What is the Greedometer?
The Greedometer® gauge represents strategic investment risk levels in the S&P500 stock market index. Its intent is to warn in advance of major / historically important stock market crashes. In the period from 1881 to 1999, the Greedometer would likely have warned on three occasions, yet as of August 2014 is providing its ninth warning since year 2000.
Anyone can examine a historical stock market chart, identify the major peaks and troughs, and therein make suppositions regarding future stock market tops and bottoms. This is not how the Greedometer functions since stock market price is not an input to the algorithm. Including it would result in a near-useless indicator. To illustrate, the following example is provided.
The S&P500 hit an all-time peak of 1565 in October 2007 (then crashed 57%). Forward to early 2011 where the Greedometer began redlining again – warning another stock market crash would soon initiate. Yet the S&P500 was only at 1265 – nowhere near the 1565 previous stock market peak. The market would have had to have climbed a further 24% to match the previous peak. Yet the Greedometer was correct: a quick stock market drop of nearly 20% happened over the summer – requiring the Fed and ECB to come to the rescue once more to stop a stock market collapse. The fact the collapse was stopped does not invalidate the Greedometer’s advance warning because without new Fed and ECB actions, there can be little doubt the stock market would have continued its collapse.
The Greedometer® is supported by a database of several thousand data points (mostly weekly) beginning in January 1999 and incorporates ten sources of macroeconomic as well as fundamental and technical market data. Whereas tachometers warn when an engine is likely to self destruct at high rpm, or stall at low rpm, the Greedometer borrows from this analogy and identifies periods of extreme risk that accompany secular US stock market tops and bottoms.
A 10th input parameter (S&P500 breadth) was added to the algorithm in October 2013.