Market Risk Report as of March 23, 2020

From Chief Investment Officer Tom Veale,
“Another brutal week passed. It started with confused and indiscriminate action and ended with some selective trading starting to return to the markets. Have the markets “bottomed” or found their “capitulation point?” Our SignalPoint Market Risk Indicator (MRI) is showing some very clear signs.”

“The MRI is now into its Bullish territory with a drop to 16 from last week’s 21. A minus 19 MRI Oscillator value (near record) shows how quickly market risk is evaporating. Compare the risk now to the start of 2020 and we see just how much and how quickly risk is adjusting to perceived market and economic conditions.

A look at three components gives us a sense of why the MRI is dropping so quickly. First, stock valuations continue to improve with Value Line’s P/E cratering to just 12.5, down 2.5 points from a week earlier. This combined with near-zero short treasury rates forced SignalPoint’s Relative Valuation Index deep into its own bullish territory:”

“Along with valuation improvement we see the average annual yield of stocks jump from 2.8% a week ago to 3.2% this week. That’s a yield better than any duration U.S. Treasury bond available. Are earnings and dividends more at risk now than a month ago? Yes, in selected areas of the economy. Many companies have eliminated any forward “guidance” on earnings and some companies have announced they are withholding dividends until further notice.

It wouldn’t be hard to guess the direction of our Speculation Index from watching daily activity. Here’s how it looks in graphic form:”

“Again we see this component accelerate to the lowest level of speculation we’ve seen in the last 2 years. Note it is now well below the 2018 low point. This is the result of the previously mentioned indiscriminate selling seen in recent weeks.

Our Divergence Index, a measure of investor consensus, also dropped into its own bullish range:”

“While not at a record bullish point it is representative of there being nearly 100 new 52 Week Lows for every single new Highs last week.

With clear bullish market signals coinciding with our SignalPoint Process triggering near-universal Buy targets we continue to deploy our cash reserves while rebuilding share inventories. The wall of worry is currently very tall and steep. It will take time for investors to regain their confidence.”

 

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.