Archive for the ‘market outlook’ Category

Deteriorating US Stock Market Condition & 2016 S&P 500 Target Price From 15 Institutions

Monday, December 14th, 2015

[This is our 2015/12/13 letter to clients]

It is sagacious to eschew obfuscation – so let’s be direct – the US stock market sucks right now.

There are a number of problematic issues for stocks at this time, but let’s look at three key factors, as if they are three legs of a stool:

  • Treasury yield curve
  • Fundamental company operations
  • Stock index and index constituent behaviors

There are many factors that influence these three things, but they are too many and their specific individual impact is too uncertain to be clearly interpreted. However, they are all assimilated into the markets and manifested by the three legs of our stool.


What is the condition of the stool (the stock market)?

  • Treasury Yield Curve (positive): The curve is favorable to company operations and investment, to investor risk taking, and to household purchases on debt
  • Company Fundamentals (negative): Revenue is declining, profits are declining and profit margins are declining, and credit worthiness of an increasing number of companies is in question (energy is a big factor)
  • Index Behavior (negative): Stock returns are flat for the year, a narrow group of large companies is supporting the indexes while most stocks are doing poorly, and index intermediate price trends are negative.
We all know what happens to a stool when a leg is missing or one or two are too short – that is where we are right now in the stock market.

This does not mean a Bear market is on the way, nor does it mean the stock market will not rise next year. However, if does mean there is damage that needs to be repaired before the market can mount a sustainable advance. That repair will take some time – not days, not weeks; probably months, and possibly quarters.

The condition needs monitoring, and that is just what we are doing.

At this time we counsel above average cash positions, and below average allocations to each of bonds and stocks.

For those accounts where we have discretion, we raised extra cash back in July, and are waiting for the post-Fed rate rise period, and for US stocks to exceed their July high, before re-committing significant funds. In the interim, we may nibble here and there on individual securities that look particularly attractive

We agree with Bill Gross who recommended in his last monthly letter that both credit bond and equity exposures should be reduced.

We recommend a strong tilt to large-cap, high quality stocks with strong brand equity, solid financial condition, above average yield, consistent dividend growth and reasonable valuation multiples versus growth expectations. To the extent that the next year or so produces low total return, the dividend income component becomes relatively more important.

Actually, we always favor such stocks, so the change aspect to this is to reduce current exposure to momentum stocks, high leverage stocks, small-caps, non-yielding stocks, and lower quality stock generally. With respect to bonds, we suggest reducing exposure to low quality, high yield bonds until the bond market settles a bit.

In a period rising interest rates and slowing economies, companies with solid balance sheets with low debt-to-equity are a safer choice.

The current yield curve is supportive of stocks. This chart shows the difference between a supportive yield curve, such as we have today; and one that is inverted and bad for stocks, such as we had in April of 2007 leading up to the Bear market.

(click images to enlarge)


Check off the box for a positive yield curve stool leg.

Sales are declining. Profit margins are declining. Reported earnings and S&P calculated operating earnings are declining.

These three charts show those dimensions (in green, left scale) versus the S&P 500 index price (in red, right scale).




Check the box for a negative fundamentals stool leg.

For a little more color, here is a table that compares some internal breadth data for key S&P market-cap indexes:


You can see that the larger-cap indexes are in better shape than the smaller-cap indexes: S&P 100 (mega-cap) better than S&P 500 (large-cap) better than S&P 400 (mid-cap), better than S&P 600 (small-cap).

More of the larger-cap index constituents are within 2% of their trailing high. Fewer of the larger-cap index constituents are in their own Bear markets. The median index constituent percent off of its 1-year trailing high is lowest for the largest-cap index, grading down to the greatest percentage off the trailing high for the smallest-cap index.

In a strong Bull, the smaller-caps outperform the larger-caps. In an aging and tired Bull market, the largest-cap stocks lead. This data suggests the Bull market is aging and deteriorating.

We break the data in this leg into two parts: one for the index as a whole, and the other for the underlying components.

Part 1: The Index as Whole
The price chart of the S&P 500 (large-caps) and of the Russell 2000 (small-caps) are weak, but not terrible.

This pair of charts shows the daily price and the 200-day average year-to-date for the S&P 500 and the Russell 2000. The small-caps are visibly weaker than the large caps. The small-caps need to improve before the large-caps are likely to have a sustained rally.


This next pair of charts shows the same indexes, but using a “noise canceling” plotting method, that only plots a new price box when the price moves by more than the 14-day average daily price change.

The S&P 500 chart shows more clearly how the index tried to exceed the 2100+ level three times earlier in the year, and then failed again just recently. The 2100 price level seems to be a current ceiling that poses significant resistance to the index.

The Russell 2000 chart simply shows the weakness in that index. In Bull markets the small-caps tend to outperform the large-caps.

When the small-caps lag the large-caps, there is a good chance the Bull is tired.


Part 2: Index Internals (Breadth)
Breadth refers to what portion of the constituent companies in an index are moving together.

In the current situation, a narrow group of large-cap stocks are rising, while most of the constituents are doing poorly. When large-caps are holding up the index, as it the current case, but the bulk of constituents are doing poorly; the indication is that the overall index is getting tired and likely to have a significant setback.

We look at a variety breadth indicators, most of which are neutral to negative. This table rates each indicators in a binary way, assigning either a +100 or -100 based on a value for that indicator that is either better or worse than a threshold. If there are two dimensions to an indicator and one is positive while one is negative, we assign a zero value to the indicator.


There are a couple of our indicators that we find particularly persuasive. Here are charts for them.

Each chart plots the percentage difference between the 1-year high price and the current price for the S&P 500 (in orange using right scale); and whatever the other dimension is in gray (for the weekly value) and in dashed black for the 13-week average of the weekly value, using the left scale.

This chart plots the distance from its 1-year high for the median stock in the S&P 1500 (the S&P 1500 is the sum of the large-caps, mid-caps and small-caps). You can see that while the S&P 500 index is off of its high by around 5%, the median S&P 1500 stock is off by 15% to 17%. That is a negative breadth indication.



This chart plots the S&P 500 position relative to its high versus the percentage of S&P 1500 stocks that are within 2% of their 1-year high. Only 2% (about 30 stocks) are within 2% of their high right now; and only about 10% (150 stocks) are within 2% on a 13-week moving average basis. That is very weak.



This chart compares the S&P 500 relative to its high versus the percentage of S&P 1500 stocks that are in a Correction or worse (off 10% or more from their high). Fully 71% are in a Correction or worse now; and 65% on a 13-week moving average basis. That’s bad.



This chart is like the one above, but it shows the percentage of S&P 1500 stocks that are in their own Bear market or worse (off by 20% or more). There are 43% in a Bear right now; and 39% on a 13-week moving average basis. That’s terrible.



Add up all those parts for the three legs of our stool, and we say this market is currently unattractive. Two legs are broken (or at least too short) and all we have that is really positive is the Treasury yield curve, which may not be enough alone to keep the stool from falling over.


KEY ANALYST FORECASTS FOR 2016 – 4.4% to 14.3%, average 2016 price return forecasted
[Last Friday closing price for S&P 500 = 2012]

Even though we see data suggesting a deteriorating US stock market, the analyst community is generally positive in their view for 2016.

There average price target by 15 firms for the S&P 500 is 2233 (11% higher than last Friday). The lowest targets (2100) are for a 4.4% rise. The highest target is 2500, which is a true outlier. The next highest target is 2300 (up 14.3%).

We hope they are right, and if/when they are right, the legs our stool will confirm that.

Here are their individual targets for S&P 500 2016 year-end price and earnings per index share, along with comments they made and/or the sectors they favor and expect to avoid.

2100 — Goldman Sachs (David Kostin) 2016 year-end target: 2,100 | 2016 EPS forecast: $120
“We forecast the S&P 500 index will tread water for a second consecutive year in 2016,”
Favor: Info Tech, Financials – Avoid: Consumer Staples, Energy, Materials, Utilities

2100 — BMO Capital Markets (Brian Belski) 2016 year-end target: 2,100 | 2016 EPS forecast: $130
“We believe the S&P 500 will likely suffer its first calendar year loss since 2008 … However, we continue to believe the longer-term outlook for US stocks remains bright, and we remain confident with our call that US stocks are in the midst of a secular bull market.”

2175 – Morgan Stanley (Adam Parker) 2016 year-end target: 2,175 | 2016 EPS forecast: $125.90
Favor: Financials, Consumer Discretionary – Avoid: Industrials, Energy, Consumer Staples

2175 – Black Rock (Russ Koesterich) 2016 year-end target: 2,175 | 2016 EPS forecast: $125
Favor: Financials, Technology – Avoid: Consumer Staples, Utilities

2200 – Citigroup (Tobias Levkovitch) 2016 year-end target: 2,200 | 2016 EPS forecast: $132.50
Favor: Financials, Energy, Technology — Avoid: Health Care, Consumer Discretionary, Materials

2200 – Columbia ThreadNeedle (Jeffery Knight) 2016 year-end target: 2,200 | 2016 EPS forecast: $126
Favor: Technology – Avoid: Utilities, Materials

2200 — Bank of America Merrill Lynch (Savrita Subramanian) 2016 year-end target: 2,200 | 2016 EPS forecast: $125
“We expect modest gains for US large cap stocks in 2016: the likelihood of a recession in the next 12 months is low in our view, but valuations have normalized from previously low levels and narrowing returns are to be expected,”

2200 — Credit Suisse (Andrew Garthwaite) 2016 mid-year target: 2,200 | 2016 forecast: 6.8% growth
“We think that we are at the later stages of the equity bull market and see increasing headwinds for equities related to valuations, an uncertain macro environment, bottom-up disruptions, weak earnings momentum, and falling market breadth,”

2200 — Barclays (Jonathan Glionna) 2016 year-end target: 2,200 | 2016 EPS forecast: $111
“Our macro narrative is simple, if obvious … We believe U.S. interest rates will go up leading to a stronger U.S. dollar. This should cause earnings per share growth and returns to remain subdued. We forecast 4% EPS growth and a 5% gain for the S&P 500.”

Favor: Financials, Energy – Avoid: Consumer Staples
2200 – JP Morgan (Dubravko Lakos-Bujas) 2016 year-end target: 2,200 | 2016 EPS forecast: $123
Favor: Energy, Technology, Financials – Avoid: Utilities, Telecom, Industrials

2250 – Prudential (John Praveen) 2016 year-end target: 2250 | 2106 EPS forecast: $122
Favor: Financials, Info Tech – Avoid: Materials, Utilities

2275 — UBS (Julian Emanuel) 2016 year-end target: 2,275 | 2016 EPS forecast: $126 | range (2,500 to 1,750)
“Barring an unforeseen external shock or a recession, if earnings continue to improve, 2016 should be a positive year for US equities … Regardless, we continue to expect further volatility — which in essence means higher risk, both upside and downside.”

2275 — Deutsche Bank (David Bianco) 2016 year-end target: 2,250-2,300 | 2016 EPS forecast: $125

“We reduce 2016E S&P EPS from $128 to $125 … We’re unsure of the tone of language appropriate to describe this reduction. Slashing or even cutting is too harsh as our new estimate is merely 2.5% lower. This trimming shouldn’t surprise investors given recent commodity and currency markets.”

2300 — RBC Capital Markets (Jonathan Golub) 2016 year-end target: 2,300 | 2016 EPS forecast: $128
“2015 was marked by falling oil prices, a diminishing global growth outlook, and flat rates … Our constructive 2016 outlook is predicated upon stabilizing commodity prices, and an incrementally higher dollar and rates. All of this should result in a substantially higher earnings trajectory as well as a modest re-rating of stocks.”

2500 – Federated Investors (Steven Auth) 2016 year-end target: 2,500 | 2016 EPS forecast: $125
Favor: Financials, Health Care, Technology, Industrials – Avoid: Energy, Materials

This table consolidates the analyst recommendations on sectors. We also added some sector data to help put their views in perspective:


The green highlighted sectors are those with the most favorable expressions (Financials and Information Technology). The pink shaded sectors are those with the most recommendations to avoid (Materials, Consumer Staples, and Utilities). The yellow shading on Energy shows a split between those who expect more poor performance and those who expect a recovery and good performance.

To tie back into our discussion of internal breadth, we added three breadth dimensions to the table:

  • The percentage of sector stocks within 2% of their 1-year high
  • The percentage of sector stocks in their own Bear market (down 20+%)
  • The percentage by which the median sector stock is below its 1-year trailing high

Clearly, Energy is in the worst current condition and Consumer Staple are in the best current condition. Energy will depend on the price of oil next year, which is anybody’s guess. Consumer Staples may be over-bought due to yield pursuit, and they may suffer somewhat as interest rates rise.

To add an element of valuation, we present the PEG ratio (1 year forward P/E ratio divided by the 5-year expected earnings growth rate) for each sector as published by Standard and Poor’s. Since lower (but positive) numbers are better, and under 2x is desirable, Financial, Industrials, Information Technology, Health Care and Consumer Discretionary look best by this metric.

There are many valuation measures to be considered. We will address them in some detail in a subsequent letter. For now, this is important to say: Over-valuation or under-valuation alone does not make markets rise or fall. Other facts need to stimulate trend change in markets. Markets can remain over-valued or under-valued for long periods.

Most measures today either support the US stock market as fairly-valued or over-valued. There is not too much out there for under-valued.

While fairly-valued or over-valued is not likely to make the market retreat, those levels make it a lot harder for the market to put up large total return results. It is a lot easier to generate high total returns beginning with under-valuation than from a fairly-valued or over-valued market.

Our view at this time is that probability weighted risk exceeds probability weighted gains potential; and given that, those in or near retirement should emphasize capital preservation more than capital growth in the short-run for now.

ETFs or Indexes Mentioned in the Article::

  • S&P 500: SPY, IVV, VOO
  • Materials Sector: XLB, VAW
  • Energy Sector: XLE, VDE
  • Financial Sector: XLF, VFH
  • Industrial Sector: XLI, VIS
  • Info Tech Sector: XLK, VGT
  • Telecom Sector: XLK, VOX
  • Consumer Staples Sector: XLP, VDC
  • Consumer Discretionary Sector: XLY, VCR
  • HealthCare Sector: XLV, VHT
  • Utilities Sector: XLU, VPU
  • Russell 2000 Small-Caps: IWM
  • S&P 600 Small-Caps: IJR
  • S&P 400 Mid-Caps: MDY
  • S&P 1500: ITOT (scheduled to change benchmark Dec 18, 2015)

The Grinch May Steal the Christmas Rally

Monday, November 23rd, 2015

Breadth tends to tell you where you are going in a market. Breadth is sending negative signals.

The direction of breadth has diverged from the direction of the market-cap weighted indexes (indexes dominated by a few giant stocks, like Apple and Exxon) creating the negative warning signal.

Breadth is moving down and the market-cap indexes are mostly flat for the year, with a recent strong rally from a short-term correction — but the indexes have still been unable to exceed their mid-year highs.  Breadth may be the Grinch that steals the Christmas rally.

These charts show the deteriorating underpinnings of the US stock market.

Each chart shows the distance of the S&P 500 price from its trailing 1 year high in orange (using right scale); and a parameter of breadth of the S&P 1500 (large-cap, mid-cap and small-cap combined) in gray for the end-of-week value, and in dashed black for the 13-week average (3 months) of that weekly value (using left scale).


This first chart shows the distance of the median S&P 1500 stock from its trailing 1 year high.

(click images to enlarge)


You can see in the orange line that the S&P 500 had its Correction in August, but that the median S&P 1500 stock began its slide from its trailing 1 year high near the beginning of the year, giving a warning.  The median has recovered somewhat on a weekly basis, but is still declining of a 13-week basis.

The median stock is off its 1-year trailing high by more than 13% as of Friday, and about 16% on a 13-week average basis.  This compares to the S&P 500 index being off a bit less than 2% from its trailing high.

At the end of 2014, the median stock was down only 4% on that Friday, and 8% on a 13-week basis — a lot better than the 13% and 16% now.  The median stock was also off its high by 4% at the beginning of 2014.  Much damage has been incurred this year.

This is an important divergence.  The median is falling while the market-cap weighted index dominated by the giant companies is essentially flat and attempting to reach prior highs.  How long can the giant companies do well if many smaller companies do not?  Generally the answer is not too long.

Let’s look at some other breath time series.


This chart tracks the percentage of S&P 1500 stocks that are within 2% of their trailing 1 year high.  That too began to slide downward months before the S&P 500 Correction, and continues its downward slide.  The weekly value has risen from its correction low, but is proportionately still in a much weaker recovery than the S&P 500.  This is an important negative divergence and warning signal.


Approximately 15% of the S&P 1500 are within 2% of their trialing high, and about 8% are that close on a trailing 13-week basis, but that compares to approximately 40% and 23% at the end of 2014. That’s a large deterioration for the top end performers.


Now let’s look at the weak performers — those  in a Corrector or worse (10% or more below their 1-year trailing high).

The S&P 500 is well out of Correction territory, but a majority of the stocks in the S&P 1500 are not, as this chart shows — note the gray and dashed black lines are using an inverted scale to more clearly show the divergence.  That charting method makes the plot turn down as the number of stocks in Correction goes up (condition goes worse).


Fully 60% of the S&P 1500 stocks are down 10% or more from their highs, and 68% are down that much on a 13-week average basis.  At the end of 2014, the numbers were 34% and 45%; and only 25% on the first Friday of 21014.

Once again, we see a big deterioration.  And, simply on the face of it; well more than half of the S&P 1500 in still in Correction.   That is not encouraging for the giant companies, that can only outpace the pack by so much for so long, after which their performances must come closer together — either by the pack catching up or the leaders coming down.


What about those in Bear or worse territory (down 20% or more)?  That doesn’t look so good either.

Currently 37% are in a Bear or worse as of last Friday, and 40% are in that condition on a 13-week average basis.  That compares to only 19% and 23% at the end of 2014; and only 8% on the first Friday of 2014.

This chart uses an inverted left scale like the last chart to show negative conditions by a downward plot.


That Bear statistic did not give forewarning, as the median and 2% off of high and Correction statistics did, but it is giving warning now that the situation is not getting better under the surface of the S&P 1500; and by indirection that is a bad sign for the near future of the S&P 500.


Now let’s look at stocks in really tough shape — those down 30% or more from their trailing 1-year highs.  That is an ugly chart too.  This also uses an inverted left scale.

2015-11-20_SevereBearAt the beginning of 2014, only 3% of the S&P 1500 stocks were in a Severe Bear condition (below their trailing 1-year high by 30% or more).  By the end of 2014, that number had risen to 10% on an end-of-week basis, and 11% on a 13-week average basis.  However, now the statistic is 23% as of last Friday, and 22% on a 13-week average basis.  That’s a serious deterioration.


The bottom line is that below the surface of the market-cap weighted indexes — the indexes the daily business reports publish — there is a deeply troubling breakdown.

The majority of stocks are not doing anywhere near as well at the giant stocks, and many are doing just terribly.  This divergence must resolve – it always does.  The top can come down or the bottom can come up, but the performance gap is too large and growing to be sustained long-term.

There is a possibility of, and perhaps an historical tendency for, a Christmas rally in the market-cap indexes, but we see the distinct possibility to probability of the Grinch stealing Christmas.

As a consequence we continue to hold above average cash positions, but are nibbling on high quality, low volatility, value oriented, above average yield, consistent  dividend paying domestic stocks with strong brand equity, and  believably sustainable businesses, that have been around long enough to have proven they can weather strong storms.

We certainly could be wrong in our short-term view — holiday spirit can be a powerful force, and who knows what the Fed, the ECB, China, Russia and ISIS have in store for us; but trying to be data driven, and needing/wanting to preserve capital as much as make it grow; we are sticking with our cautious view for now


Here are some noise canceling charts of the S&P 1500, and its three components indexes, the S&P 500 large-caps, S&P 400 mid-caps and S&P 600 small-caps that show in their own way that the smaller market-cap weighted stocks are well behind the large-cap stocks.

The charts cancel “noise” by only plotting a change in price when it moves by more than a certain amount (the 14-day average true range in this case).  They do not plot time on the horizontal, just new equal size “boxes” for each incremental price change greater than the selected amount (the 14-day average true range).

A second traditional set of charts plots the market-weighted version and equal weighted version of the S&P 500 and of the Russell 2000 small-caps, to further show that the bulk of stocks in the major indexes are falling behind the larger members to dominate the index quotes you see and hear on TV and radio and read in the business press.

Both the S&P 500 and the S&P 1500 are massively dominated by a handful of mega-cap companies such as Apple and Exxon.  As a result they have similar performance.

S&P 500 Large-Cap (SPY)


S&P 1500 All-Cap (ITOT)


S&P 400 Mid-Cap (MDY)


S&P 600 Small-Cap (IJR)



S&P 500 Equal Weight vs Market-Cap Weight (RSP equal weight and SPY)



Russell 2000 Equal Weight vs Market-Cap Weight (EWRS equal weight and IWM)


Current US Stock Market Condition Rating on 43 Indicators

Tuesday, November 10th, 2015

[This is our November 9, 2015 letter to clients]

There is no denying a very impressive rally in the S&P 500 over the past couple of weeks, but there is also no denying that things are not universally in good shape – that some of the underpinnings of a sustainable Bull market are showing signs of weakness. This letter presents some of the good and some of the bad in the stock market story.

We have been publishing this data to you for some time, but the format today is different (hopefully easier to read and quickly scan). We also added a few more indicators that help add depth and color to the market conditions.

  • Overall US large-cap stock market is currently moderately Bullish, all indicators taken together
  • Important fundamental indicators are mixed, but currently net positive
  • Internal breadth indicators (how all the individual stocks in the indexes are doing) are negative and flashing caution
  • Index price behavior is largely positive, flashing encouragement for stocks

Let’s look at these observations one at a time, with data.

We are using a 200 point conditions rating scale from minus 100 (strong Bearishness) to positive 100 (strong Bullishness), with zero in the middle for a neutral indication.

We rate the overall US large-cap stock market by these indicators at about positive 33 (moderately Bullish). The weights within the overall rating are:

  •  60% Fundamentals
  • 20% Internal Breadth
  • 20% Price Chart Data.

(click images to enlarge)


The fundamental data has two main parts: intermarket Impact Factors, and Company Operations.

The Intermarket Impact Factors are primarily a set of interest rate data that drives the economy, profits and stock investment behavior in various ways – all translating in the end to changes in stock valuation levels. The data consists of Treasury yield curve data, junk bond spreads versus same duration Treasuries, and multi-factor financial market stress indexes from the St Louis Fed and the Cleveland Fed.

The Company Operations data consists of earnings growth, profit margins and sales growth – bedrock core fundamental data driving stock prices.

The weights within the Fundamental section are:

  • 50% Intermarket Impact Factors
  • 50% Company Operations.

The Intermarket section is rated positive 90 (very supportive of stocks), but the Company Operations are rated negative 10 (mildly Bearish).

When weighted equally, they give the Fundamental a rating of positive 40 (a Bullish rating) – but note the tug of war between largely interest rate factors supporting the market, and weak company operations weighing on the market. Note also that the Company operations are divided between not so hot reported data and optimistic 2016 estimates.


The Internal Breath Factors, with a 20% weight in the overall rating index, have a rolled up rating of negative 11 (mildly Bearish), in spite of some encouraging advances within the S&P 500 index.

Breath data suggests that a declining number of very large members of the S&P 500 are doing the heavy lifting, while a rising number of smaller members of the S&P 500 and the broader market are declining or sitting out the recent sharp stock market index rally — note: we have had a market-cap weighted index rally, not an across the board rally of most stocks.

The Internal Breadth Indicators look at 20 dimensions

For the S&P 500 versus the New York Stock Exchange Index:

  • New Highs
  • Net Advancing Issues
  • Net Advancing Volume
  • Issues with price > 200-day average
  • Issues with Bullish Point & Figure charts

For the 1500 constituents of the S&P 1500 total market index:

  • Direction of median price
  • Direction of median flow of investments
  • Direction of stocks within 2% of their 1-year highs
  • Direction of stocks in a Correction or worse
  • Direction of stocks in a Bear of worse
  • % of stocks with 21-day positive flow of investments
  • % of stocks in a Correction or Worse
  • % of stocks in a Bear or worse

For equal-weight versus market-cap weight sisters for these indexes:

  • S&P 500 large-caps
  • Russell 200 very large-caps
  • Russell 800 mid-caps
  • Russell 2000 small-caps

The most negative data comes from the study of the individual stocks in the S&P 1500 total market index. For that data, we identified the weekly prices and volumes for each of the member companies for each week from the beginning of 2014 through this past Friday, and then plotted the data versus the percent by which the S&P 500 was off from its trailing 1-year high. You have not seen this data before, so we have supplied some of the graphs at the bottom of this letter for you to get a better feel for this part of the rating.


The Price Chart data has a 20% weight in the Overall rating. It paints a Bullish picture consistent with the ebullient TV moderators all last week, and consistent with the strong rally of the last couple of week; sporting a positive 55 rating .

The section consists of 12 data points, as follows:

Our 4 factor technical rating tool (combines trend line tip direction, price position vs trend line, money flow index, and parabolic stop and reverse indicator)

  • S&P 500 large-caps
  • Russell 2000 small-caps

Price over or under 40-week moving average

  • S&P 500
  • New York Stock Exchange Index

40-week average tip direction

  • S&P 500
  • New York Stocks Exchange Index

Short-term price direction and position in 1-year high/low range

  • S&P 500
  • S&P 1500
  • Russell 2000


Most of these indicators cannot be used to predict or declare major tops or bottoms, but collectively they show the presence or development of forces that shape and move markets.

The Fundamental section does contain indicators known to predict or call tops or bottoms – namely the Treasury yield curve, reported corporate earnings and profit margin changes.

We have tested our 4 factor rating tool back as far as 1980, and it has done a pretty good job when using monthly data of calling tops and bottoms with a few false positives. It did not fail to give a signal, but has given some few signals that did not materialize (weekly and daily data for the tool are too noisy with many whipsaws).

We have recently cautiously added back some to equity exposure, but with more conservative funds and stocks, and still with above average cash.


Here are some of the S&P 1500 Internal Breadth charts we developed for this rating approach. We think they cast a shadow on the sharp rise of the market-cap weighted indexes

Each chart plots the distance of the S&P 500 from its trailing 1-year high in orange (right scale).

In this first chart the gray line (left scale) plots the median distance off its trailing 1-year high price for each stock among the 1500 stocks in the S&P 1500 index; and the dashed black line is the 13-week average of the median for the median stock.

You can see that the moving average of the median began to decline in early January and continued to and through the recent S&P 500 Correction. There has been some recovery of the weekly median stock along with the S&P 500 rally, but the median is still down from a pre-Correction level of negative 6-8% to a current level of negative 14-16%. That is not supportive of the stock market as a whole.


This chart plots the percent of stocks in the S&P 1500 that are within 2% of their 1-year trailing high (left scale) in the gray line. That also began declining in early 2015 from the high teens to less than 10% now. That is not supportive of the market as a whole.


The gray line (left scale) of this chart plots the percentage of S&P 1500 stocks that are in a 10+% Correction or worse. That percent began a clear rise in April and May from around 40% to 60+% now. That is not supportive of the market as a whole.


The percentage of S&P 1500 stocks in a 20+% Bear market, shown in gray (using left scale) did not provide any advance warning, but it has risen from around 20% in June to near 40% now – also not supportive of the market as a whole.


This chart plots the percentage of S&P 1500 constituents that have a 21-day moving average positive flow of investments (left scale), along with the 13-week average of that measure. The 13-week average has declined for most of the year, beginning around 60% to the current level of around 40%. On the other hand, the weekly 21-day investment flow responded strongly favorably to the rally in the S&P 500. This measure needs a little more time to tell its story. You can see that it is a very volatile measure, that makes the 13-week average a more useful guide.


Fundamental and Technical Ratings for Key Regions and Countries

Monday, October 12th, 2015
  • look at US, Eurozone, Japan, Emerging Markets, United Kingdom, Asia Pacific ex Japan, Switzerland, China.
  • China and Emerging Markets most attractive from a PEG perspective (if you believe the forward estimates, and can stomach to volatility)
  • AsiaPacific ex Japan has by far the highest yield, but is very heavily concentrated in commodity sensitive Australia
  • Technical views are somewhat mixed, but none are particularly attractive from the technical perspective
  • Earnings declines, past and estimated, portend negatively for S&P 500 price

Let’s take a quick summary review of fundamental and technical ratings for key regions/countries:  US, Eurozone, Japan, Emerging Markets, United Kingdom, Asia Pacific ex Japan, Switzerland, China.

The regions and countries were selected for market-cap significance within a world index of stock markets.

This table shows the market-cap weight of each within the FTSE Global All Cap Index. It also presents the relative size of the earnings of the markets within that index, generated by normalizing their P/E ratios.

The U.S. is still the giant relative to the others at 52% of market-cap and 44% of world earnings from listed companies.

China is a major economy, but with respect to listed companies, it is still a minor market at 2.1% of world index market-cap.


Here are several key fundamental valuation metrics for the securities representing those regions/countries (source Morningstar):


China and the emerging markets overall have the lowest P/E ratios (9.3x sand 11.1x), while the U.S. and Switzerland have the highest (17.9x and 17.5x). Note that Switzerland has a relatively small local economy, but is home to many global multi-national companies.

The U.S and Switzerland also have the highest price to cash flow (9.6x and 10.7x) while Japan, China and emerging markets have the lowest (3.0x, 3.4x and 4.5x).  Europe is relatively more attractive by P/CF  (5.4x) than the U.S. at (9.6x)

Japan has the lowest trailing yield at 1.17% while Asia Pacific ex Japan has the highest at 5.7%.

Additional note about the U.S (S&P 500).
According to FactSet the current estimate for Q3 earnings is negative 5.5% for the S&P 500.  While there are often some upside surprises, they expect a negative quarter in any event.  Q2 was also negative, so if Q3 is negative that would be the first time there were 2 year-over-year, back-to-back quarterly declines since Q2 & Q3 of 2009.

The current estimate (according to FactSet) for Q4 earnings is negative 0.4% for the S&P 500.  If that comes to pass, that would be 3 back-to-back, year-over-year quarterly declines.

This chart is for sequential quarterly earnings, presenting a difficult period for the index.  Recent declines plus the expected Q3 and Q4 declines look uncomfortably like prior periods that saw accompanying index price declines.  Analysts are predicting earnings growth in 2016, however.

(click image to enlarge)


With respect to Europe, Thomson Reuters reports that the STOXX 600 is expected to have an earnings decline of 4.1% for Q3 on an 8.3% revenue decline

Before you run off to buy EPP for the 5.57% yield, look behind it to the holdings.

Australia (commodity export based economy) is about 57% of the EPP holdings.  Within Australia, the top five holding are 4 banks and 1 mining company totaling about 1/3 of total assets.  Those five stocks yield from 5.5% to 6.6%.  Those are high numbers that call out for close inspection.  The banks may be highly leveraged to commodities, as is the country.

If you like the commodities, you may like Australia, and EPP — otherwise look elsewhere.

If we accept the forward P/E and forward earnings growth estimates published by Morningstar, we can calculate the PEG ratio for each security.

If we accept that PEG ratios under 2x are reasonable,  and under 1x are attractive; then China would be attractive (if you have confidence in the estimates); and most of the rest would be reasonably attractive (with Asia Pacific ex Japan and Switzerland being expensive at more than 2x PEG).

This table presents the current technical view of the same securities.  The ratings are from StockCharts (John Murphy), BarChart, Market-Edge, and from our own 4-factor technical rating.


None of the securities is strongly attractive technically at this time, and none are moderately attractive by consensus of the four ratings sources.

Note: a description of each rating approach is located at the bottom of this article as a post-script.

The StockCharts (source: subscription) data is based on indicators covering the last 60-90 days of daily data.

The Market-Edge (source: Schwab) service does not describe their decision tools, but says the time horizon for their ratings is 30-90 days.

Barchart (source: free site) data is based on indicators covering the last 7 to 100 days of daily data.

Our QVM 4 factor technical rating is based on the last 10-12 months of monthly data.

The following monthly charts are for the QVM rating method.

The main panel provides the individual indicator data, and the upper panel provides a black line summarizing the 4 factors on a 0-100 scale (in units of 25), where zero is all indicators negative and 100 is all indicators positive.

The two primary factors (necessary but not sufficient) are the position of the price above or below the 12 month moving average; and the direction of the tip of the 12 month moving average.

The two secondary factors (used for confirmation of the primary factors) are the 12-month money flow index (introduces volume — in green), and the parabolic stop & reverse indicator (introduces time and pace — in blue dots).

United States



Emerging Markets

United Kingdom

Asia Pacific ex Japan


Symbols for securities mentioned in this article are:

The S&P 500 is mentioned for which SPY, IVV, VOO and VFINX are good proxies.



StockChart Technical Rating Criteria ……

Long-Term Indicators (weighting)

  • Percent above/below 200-day EMA (30%)
  • 125-Day Rate-of-Change (30%)

Medium-Term Indicators (weighting)

  • Percent above/below 50-day EMA (15%)
  • 20-day Rate-of-Change (15%)

Short-Term Indicators (weighting)

  • 3-day slope of PPO-Histogram (5%)
  • 14-day RSI (5%)

BarChart Technical Indicators ……

Short Term Indicators (7 to 50 day indicators)

  • 7 Day Average Directional Indicator
  • 10-8 Day Moving Average Hilo Channel
  • 20 Day Moving Average vs Price
  • 20 – 50 Day MACD Oscillator
    20 Day Bollinger Bands

Medium Term Indicators (20+ to 50 day indicators)

  • 40 Day Commodity Channel Index
  • 50 Day Moving Average vs Price
  • 20 – 100 Day MACD Oscillator
  • 50 Day Parabolic Time/Price

Long Term Indicators (50+ to 100 day indicators)

  • 60 Day Commodity Channel Index
  • 100 Day Moving Average vs Price
  • 50 – 100 Day MACD Oscillator

MarketEdge Second Opinion Indicators ……

  • A LONG Opinion implies that there is a high probability that stock should move up over the next 60-90 days.
  • A NEUTRAL Opinion suggests that the supply/demand condition of the stock is in a state of flux and the likely hood is that the stock will trade sideways over the near term. A Neutral from Avoid indicates that the supply/demand condition is improving while a Neutral from Long indicates that the supply/demand condition is deteriorating.
  • An AVOID Opinion can either denote a Short Sale candidate or a stock that has lost its positive momentum characteristics at this time should trade sideways to down over the next 30-60 days.


Score is a value between -4 and +4 and indicates whether the technical condition of the stock is improving or deteriorating. A score of -4 represents the worst extreme possible before the stock is Downgraded to Avoid while a score of +4 indicates the best level obtainable before the stock is Upgraded to a Long Opinion. It is suggested that you take defensive action if you are long a stock and the Score deteriorates to -3 or -4. Conversely, if you short a stock take defensive action if the Score is +3 or +4.

QVM 4 Factor Technical Rating ……

We look at monthly data to see:

  1. Whether the price is above or below the 12-month moving average
  2. Whether the leading edge of the 12-month average is tilted up or down versus the prior month
  3. Whether the price is moving up at a reasonable pace (introduces time and pace — with an indicator called the parabolic stop & reverse)
  4. Whether the volume of trades is more at the upper end of daily price ranges or at the bottom end of daily price ranges (introducing trading volume — with an indicator called the money flow index).

The first two factors are necessary, but not sufficient, to trigger a major reversal alert – because alone they are prone to whipsaw.

The third and fourth factors measure different things than the first and second, and are necessary to confirm the alerts from the first and second to minimize whipsaw risk.

S&P 500 Volatility-Based Price Probability Range

Wednesday, September 30th, 2015
  • Historical volatility projection suggests the range of probable S&P 500 prices from around 1750 to 2050 by year-end
  • Major trend indicators suggest high probability of prices ending in the lower half of the probability range
  • GAAP P/E and forward operating P/E ratios reverting to 5-year and 10-year averages suggest prices in the 1700’s
  • GAAP earnings have turned down and prices tend to follow
  • But GAAP earnings yield relative to current and near-term prospective 10-year Treasury yield is supportive of current index price

As you might imagine, the phone has been busy these past few days with nervous inquiries.

The prevailing questions are about direction of the US stock market and the magnitude of likely price change.

I have written to you before with a negative outlook, based on objective data mostly about breadth; simple price chart behavior and patterns; and recent declines in quarterly earnings — but tempered by the continued market supporting aspects of the Treasury yield curve.

Our 4 factor major trend reversal indicator is suggesting a major trend change to a downward direction.

None of that attempts to fathom events and conditions around the world, but merely examines the final result of all that is going as expressed in earnings, price changes and trading volume.

So, my conclusion is that the probabilities (not certainty) is for the Correction to continue into a Bear.

A Correction is a 10% price decline from the trialing 1-year high. A Bear is 20% price decline from the trailing 1-year high, which decline is sustained at that level or worse for at least 2 months.

Let’s look at that two ways:

  1. out 3 months based on historical volatility
  2. valuation level reverting to a “normal” valuation (not an overshoot) based on historical price GAAP and forward operating earnings estimates; and GAAP earnings yield relative to historically normal 10-year Treasury yields.

These are all projections, but based on reasonable and historically justified calculations.

Volatility-Based Price Probability Projections
This daily S&P 500 chart plots three horizontal cones projected three months into the future (to 12/28/2015) based on the 1-month, 3-month and 12-month historical volatility of the S&P 500 index, and using a 67% probability range.

That means prices would be expected to remain within the cone area with a 67% probability if the prices form a normal probability distribution (no “fat tails” and ignoring historical positive skew).

Such volatility projections are non-directional (they show price range potential equal on the upside and downside), but we believe the Direction is to the downside based on the other data we have evaluated in prior articles.

(click images to enlarge)


The trailing index high price is 2132. The current price is 1881. The 12/28/2015 end-points of the volatility cone range from 1784 to 1752.

The current price is below the trailing high by 11.8%
1784 is 16.3% below 2132
1752 is 17.8% below 2132

These are not posited as end points of a Bear, but just 3-month (year-end) values at the outer boundary of 67% probability.

Notice that the upper probability bound by year-end is for about a 60% retracement of the decline from the peaks in July to the trough in August

Let’s now look at the 90% probability range.


The trailing index high price is 2132. The current price is 1881. The 12/28/2015 end-points of the volatility cone range from 1720 to 1667.

The current price is below the trailing high by 11.8%
1720 is 19.3% below 2132
1667 is 21.8% below 2132

These are not posited as end points of a Bear, but just 3-month (year-end) values at the outer boundary of 90% probability.

Notice that the upper probability bound by year-end is for about a 100% retracement of the decline from the peaks in July to the trough in August

GAAP Earnings P/E Valuation Reversion to 5-Yr or 10-Yr Average
Valuation is about earnings. Trailing reported GAAP earnings are trending down as this FactSet Earnings Insight chart shows (the blue line) and stock prices are following (the green line).


The P/E on 12-month trailing reported GAAP earnings last Thursday was 17.1x compared to a 10-year average of 15.7x and a 5-year average of 15.3x. After yesterday’s (09/28) market action the trailing P/E was 16.6x (at index price 1882).

If the P/E reverted to the 5-year average, the index price would be about 1734 (18.7% below the trailing high index price of 2132). It would be 1790 at the 10-year average P/E (16% below the index high).

During the European debt crisis in 2011, the P/E went down to less than 12x. At 12x (not a projection, just a data point), the index would be priced at 1360 (36.6% below the index high – a severe Bear).


Forward Operating Earnings P/E Valuation Reversion to 5-Yr or 10-Yr Average
Forward operating earnings estimates were trending down, but have risen, and are not nearly flat as this FactSet Earnings Insight chart shows (the blue line) and stock prices are following (the green line).


The P/E on 12-month forward operating earnings last Thursday was 15.2x compared to a 10-year average of 14.1x and a 5-year average of 14.05x. After yesterday’s (09/28) market action the trailing P/E was 14.75x (at index price 1882).

If the P/E reverted to the 5-year average, the index price would be about 1740 (18.4% below the trailing high index price of 2132). It would be 1746 at the 10-year average P/E (18.2% below the index high).

During the European debt crisis in 2011, the P/E went down to less than 11x. At 11x (not a projection, just a data point), the index would be priced at 1404 (34.1% below the index high – a severe Bear).


Earnings Yield Relative to 10-Year Treasury Yield
The S&P 500 earnings yield (inverse or P/E – it is E/P) is 5.27%. The 10-year Treasury yield is 2.05%. The spread is 3.22%. The 20-year average spread is 0.30%. That is very supportive of current prices.

The 20-year average 10-year Treasury yield is 4.32%. If the 10-year Treasury yields were at is 4.32% average, today’s earnings yield would be 0.95% greater. That would still be more favorable to stocks that the historical averages.  A 4.32% 10-year Treasury is nowhere is sight.

It’s hard to make an argument that the current earnings yield (and thus the P/E) is unreasonable in the current interest rate environment if earnings were stable, or in the rate environment that is likely within the next year or so.

Unfortunately, earnings are not stable and are in decline. The uncertainty is whether those who expect earnings to decline in 2016 or those who think they will rise are correct.


Earnings Direction and Price Direction
Earnings have turned down, and stocks tend to follow – and if the turn down is significant, it can create enough downward momentum in stocks to create a Bear.

This chart shows how the index price varies with the direction and magnitude of change in earnings.


You can see that when earning make a significant downturn, the index changes trend from up to down.

The failure of the S&P 500 to make that change in the late 1990’s was due to the fact that most of the popular DotCom stocks that dominated the index then were not making money or expected to do in the near-term. Note, however, that the Russell 2000 small-cap index which was not dominated by DotCom stocks did respond to declining earnings, although not with a major trend change.

This chart gives a magnified view of the change in earnings over the last 3 years.

Clearly, profits have been down all of 2015 so far (and stocks are down for 2015 so far).


If earnings were stable and growing all would be well, but earnings are not stable, are not currently growing.

A sufficient number of experts are concerned that earnings may not do well in the near-term that caution is warranted.

The consensus street estimate for year-end S&P 500 price is in the 2100 to 2200 range.

Let’s hope that is true and that we are wrong, but until and unless that recent chart trend and earnings trend is reversed to the upside, the weight of evidence is for S&P 500 prices to reside in the lower half of the probability ranges shown in the cones at the top of this article (from around 1900 to the mid 1700’s).


A Bear Is Now More Likely Than Not

Monday, September 28th, 2015
  • A Bear market from this Correction is more likely than not
  • Yield Curve suggests Bull has further to go
  • Breadth measures suggest Bull is exhausted
  • Triple top and Head & Shoulders pattern suggests breakout to the downside
  • 4 Factor Technical indicator suggests Bear is around the corner

[the following is a copy of our letter to clients last night (Sunday Sept 27)]

20150927aThe stock market does stink right now.

How do I know?  Well, stocks are in a Correction and gyrating up and down by large percentages, with a massive trading and investment press opinion tug of war on whether we are OK to return to S&P 500 price growth, or heading for a significant Bear market.

I also know because last Friday, Jim Cramer said, “This market stinks!”  So there it is.

But let’s look at some data instead of headlines and 30 second interviews.  The evidence is split, but mounting on the side of more pain to come.

First, here is our table of market indicators that we have been updating for you over the last several weeks.  It has some positive items, but a lot more negative items, and the negatives are a bit more negative than before, while the positives are about the same magnitude.



The yield curve is still steep, more specifically the 10-year Treasury rate minus various shorter-term Treasury rates is still positive.  In prior letters to you, we have shown that virtually all recessions are preceded by the yield going flat and then inverting (the spread between the longer and shorter rates going to zero, and then the shorter rates rising above the longer rates) – the New York Federal Reserve confirms that with their research.

Stock markets tend to go into Bears before recessions (and after, or coincidentally with, the yield curve going flat or inverted).  The yield curve is still steep, and that is Bullish.

An argument could be made that in this artificially controlled interest rate market the yield spread is of little predictive value.  Recognizing that, we are prepared to say the 3-mo/10-year spread may have no current meaning.  However, the 2-year/10-year and the 5-yr/10-year is not Fed controlled (Fed influenced YES, but still in the domain of market forces, not just Fed decisions), so we think they have some predictive value.

The 2016 consensus earnings growth analyst forecast is nearly 10% higher than estimated 2015 operating earnings.  That is good, but analysts tend to modify their estimate regularly and it’s hard to know what they will think 3 months from now, or how energy earnings as a major wild card will change their estimates.

The Saint Louis Fed Financial Stress Index is on the low side of a +/- 1 standard deviation (“normal”) level.  That is positive, but the different parameters measured by the Cleveland Fed for their stress index are at the high side of normal.

Those are the good things in our regular data set that suggest the Bull will continue.


Breadth is down:

  • Cumulative net new highs are down
  • Cumulative net advancing issues are down
  • Cumulative net advancing volume is down
  • Equal weight indexes are underperforming market-cap indexes.

Price chart conditions are negative:

  • Prices are below moving trend line (200-day) moving averages
  • Trend line leading edges are moving down
  • Retracement from Aug low to July high is low.

Near-term earnings are down:

  • Reported GAAP earnings for trailing 4 quarters is lower than the 4 quarters before that
  • Operating earnings for 2015 over 2014 are down.


I am glad you asked, because there is more on the negative side.

Clearly, there are plenty of positive stock stories, and in the long-term it is not a good idea to bet against American industry or the stock market.

However, in the shorter-term, sometimes a year or two, earnings, valuations and stock prices can take a big hit, before resuming their historic rise.

Let’s look at some immediate stock market behavior that is concerning, and tilting very close to an outright Bear call – not totally yet, but it certainly starts to smell that way.

We look at four technical factors that, taken together, did a great job of calling the market tops in 2000 and 2007/2008, while at the same time they did not suggest jumping in and out of the market over common bumps in the road.

They were not as effective in the period 1980 through 1993, however, so maybe they have had their day.  On the other hand, what has worked recently is likely to work in the present.

We have written about those factors and provided back testing data from 1980-August 2015 on our blog.  When those 4 factors confirmed each other in 2000 and 2007, they did so at the market tops.

We look at monthly data to see:

  1. Whether the price is above or below the 12-month moving average (same length as the daily 200-day average)
  2. Whether the leading edge of the 12-month average is tilted up or down versus the prior month
  3. Whether the price is moving up at a reasonable pace (a time-based indicator called the parabolic stop & reverse)
  4. Whether the volume of trades is more at the upper end of daily price ranges or at the bottom end of daily price ranges (the money flow index).

The first two factors are necessary, but not sufficient, to trigger a major reversal alert – because alone they are prone to whipsaw.

The third and fourth factors measure different things than the first and second, and are necessary to confirm the alerts from the first and second to minimize whipsaw risk.

Here is a chart for the two most recent major market tops (our blog reviews all the trend reversals from 1980).


No method works all of the time, and this one has worked better since 1993 that before, but we think it still has utility.

You can see from this chart it did a great job at signaling reversals to the down side.  It did a pretty good job on alerting reversals to the upside, but that is not our concern today.  All eyes are on the lookout for a top, and one seems to be near.

Because the method is monthly, the data in the chart above is through August, and in three days we will have September.

In the meantime, let’s try to peak around the corner by running the same data through a weekly filter.  Weekly data is not as reliable as monthly data, and has lots of whipsaws, but that said, it forecasts a fully confirmed trend reversal come next Wednesday.


There is one more negative item, that deserves attention in this letter.  It concerns a specific (actually two specific) chart patterns that are each typically indicative of a trend reversal.

One is called a Triple Top, and the other is called a Head & Shoulders Top (we have a detailed article about them on our blog), but here are the key points. describes Triple Tops this way:

“The Triple Top Reversal is a bearish reversal pattern … There are three equal highs followed by a break below support. As major reversal patterns, these patterns usually form over a 3 to 6 month period

Here is a recent example of a Triple Top in Chevron – just to show you in isolation what one looks like:


(explanation of Renko charts)

This is what says about Head & Shoulders patterns:

“A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline. … The head and shoulders pattern is one of the most common reversal formations. It is important to remember that it occurs after an uptrend and usually marks a major trend reversal when complete.”

And here is what a Head & Shoulders looks like, in hypothetical form:


Well, we think we see both patterns in this noise cancelled 3-year daily Renko chart of the S&P 500.



Once again, no chart analysis is perfect or consistently correct, but when you add all of the stuff above, including our major trend reversal indicator with this specific trend reversal chart pattern; it gets really hard to be warm to stocks at this time.

What you should know is that a major drawdown has a high probability of occurring, based on the evidence presented here.

What you should do depends on:

  • when and if you will rely on your portfolio to support your lifestyle
  • whether you have near-term capital expenditure commitments
  • how long you think you are willing and able to emotionally wait for a major market drawdown to fully recover
  • how you would feel if you experienced a major drawdown (even if you knew it would come back)
  • whether your money is in a tax deferred or exempt account (where there would be no tax cost for making changes vs a regular account where embedded gains might be taxed more than the market may take)
  • how you balance in your own mind the possibility of missing out on some capital appreciation if a Bear does not materialize versus the comfort that may come from getting out of the way
  • and other things.

Most of you are either near retirement or currently living out of your portfolio, and most of you have limited ability to sleep well if another Bear comes along.

I don’t believe in market timing, which I view as quite different from gauging major trend direction.

If it’s raining or snowing with lots of wind, I am willing to be outside or on the road; but if there are public safety announcements of an approaching tornado or hurricane, I stay inside, off the road, and out of the weather.  The same holds true, in my view, for investing.

Volatility comes and goes.  Corrections come and go.  It makes sense to stay fully invested for those, but for major trend reversals for those in or near retirement, without excess assets, and without an iron stomach; taking some money off the table makes sense to me.  There will probably be attractive re-entry points later.

With a few exceptions, most of you have 40% to 100% of your equity allocation in cash at this time.  That was accomplished over a period or weeks or months.  I personally have about 75% of my equity allocation in cash.

I could be wrong, but personally value the peace of mind and capital protection more than the opportunity cost if this is a whipsaw and I must re-enter at a higher price.

How do you balance capital protection and peace of mind versus potential opportunity cost in this situation?

If you feel differently, let me know so I can adjust your allocations.

If you agree, look over your other assets you manage yourself, or that you have with other advisors, to see how they are positioned for a Bear.

I am tending to keep the assets I control for you heavily in cash for now.

Please feel free to call and discuss.


Directly related funds are S&P 500 funds such as SPY, IVV, VOO and VFINX — but if we have a bear market, virtually all US equity funds and individual stocks are likely to be sucked in the whirlpool of declining prices.  Correlations approach 1.00 in the early stage of rapid decline in a Bear market.