemployment Rate, ISM Manufacturing Index, Yield Curve, Inflation Rate, and P/E Ratio. Each month's reading is ranked versus all other historical readings and assigned a score.

The higher the score, the higher the probability of a bear market in the months ahead. As outlined in a report from September 5, 2018 (see the archives), when the model was 20% - 29%, the S&P's average one-year return was +21%. But when the model was 80% - 89%, that average return plunged to -2%. So the higher the model, the greater the chance for a bear market, or at least negative forward returns.

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