Weekly Risk Report 10/28/2009
While there was only a slight change in the NYSE, Dow 30, S&P500 and NASDAQ Composites last week, there has been an internal shift in our risk assessment model. Short term interest rates remained essentially unchanged, but our Relative Valuation (RV) component is now at the highest level since the market recovery started in late March. While still bullish, the Price/Earnings portion of the RV can’t tolerate much of a rise in interest rates and remain so. The speculative wave we’ve seen as money returns to the stock markets continues, although is slightly less extreme. Speculation remains bearish but is moderating now.
The Divergence component remains bullish, but has been rising slightly in risk. We are beginning to see a more divergent level of thinking in market participants. That can be good news in the longer term, but less enthusiastic in the shorter term. When all participants are thinking alike (either bullish or bearish) it is usually good for the markets short term. When there are large numbers of participants betting both for a rising and falling market, it usually has meant a stagnate or declining market in the shorter term. On the NASDAQ last week there were twice as many declining stocks as advancing. This would indicate the beginning of the expected consolidation mentioned in earlier reports. Trading activity also slowed after the beginning of last week. Again, this is probably the market digesting the large gains of the last quarter.
Finally, our risk model continues to show “average risk” overall and remains in the manageable arena. The portfolio cash reserves are coming in line with the risk level which allows our inventory to be sold should prices continue upward and ample reserves of cash for downside averaging should prices decline. We continue to monitor the SignalPoint portfolios for potential opportunity.
