As you know from our previous weeks updates we have been busy looking at how we can build a framework for investment decisions that give us some clues as to where markets are heading next.
Last time we looked at some key indicators, such as trends moving averages and risk levels; this time we have a look at how we have used a selection of shares as "bellwethers" for the FTSE-100.
Using this shares we then calculate a simply average of their price ratios - for example Price Earnings Ratio, this is the current share price divided by the company earnings per share; a high price ratio means investors are willing to pay more for a shares earnings - we also use a few other reliable measures (6 in total) and use some maths to create an estimated return per annum for the next five years. Below are the results with the red line showing actual returns, as you can see there is a fair degree of accuracy.
To remove a bit of the "noise" we can create an average of these indicators, the graph below shows this which as you can see is pretty accurate - in fact statistics tell us that its about 75% correct (100% being exactly the same) and whilst this may not be perfect its a more than acceptable contributor to the decision making process.
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