Market Risk Report as of March 21, 2022

From Chief Investment Officer Tom Veale,

Last week the S&P500 Index rose a solid 6%. That’s the Cap Weighted index. The S&P 500 Equal Weight Index rose just 5%. I think we can assume the largest cap stocks outperformed the smaller caps from this. Advancing stocks swamped decliners by significant margins even if there weren’t many new 52 week highs (still lots of new 52 week lows). The SignalPoint Market Risk Indicator has been very sensitive to the current inflation rate even while three of its components moved to lower risk profiles.

The trouble with high Price to Earnings in the face of rising inflation or short term interest rates is there’s no wiggle room to bring Relative Valuation down to more normal levels. To get back to a neutral rank, at least one of these has to drop 1) the P/E, 2) ST Interest rates, 3) CPI inflation. With Value Line’s 1700 stock universe showing an average P/E of 17.5, we need the CPI inflation rate to drop to less than 3%/yr to return Relative Valuation to less than one standard deviation from its median (neutrally ranked). It would be quite painful to have the P/E drop those 3 points by comparison.
Best regards,
Tom Veale
The MRI comes in one point higher this week at 37. The MRI Oscillator dropped to +5 and still shows upward risk pressure. Three MRI components dropped in risk while one (Relative Valuation Index) rose.

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