Shiller PE ratio or PE 10
The Shiller P/E ratio, named after Robert Shiller, an American Nobel Prize-winning economist, is a measure of equity market valuation. This variable is better for evaluating relative value of larger equity indices than individual stocks. This indicator has been used historically as an efficient predictor of future returns. It is also known as a cyclically adjusted p/e ratio (CAPE). The Shiller P/E ratio smooths real earnings to remove any impact on net income or profit margins from short-term factors like supply shocks and changes in business cycles. Research has shown that the Shiller PE ratio is most useful in predicting future equity returns when it is applied over a period of 10-20 years. This ratio was created to help investors determine whether the stock market’s value is too high or low by comparing the current price of the stock with its inflation-adjusted earnings over the previous year.
High Momentum Measure
Studies show that stocks that outperform the market in the future tend to be more successful. This phenomenon is called “momentum”. How can traders measure the momentum factor? Relative Strength Index and Moving Average Convergence Divergence are two examples of technical indicators that can be used to measure momentum. They are easily accessible by any investor using basic charting tools. However, there are more sophisticated momentum indicators that can produce future returns that exceed their benchmarks. The high momentum indicator, a product from the AQR hedge fund, is one such indicator. This indicator was created using a methodology that defines momentum as the “total return of the stock (including dividend reinvestment) over the previous 12 months.” It then ranks stocks according to this measure. This strategy does not involve trading individual stocks. It is achieved by managing a portfolio of high-momentum stocks.
Beta
Stock-picking is not all about taking greater risks. However, it does not always result in higher returns. Research has shown that stocks with lower volatility over time tend to outperform overall market returns. Beta is the most commonly used indicator to identify low-volatility securities. This indicator measures volatility relative to volatility in the wider market. Why is it that stocks with low volatility are more likely to outperform in the long-term? Because it reduces risk during market declines and still allows for upside once markets recover, low volatility securities can lead to better returns.
In Summary
A trader can validate an indicator’s predictive value by simply accessing a browser. They can then run trading rules against historical data to see how the indicator-based strategy performed in the past using data visualization tools, such as this figure chartiste and return distribution curves, to refine their strategies. Indicators are particularly useful when trading securities like stocks and ETFs. They allow traders to be more methodical in their approach rather than relying on emotions. Trading with indicators alone is not enough. It is important to know what indicators a trader uses.