07 Dec Market Risk Report as of December 7, 2020
“The SignalPoint Market Risk Indicator remains unchanged this week at 35 and bearish for the 20th week. The MRI Oscillator shows a +3 indicating mild upward risk pressure currently.”
“Three components remain bearish while the investor sentiment component (Divergence Index) remains solidly bullish. Speculation in our traditional measure remains bearish along with the less frequent signal coming from the IPO/New Issues index. The traditional Speculation Index is a look-back of 13 weeks and it shows a rather high disregard for downside risk right now. It shows a company’s stock must have risen at least 65% in the latest 13 weeks to make Value Line’s “Best Performers” list. In contrast, a company whose stock has dropped just 16% is guaranteed a place on Value Line’s “Worst” list. From a business point of view we don’t see that big a change over those 13 weeks and hence agree with this bearish signal.
Even so, for those currently invested in the markets they continue to benefit from this impressive rally. New market highs were registered in the three major U.S. market indexes by last Friday’s close. Price/Earnings ratios remain high and seem supported only by the very low short term interest rates right now.
In summary, we continue to capture profits as opportunity to do so arises. We are monitoring the new wave of investors and their lack of caution by watching stock option activity.”
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.