The Monetary Model
Martin Zweig uses a monetary model to time stock market entries and exits.
Most investors know that when interest rates are high, and moving higher, stock prices suffer. There are two fundamental reasons this should be so:
- Most businesses carry debt. Rising interest rates result in higher loan repayments, cutting profit.
- The returns on interest bearing products increase, increasing their attractiveness to investors relative to stocks.
Zweig uses a monetary model to determine the likely direction of the market. Zweig's monetary model has three components:
- The Prime Rate Indicator
This is based on the interest rate charged by banks to their most respectable clients - such as blue-chip companies. Keeping tabs on the prime rate is easy. On average it changes around once per month. Prime rate changes are widely published and discussed in the financial pages of newspapers and on the web.
- The Fed Indicator
The fed indicator is based on the Federal Reserve's discount rate and reserve requirements. These change infrequently and, again, any changes are discussed widely in the financial pages.
- Installment Debt Indicator
Increasing demand for loans can put upward pressure on interest rates. Consumer installment debt figures are released once per month and are reported in the financial pages of major newspapers.