Entering text into the input field will update the search result below

The S&P Price Regression Line Has Kept Followers From Enjoying The Bull Market

Summary

  • The S&P Price Regression Trend Line is a commonly used metric to gauge the stock market’s valuation.
  • This metric has merit to the extent it identifies whether the S&P is deviating from long-term trends.
  • However, the assumption that the market will rise at the same rate over time is not valid, so this metric is problematic.

Introduction to the S&P 500 price regression trend line

There is a large market (pun intended) for metrics that give a gauge of the relative valuation of the stock market. Among them are the Shiller PE, the Buffett Indicator, and the S&P price regression trend line.

Many analysts use these indicators to make determinations about the relative valuation of the stock market. The general process is to compare the current reading of the metric to the long-term average, which is true for the Shiller PE and the Buffett Indicator. And for the S&P price regression, a price regression line is drawn, which essentially reflects the long-term mean price appreciation, and then the current S&P price index level is compared against it. So, all these metrics essentially compare current market data to the long-term averages.

However, the comparisons are problematic when the current data is systematically different from long-term averages. I’ve highlighted how this is the case for the Shiller PE and for the Buffett Indicator, but the same appears to be true for the S&P price regression.

This metric has merit to the extent it identifies whether the S&P is deviating from long-term trends

The S&P price regression can be developed by using long-term S&P 500 data, for example from Shiller’s database. Then, a best-fit exponential curve is created to fit the data as best possible, essentially a regression, which seeks to minimize the squared error of all the actual data points to the regression line.

Once the regression line is developed, its usefulness relies on the assumption that the stock market should rise in price at the same level throughout all history, since the trend line is based on historical data back to 1870.

The assumption that the market will rise at the same rate over time is not

This article was written by

I am primarily an equities investor whose foremost objective is growing income for retirement. My investment strategy concentrates on maximizing returns while minimizing risk. The Core component of the strategy is accumulating US Stocks. I also utilize options to enhance income and manage risk.I started investing in the stock market at the age of 15 in 2005. All my articles and comments are strictly my opinion and therefore do not constitute investment advice, and they do not constitute a recommendation to buy or sell any security.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Related Stocks

SymbolLast Price% Chg
SPY--
SPDR® S&P 500 ETF Trust
QQQ--
Invesco QQQ Trust ETF
DIA--
SPDR® Dow Jones Industrial Average ETF Trust
SH--
ProShares Short S&P500 ETF
IWM--
iShares Russell 2000 ETF

Related Analysis