14 Dec Market Risk Report as of December 14, 2020
From Chief Investment Officer Tom Veale,
“With three of the four Market Risk Indicator components aligned as bearish right now it is difficult to ignore building risk. Only our consensus component, the Divergence Index, is at odds and bullish.”
“This week the MRI rises two full points to 37 and the MRI Oscillator scores a +7 indicating strong rising risk pressure. The severe Covid-19 pessimism has been replaced with antiviral optimism. It is our best guess that it will still take possibly two full quarters for business earnings to return to pre-pandemic levels.
Last week saw most indexes off slightly while “Emerging Markets” rose a bit. Market breadth as measured by stock advances vs declines narrowed from previous weeks to being about even last week. Still, the number of issues hitting new 52 week highs was over 1400 while new lows clocked only 91. Over the last 12 months the Dow 30 Index has risen over 10%, the S&P 500 is up nearly 19% and the NASDAQ Composite is showing a 12 month gain of over 44%. These gains make it appear as though Covid-19 never happened.
We continue to cautiously and opportunistically capture profits where indicated and are monitoring our reserves of cash carefully.”
The Market Risk Indicator is an assessment tool that serves as a guide through all markets as to the prudent use of a liquid cash cushion. It helps determine an approximation of the amount of cash reserve relative to a diversified equity portfolio. (this is depicted by the graph above)
At times of high risk in the market, the MRI will suggest a higher level of cash reserve. At times of low market risk, the MRI will suggest a lower level of cash reserve. This investment process helps to measure and manage market risk.
Because of this, the fear associated with the uncertainty of the market can be replaced by the security of a sound investment strategy.