One Way to Time the Market; VLMAP, Value Line’s Median Appreciation Potential, is used to project where the market will be in four years

April 19, 2013, 4:59 p.m. ET

One Way to Time the Market


The stock market in four years’ time is unlikely to be much higher than it is now. That sobering forecast comes from a simple stock-market timing model that has an impressive track record over the past five decades. Among the more than 100 market timing strategies tracked by the Hulbert Financial Digest, in fact, this model has turned in the best performance of any in forecasting the market’s four-year return. The clear investment implication is to begin reducing risk in your stock portfolio—either by building up cash or shifting your holdings toward more conservative stocks such as those with strong balance sheets and which pay high dividends.

This market timing system is based on a single number that appears each week in the Value Line VALU -1.20% Investment Survey, the flagship publication of Value Line, a New York-based research firm. The number represents the median of the percentage gains that Value Line’s analysts estimate the 1,700 widely followed stocks they monitor will produce over the next three to five years. Over the past five years, for example, this number—known as the VLMAP, for Value Line’s Median Appreciation Potential—has been as low as 45% and as high as 185%. It currently stands at 50%. Value Line itself doesn’t endorse using the VLMAP for market-timing purposes. Though the firm doesn’t actively discourage investors from relying on this number or any of the other data that it produces, Value Line instead showcases a market-timing model that has a shorter-term focus.

Those who do follow the VLMAP for market-timing purposes use it to project where the market will be in four years, the midpoint of the analysts’ three- to five-year horizon. Because Value Line’s analysts—like most of Wall Street—are on average too optimistic, followers of the VLMAP often adjust it downward when translating it into a specific four-year forecast.

For example, Dan Seiver, an emeritus economics professor at Miami University of Ohio and chief economist at Reilly Financial Advisors in La Mesa, Calif., told me that he advises clients to use any VLMAP reading below 55% as the occasion to build up cash.

Right now is just such an occasion. Noting that the current reading of 50% is only marginally higher than the 35% level registered in the weeks leading up to the bull-market high in October 2007, Mr. Seiver currently advises subscribers to his investment newsletter, the PAD System Report, to allocate 40% to 50% of their equity portfolios to cash.

That is a lot of cash to recommend at this stage of the market cycle, of course, which illustrates the contrarian nature of this market-timing model: Followers tend to decrease exposure as the market rises. In fact, Mr. Seiver says that he will recommend building up an even larger cash position if the market goes any higher from here.

Mr. Seiver has been employing the VLMAP for several decades in his newsletter, and the service’s model portfolio has beaten the market over the past 15 years. The VLMAP’s usefulness as a market-timing tool has been confirmed by several academic studies as well.

Why does this model work so well? Mark Robertson, founder and managing partner of the Detroit-based advisory service Manifest Investing, also uses a version of the VLMAP. He thinks one answer lies in the willingness of Value Line’s analysts to focus on a longer-term horizon than is typical for most Wall Street analysts.

It may seem “counterintuitive,” he acknowledges, but “long-term forecasting is actually easier and more accurate than the quarterly whispering and chasing that we see from and on Wall Street.”

Because they are focusing on where the stocks they follow will be trading in three to five years’ time, Value Line’s analysts are less likely to get swept away by whatever mood has captured Wall Street’s attention, Mr. Robertson says.

Compared with analysts who focus on just the next couple of quarters, for example, Value Line’s are less likely to adjust their price targets based on the latest earnings. This makes them less inclined to get more bullish as the market goes higher—a tendency that leads to being excessively bullish at market tops.

Like Mr. Seiver, Mr. Robertson is recommending that clients keep their equity portfolios quite conservative.

“For those who are in capital-preservation mode, any proceeds-of-sale can be placed in cash equivalents,” he says, while declining to specify a specific portfolio percentage that should be kept in cash.

For those who want to remain relatively fully invested, his recommendation is to “increase emphasis on the highest-quality stocks”—issues that he refers to as the “bluest of the blue chips.”

Five stocks that Mr. Robertson mentioned are C.H. Robinson Worldwide,CHRW +0.14% a freight transportation company; two software companies, MicrosoftMSFT +3.39% and Oracle ORCL +0.78% ; QualcommQCOM +0.46% a telecommunications company; and oil-and-gas company Total. Their appeal, he says, can be traced to a number of factors. Compared with their peers, for example, their profit margins are higher, they are expanding faster, and their earnings are more consistent.

—Mark Hulbert is editor of the Hulbert Financial Digest, which is owned by MarketWatch/Dow Jones. Email: mark.hulbert@

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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