Model Says "Buy Stocks Now."

The following is an excerpt from Keith Hays of Hays Advisory's morning comment from the other day. I thought it was a simple explanation of how I keep tabs on the medium term risk in the stock market. We use a variation of Hays' tested model that includes many indicators grouped into four categories: 1. Sentiment Measures - Smart/Dumb Money 2. Monetary Regime 3. Overall Valuation 4. Trend is Investment or Trading Phase.

The combination of these measures indicates only a small risk of decline from here but a high probability of a four year double digit, about 15% per year, for the stock market index.

Each morning, I have my morning cup of coffee and do a review of what I consider the most important indicators in Psychology, Monetary, Valuation and Market Trend. I say that I consider the following indicators the most important, because out of the many different statistically significant indicators which Mark seeks out and back-tests, these are among the best in relation to probabilities of the stock market's next direction. So this morning, I thought I would share my daily, quick morning review with you.

Rydex Ratio: As one of our most important Psychology indicators, this ratio that focuses on the "dumb money" is a daily sample of the public, direct investors and what they are buying and selling. I typically ask myself, "Are they mostly long (not good for me) or mostly short (you are wise to do the opposite)?" Today, this indicator is at levels last seen during last year's market correction.

Gambill Insider Ratio: Produced by Scott Gambill of Emergent Financial, this ratio tracks the "smart money" by comparing insider buys versus sells. This indicator hit RECORD levels a couple of weeks ago as CEOs who already owned millions of shares of their own companies could no longer resist as the market declined.

Yield Curve: This Monetary indicator, which outlasts and outperforms every economist that has ever uttered a word on CNBC when it comes to the future of the stock market, is measured by taking the 10-Year Treasury yield less the T-Bill yield. Generally, when the Yield Curve inverts, and especially starts to reverse upward, you better be careful, but when it is wide and reversing back down, good times are often ahead for investors. And today, this indicator is moving in a downward direction.

Hays Valuation Model: The indicator is a combination of a forward earnings or normalized forward earnings yield and a comparison to an average of the 10-Year Treasury yield and a AAA Corporate Bond yield. When we hit P6 on our Psychology Composite in early July, this indicator was closing in on moving from an Extremely Undervalued to a (still positive) Undervalued level. However, after the market's recent actions, we are now back solidly to an Extremely Undervalued level.

5. Hays Market Trend Analyzer: This final leg, which is a form of protection in place just in case something happens that is not picked up by our Asset Allocation Model, is a technical tool that triggers in the equity markets when the short and medium-term moving averages cross over the long-term moving average. They are not ready to do that today; however, the short-term is closing in on the long-term, and the medium-term has rolled over.

Overall, I would highly suggest a daily routine of perusing these 5 charts, which can be found on the Market Indicators of our website. If you learn to take a moment and review just these 5 charts, you will be so far ahead in your understanding of the markets.