16 Mar Market Risk Report as of March 16, 2020
From Chief Investment Officer Tom Veale,
“I think the place to start this week’s report is with something I’d captured from a Franklin/Templeton report over the weekend.
|Dow Jones Industrial Average*|
It is somewhat obvious that there is no consensus on the markets’ near term future. Is there a way to filter out some of the ‘noise’ and see if we can divine something of value? Let’s start with our Divergence Index.”
“From this image we see the consensus of investors is that the markets are going downward. While not yet bullish our Divergence Index is now on that threshold and down nicely from a week ago.
Several significant changes were seen over the last two weeks as far as valuations go. The Value Line P/E was at 18 at the end of February and has now dropped to just 15. Along with the drop in P/E came an improvement from 2.2% to 2.8% in average yield of Value Line’s stocks that pay dividends. At 2.8% average, dividend paying stocks compete very successfully when compared to the current 13 Week Treasury Coupon Rate of just 0.369%. How does this look when we examine our Relative Valuation Index?”
“As seen here, SignalPoint’s Relative Valuation Index is now well into its own bullish range. Looking back to the end of 2018 when it was last at this level shows very nice market gains over the following 12 months. (past performance does not guarantee future results).
The huge and frequent selling days have evaporated market speculation to a significant degree.”
“Here again we see the dramatic change in speculative activity since the start of 2020. It now takes just a 16% gain to make Value Line’s “Best Performers” list while a drop of nearly 62% is required to get a stock listed on the “Worst” list. Obviously money has been flowing out of stocks and into cash and other safe havens. The current Speculation Index reading hasn’t been seen since the 2018 low point.
So, to summarize, the SignalPoint Market Risk Indicator (MRI) dropped from 25 a week ago to 21. The MRI Oscillator posts a negative 13 as a near record level indicating steep decline in market risk looking forward. (again, past performance does not guarantee future results) Here’s how it looks:
“While smoothing calculations haven’t yet brought the MRI under its Bullish threshold the raw, unsmoothed data shows a deep plunge into bullish territory. Overall, three components moved down to more bullish numbers and one remained unchanged (IPO Activity). We start the new week with stocks showing better valuations, little speculation and near bullish consensus on the markets’ next moves.
Most all of the SignalPoint portfolio strategies were in their accumulation mode this last week with nearly all equity ETF positions adding shares over the last 14 trading days. We continue to monitor the cash held in reserve and are deploying it where we see good discounts and future opportunity. (again, past performance does not guarantee future results)”
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.