16 Nov Market Risk Report as of November 16, 2020
From Chief Investment Officer Tom Veale,
“In 17 weeks of continuous bearish signals from the SignalPoint Market Risk Indicator (MRI) we’ve seen a rotation of bearish signals from its internal components. Starting in late July, 2020 we saw valuations and speculation leading the MRI to suggest bearishness. By October the Speculation Index had relaxed but our New Issues/IPO Index had taken over in bearish territory. Last week the Relative Valuation Index finally came back into neutral territory while the New Issues/IPO Index continued higher into bearish territory. Once the Presidential Election seemed to be put to rest we have seen a high level of consensus by investors driving our Divergence Index into bullish territory.”
“As this week starts we have one bearish component (IPOs) and one bullish (Divergence) with the overall MRI dropping another point to 34 with the MRI Oscillator coming back to minus 2 (modest risk decline). Overall, risk is moderating even if there are still signs of caution lingering.
Currently it takes a gain of over 51% for a stock to make it onto Value Line’s Best Performers list for the latest 13 weeks. A drop of 25% will assure a company that its stock will be on VL’s Worst list. This modest imbalance is considered neutral but still shows a willingness of investors to shift idle cash or risk averse assets back into stocks.”
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.