The Ned Davis Research Composite Model for the U.S. Stock Market is based on an equal weighting of 50% of U.S. stock market internal and 50% external indicators. The NDR model has proven to be an important tool for identifying periods of outperformance and underperformance for the stock market. While the top chart plots the S&P 500 Index, the bottom chart plots the NDR composite score, which has moved down below 55. That represents bearish conditions and negative returns for the market. Composite readings above 70 represent bullish conditions and readings between 55 and 70 represent neutral conditions.
AS NDR explains: “By combining multiple indicators which historically have been shown to add value in broad market investment decisions, we can objectively assess the weight of the evidence and generate a summary broad market recommendation.”
It is important to note, as shown in the two boxes below the chart, that historically there have major negative market returns when the NDR Composite has been below 55. The boxes also illustrate the accuracy of the model in bullish and neutral conditions.
Here’s the composition of the internal and external indicators.
Internal Composite Indicators are tape-based (i.e., price-driven) indicators and include:
• Big Mo Multi-Cap Tape (DAVIS250A)
• Moving Average Slope (S61)
• Deviation from Trend Slope (S62)
• Deviation from Trend Reversals (S221)
• Momentum Reversals (S222)
• Net New 30-Day High Reversals (S223)
External Composite Indicators are non-price indicators and include:
• S&P 500 Earnings Yield (S672)
• S&P 500 Earnings Per Share (S673)
• Industrial Production (S1042)
• 2-Year Treasury Note Yield (S877)
• Moody’s Baa Bond Yield (S878)
• NDR Daily Trading Sentiment Composite (DAVIS265)
• AAII Bulls/(Bulls+Bears) (S505)
• Investors Intelligence Bulls/(Bulls+Bears) + Monetary (S502)
• Implied/Historical Volatility (S234)
• Low/High Beta (S591)