Weekly Risk Report 07/20/2010
The sell-off in the markets that has occurred since the beginning of May has managed to bring our risk indicator back to a bullish stance. At that time the Dow 30 Industrial Average sat at 11000, the NASDAQ Composite at 2460 and the S&P 500 Index at 1186. Our risk indicator was in the middle of its Neutral range, but showing a rapid rise in market risk (peaking two weeks later). Speculative excess was the main contributor to that higher risk signal. Today we see overall risk back in the bullish end of our database.
The Speculation component of our Risk assessment Model gave us concern in early May, however it has turned and is now quite bullish for the short term. In May the best performing stock over the previous 13 weeks was up over 276%. As of today the best performer is up just 82%. In our opinion, the contrast in this performance reflects a significant contraction in the amount of speculative activity in the market place. The contraction is generally a very healthy sign and indicative of near term potential for a market rally.
Our Relative Valuation component has pulled back significantly with the decline in the Price/Earnings ratio. While this component never reached bearish levels, it was rather optimistically high. Today it has retrenched a full 20%. Again, this helps to put a floor in the recent market declines.
Overall, we see the Market Risk Indicator at the lowest level since May of 2009. At that time the NASDAQ Composite was at 1719, the S&P500 at 883 and the Dow 30 Industrial Average at 8427. Uncertainty is still relatively high and impeding a more general advance of the stock market. Along with low Relative Valuation and Speculation, uncertainty makes for an attractive contrary indication for investors. In summary, the current market is probably the most reasonably priced market we've had in the past year.
