The detection of downturns in the US equity markets

The goal of this thesis is to build a model capable of detecting the reversals - shift from bull market to bear market or vice versa - of the American stock market, by using a relatively large number of explanatory variables, both of fundamental (macroeconomic and microeconomic) and of technical analysis' types.

The statistical model used is static logistic regression, with lags for the independent variables ranging from zero to three months. Starting with twenty variables, the eight most significant ones have been selected on a training set consisting of monthly data of the S&P500 between 1963 and 2003. The resulting model has been tested over the 2004-2013 period and its performance was better than those of a buy & hold strategy and of a univariate model based on the variable with the highest predictive power - the latter model being the focus of a paper in the current literature.

Another contribution of the thesis is that some variables not yet studied in the literature - the six-month moving average of net non-farm job creations, the monetary base and the OECD Composite Leading Indicator - are statistically significant for our problem. Moreover, the predictive power of the binary variable indicating whether the S&P500 is above or below its ten-month moving average - a technical analysis variable - is much higher than that of the fundamental variables which have been considered. Finally, the two other most significant variables are macroeconomic ones: the spread between the ten-year T-bond and three-month T-bill rates and the moving average of non-farm jobs creations.