One dynamic indicator favoured by many economists is to look at fund flows – ie, who's actually buying shares. Mr Smithers argues that if corporations are buying shares (much of the time their own shares), it is usually associated with positive future returns. Sadly, according to Mr Smithers, the trend is no friend here – if anything, he expects corporations to scale back their buying of shares and start issuing new shares. "We expect companies to be net issuers of equity and for this to depress share prices. Companies, which have been the main buyers of shares in recent years, were still net buyers in Q4 2008, despite nearly $200bn of new issues by commercial banks.
"We expect companies in aggregate to move from being net buyers of shares to net issuers in 2009 and for this to have a negative impact on the stock market. The US market has tended in recent years to be very dependent on the level of corporate buying and we expect this to continue and, consequently, expect the US stock market to fall further in 2009."
■ Prognosis: Poor – markets are likely to fall.
Volatility
The concept of volatility doesn't quite fit into any normal discussion of relative value or cheapness – volatility isn't concerned with trying to establish whether something has fair value and is only concerned with the relative rate at which a share or bond moves up or down in price. The high volatility of share prices at present indicates that prices are moving up and down an awful lot – the key measure for volume is the VIX from the Chicago Board Options Exchange. The graph below shows that VIX levels are still close to all-time highs – although the index has traded in the mid 30s in recent weeks, this is still twice the average for the last 19 years. This long series data needs to be treated with some caution, though – many technical analysts think that using a snapshot of the VIX is a dangerous exercise. As with the PE ratio, it’s a dynamically changing index and some maintain that the best way of using VIX as an indicator is to compare its current level (36.09 at the time of writing) with its simple 10-day moving average. Until very recently the VIX had been trending below the 10-day moving average, indicating that the market is overbought and likely to move downwards.
Many fundamentals-based analysts accept that volatility is a useful measure although few use it as a leading indicator. Nearly every leading analyst and economist accepts the basic idea that high volatility usually involves massive losses.
■ Prognosis: Poor – markets are still very volatile.
