Most people have favorite market indicators, ranging from the useful, such as moving averages, to the silly, such as the Super Bowl Indicator. (Supposedly, this will be an up year, depending on whether you think the Patriots won the game legitimately.)
Here’s one that’s not only useful, but has a fairly long history: The Thermostat fund (CTFAX). Invented by legendary Ralph Wanger, founder of the Acorn funds, it has a reasonably simple premise: It adds bonds as the market heats up, and adds stocks when the market cools down. It gauges the market’s temperature by looking at its price vs. long-term earnings.
The fund has averaged a 6.33% gain the past 10 years, which is pretty good for a conservative allocation fund. The S&P 500, by way of contrast, has gained 6.8% a year with dividends reinvested.
What’s the current temperature? Pretty warm. The fund has about 75% of its assets in bonds and another 5% in cash.
If you’re trying to gauge the market, you should never use just one indicator. (And trying to time the market with any success is generally a waste of time.) But if you’re wondering whether the market is overheated, the Thermostat fund says it’s getting hot in here.