Weekly Risk Report 5/19/2010
The last few weeks have brought back a large amount of volatility to the markets. We see this reflected not only in the day to day trading but in the component we call Divergence. It is a measure of divergent thinking by market participants. Last week, for instance, the combined total of the NYSE and NASDAQ “new 52 week highs” was 584 stocks. At the same time, there were 473 “new 52 week lows” being recorded. This shows a lot of betting on both sides of the market. History tells us this is a shorter term bearish signal.
Over the last few weeks we’ve seen prices deteriorate across many asset classes with only a few sectors remaining relatively unchanged. Of those declining our SignalPoint process has triggered buying mostly in the non-U.S. markets, in those portfolios that contain these positions. Recent activity is represented by the Latin America ETF shown below.
The longer term shows sequential buys followed by several sequential sales. But notice the change since the beginning of the year. We’ve now had a buy, a sell and another buy. This is yet another sign of the rising divergent thinking on the part of market participants. Unsure of the “trend”, they are being whipsawed by the market. Note how our SignalPoint process has been proactive in each area of the history shown. We used reserves of cash as the markets declined in ’08, recovered a sizeable reserve in 2009 and are now responding to the markets’ moves in this more choppy environment.
Our speculation component is starting to moderate back toward its neutral range. While there’s been a small net gain in the number of issues being traded on the exchanges, our IPO Zeal measure remains neutral. Relative Valuation remains bullish with the very low interest rates on short term treasury notes.
While our market risk measure isn’t as healthy as over the last 12 months, it remains in its overall neutral zone for now. This side of the “bell curve” is why our process utilizes a healthy reserve of cash.
