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Risk Report – 12/04/2013

For several weeks now we’ve noticed that “market breadth” has been narrowing even as the indexes have moved higher. This could indicate a concentrating of activity in the larger cap stocks of those indexes. Like narrowing of a coronary artery, it doesn’t mean a heart attack is just around the corner, but that the overall health isn’t as vibrant as earlier. Our Market Risk Indicator (MRI) has stayed steady in the middle of its neutral range for several week, too. The MRI currently is at 27% indicated cash for diversified Equity portfolios.

Upside potential and downside risk are far closer to balanced now than at the beginning of 2013. Back then it would have taken quite a bit to convince some people that the market risk (as we measure it with the MRI) was quite low (90% of the time since 1982 the MRI indicating higher risk). Today it would be equally hard to convince some people that market risk is significantly higher, but only neutral. Prevailing opinion seems to be that we’re at the beginning of a bullish period, not 5 years into one.

Gold and Oil have been somewhat out of favor with declining prices in each. Countries rich in both have seen their currencies value relative to the U.S. Dollar contract as the value of these commodities has contracted. SignalPoint has added back shares of the gold ETF (IAU) in two Portfolio Strategies (Global Signal and Universal Signal) during 2013 as the price has sagged. While SignalPoint isn’t in the business of predicting the future, we do see the drop in share price of IAU from previous levels as an opportunity to replace shares sold previously at higher prices.

We don’t see any obvious business sector rotation right now. Price appreciation has been relatively uniform with the exception of Utilities. On another front, there has been continuing outflow from longer duration treasury bond funds. This continuing pressure has contained prices on those longer bond funds in a very narrow range since the end of June. As these bond fund portfolios are “freshened” with newer, higher yielding bonds we are seeing a slight increase in effective yields beyond what the share price discount would suggest. We are watching closely for opportunity to redeploy cash reserves set aside earlier when share prices were significantly higher.

The MRI Components also have remained in their respective neutral positions for some time. This week two rose slightly while one declined and one was unchanged.

Relative Valuation, up, Neutral

Speculation, up, Neutral

Divergence, down, Neutral

IPO Expansion, unchanged, Neutral

The MRI Oscillator is +1 indicating modest upward pressure on market risk. So, while the MRI suggests higher risk than a year ago, it is still in a manageable range with no current red flags flying. Another round of budget battles awaits the U.S. at year’s end. While the markets seemed to be “desensitized” somewhat in the last round of talks, we expect there will be some negative effect when this subject is again in the headlines.

Best regards,

Tom Veale

SignalPoint Asset Management, LLC
Office Hours: 8:00 am—4:30 pm Monday—Friday
1201 E. Walnut Street, Springfield, MO 65802
Phone: 877.769.9980