Market Risk Report as of December 28, 2020

From Chief Investment Officer Tom Veale,

“Markets were flat through the previous week but two of the SignalPoint Market Risk Indicators rose in their own risk ranges. Three remain bearish and one bullish similar to last week, but the upward pressure on the Relative Valuation and Speculation indexes was enough to push the MRI up one point to 38 this week. The MRI Oscillator shows this upward risk pressure with a +5 reading.”

“Compared to the start of 2020 we end the year with the MRI consistently bearish for 23 weeks. At the start of the year the MRI was at its median, 26, with only modest upward risk pressure. The 13 Week Treasury rate has been dropped from around 1.5% to less than 0.10% during the year. This affects all those who draw their income from fixed investments as the rest of the yield curve moved to fit this punishingly low yield. The yield on stocks as measured by Value Line remained nearly unchanged from the year’s start and offers investors around 2% for holding stocks. This might help to explain why equity price/earnings have pushed ever higher after the initial plunge starting in March, 2020.

Our Speculation Index is reactive to investor cash flows and after the Presidential Election results were final has moved to bearish territory. 26 of the 41 stocks on Value Line’s “Best Performing Stocks, latest 13 Weeks” are up over 100% in that time frame. This is indicative of rapid and somewhat indiscriminate movement of cash into the stock market. The IPO/New Issues Index confirms yet another type of speculative activity and is also bearish.

We end 2020 with positive news on antiviral therapies being deployed here and abroad. It’s started but is a long way from being fulfilled. We feel the high Price/Earnings rate is at risk for possibly another two quarters in 2021. If markets don’t move upward after the start of the New Year, it is possible speculative investors will become disenchanted and look elsewhere. In the meantime, assessment of the economic damage done by the Coronavirus and public policy measures put in place as reaction continues to unfold. “

 

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.