Market Risk Report as of June 15, 2020

From Chief Investment Officer Tom Veale,

“This statement appeared in last week’s Market Risk Report…

“The MRI Oscillator comes in at +11 showing extreme upward risk pressure.” – Market Risk Report, 06/08/2020

It appears this was a bit of an understatement. The SignalPoint Market Risk Indicator is no longer in its Bullish range after 12 weeks of being so. Further, it jumps this week by 4 points to 23, a neutral reading only if we ignore this week’s MRI Oscillator value of +18. This is the highest Oscillator value in memory and indicates excessive upward risk pressure even exceeding last week’s high number.

“What is causing this? Two components rose into their bearish territory this week; the Relative Valuation and Speculation Indexes. The Relative Valuation Index got there through a steadily rising Price/Earnings ratio as seen in the Value Line composite of 1700 stocks. Consider this to be “too much, too fast.” Our Speculation Index is shown as bearish partly by the rise in winning stocks’ performance compared to losing stocks and partly because of the fact it is based on 13 week changes. 13 weeks ago stocks were near their deepest decline from the C-19 panic. Here’s how they look:”

“In contrast to these two bearish signals we have our Divergence Index still in its bullish range. Our IPO Activity Index is nearly unchanged and is neutral.

How do we interpret these diverse bits of market information? There is concern about market valuations being too high with probably two quarters of unhappy earnings comparisons ahead of us. This seems valid. The two stage speculative rocket changed Slope significantly after its initial recovery launch. The second stage suggests considerable lack of caution as all asset classes were bid upward. Usually after bearish periods it is a harder climb back up the Wall of Worry.”

 

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.

 

 

 

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