Weekly Risk Report 05/25/2009
Each component of our i-Wave Market Risk Indicator takes on its own life at various times. Recently we’ve seen the buildup of speculative activity pointing to a need for market consolidation in the shorter term. The statistics again this week show the stress of “too much, too fast.” Both Relative Valuation and Divergence remain bullish while our close watch on the IPO markets show only neutral risk. Speculation, though, remains quite bearish. Some of what we see is deeply submerged corks coming back to the surface. Thousands of company stocks are much higher than the March lows which gives the impression of high levels of speculation.
While the corks are returning to the surface it can be very exciting. However, when they do surface, they don’t usually continue to rise. Instead they will bob there for some time waiting for the tides to lift or lower them again. They were driven deep in last year’s tsunami – they’ve risen quickly in recent weeks. The Speculation component shows this and tempers our enthusiasm relative to how far the corks will rise. Relative Valuation indicates that the broad markets are as yet not over-valued. We do see a difference between the larger cap and smaller cap areas of the market, however. It is the larger caps that show the higher speculative activity right now. While smaller caps usually are the “early recovery” stocks following a recession, the larger caps usually respond first after a panic as we had last fall.
The smaller cap stocks may still be the group that responds more quickly to economic stability and recovery as that develops. In the mean time we’ve been fortunate enough to take small profits as they appear and limit risk exposure as it has been rising via the SignalPoint Process.
