10-Year Future Returns For Model Portfolios From 5 Thought Leaders

October 16th, 2017

Let’s look at what 5 important thought leaders had to say about constructing a portfolio for the long-term (10+ years); and how their portfolio models are expected to perform over the next 10 years, based on asset returns, volatility and correlations according to JP Morgan Asset Management and Research Affiliates.

Here’s the spoiler:

  • Ray Dalio’s “All Weather” portfolio has the best risk adjusted expected return
  • David Swensen’s “Reference” portfolio has the highest expected return
  • John Bogle’s traditional “60/40 Balanced” model using global stocks is a contender
  • Harry Browne’s “Permanent” portfolio isn’t a contender
  • Warren Buffet’s “Estate Plan” portfolio has the highest potential, but the worst risk adjusted return
  • For all portfolios, the expected returns are significantly below returns of the last several years.

Here are mug shots of the 5 thought leaders.

(click images to enlarge)

Their portfolio models in our approach, would be for the Broad Core sleeve.  More income intensive securities would go into the Income Core sleeve of the portfolio.   And, when, as and if it makes sense to make some tactical bets, we can add narrowly focused assets we believe will do particularly well in the Tactical Opportunity sleeve of the portfolio.  This discussion is only about portfolio models for the Broad Core sleeve.

  • David Swensen is the long-time CIO of the Yale endowment.  He is acknowledged as one of the best at that job, if not the best.  In 2005, he translated his 2000 book for institutional portfolio managers (“Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment”) to one suitable for individual investors.  In that book (“Unconventional Success: A Fundamental Approach to Personal Investment”), he described a “reference portfolio” for the long-term.  He made it clear that adjustments are needed to fit the specific needs, goals, limitations and psychology of each investor; but that the reference portfolio is a good place to begin the thinking process about a suitable portfolio. In his reference portfolio he stresses the functions which must be provided (capital growth, inflation protection, deflation protection, and protection in times of crisis).  He specified assets for the portfolio and how much of each function each asset provides.
  • Ray Dalio is the founder and CEO of Bridgewater Associates, one of the oldest and largest private funds (about 40 years old and about $160 billion in assets).  He wrote about his All Weather strategy in a white paper in January 2012.  His fund has been very successful with the core All Weather portfolio model, and around which they make certain other tactical investments.  Their core portfolio is equally weighted to deal with 4 scenarios (rising corporate profits, falling corporate profits, rising interest rates, and  falling interest rates).  Then within each of those 4 segments of the All Weather portfolio, he specified suitable asset categories, which are then equal weighted for volatility (“risk parity”).
  • Harry Browne (deceased) was an investment advisor and author, who in his 1999 book “Fail Safe Investing” was focused on limiting losses in a portfolio that would be profitable in any market, which he posited was best accomplished with equal amounts invested in stocks, long-term Treasuries, T-Bills and Gold.  That was dubbed a “permanent” portfolio.
  • John Bogle is the founder and former CEO of Vanguard.  He virtually created the index mutual fund industry, launching the first ever index fund (dubbed “Bogle’s Folly”) on December 31, 1975, to track the S&P 500 index.  He is a firm believer that no amount of effort can predict the future of markets, and that active management is not competitive with index funds over long periods.  He recommends simply owning a broad index stock fund, such as one based on the S&P 500, and a broad bond index fund, such as one based on the aggregate US bond market.  He is an advocate of a 60% stocks, 40% bonds allocation.
  • Warren Buffet is the CEO of Berkshire Hathaway, which has made him one of the richest people in the world.  He is a fierce critic of the expense drag created by actively managed funds and their trading costs due to high turnover.  He believes that low cost index funds are the only way to go, and that a domestic focus is at least good enough, if not best.  In his 2013 letter to Berkshire Hathaway shareholders he gave investment advise which he felt was good enough for most investors by revealing his instructions to his estate trustee:  “… instructions I’ve laid out in my will … cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”

Using the 10-year forecasts for asset returns, volatilities and correlations published by JP Morgan Asset Management (optimistic) and by Research Affiliates (less optimistic), let’s see how the recommended portfolios from those 5 thought leaders would be expected to perform in the future.

It is important to know that any single value projection of portfolio return is not a good idea.  Because assets go up and down in price over time, it is more reasonable to think of future returns in terms of a probability range of return; with the most likely return near the middle of the distribution, and the increasingly less likely, but still possible returns spread out above and below the middle.  That is how our first image is presented.  The probability distribution is developed through Monte Carlo simulation.

For each portfolio, the return probability distribution is represented by a box with whiskers.  The line in the middle of the box is the 50th percentile return, which is equal to or near the mean expected return.  Half of the probable returns expected to be higher than the 50th percentile, and half lower than that value.  The entire box encompasses the middle 80% of probable returns (from the 10th to the 90th percentile).  The whiskers extend out above and below the box so that the entire box and whiskers encompass 98% of probable returns (only 1% are expected to be higher, and only 1% are expected to be lower).  Because of shocks and crises, the lower 1% could be a lot lower.  For that, we present what could be thought of as a worst case (at least a very bad case) year, when the return is 3.5 standard deviations below the expected mean return.

This chart is the main one we used to decide our spoiler alert at the beginning of this letter.

The green colored boxes and whiskers are based on the more optimistic JP Morgan assumptions.  The yellow colored boxes and whiskers are based on the less optimistic Research Affiliates assumptions.

Note, that only the deeper green and deeper yellow colored boxes and whiskers have their 1st percentile above zero. If the bottom whisker is above zero, it means that the forecasts expects a 99% chance that at the end of 10-years, your portfolio will be worth more than at the beginning.

The portfolio models with the bottom whisker above zero when using JP Morgan assumptions are the Swensen Reference, Dalio All Weather, and Bogle 60/40 with global stocks. The models with 99% chance of a positive 10-year outcome when using the Research Affiliates assumptions are only the Dalio All Weather portfolio, and the Simple 2 Asset Risk Parity model (which uses the S&P 500 and intermediate-term Treasuries in a ratio that expects the same risk from each asset).

The lighter colored boxes and whiskers have varying probabilities less than 99% that the portfolio will grow in value over 10 years.  In fact, the simplified Dalio All Weather portfolio (published  by Tony Robbins, based on his discussions with Dalio), has about a 10% chance after 10 years of being worth less than the starting value.  The Warren Buffet “estate plan” portfolio has by far and away the higher upside potential (because it is 90% stocks), but also something near a 10% chance of a cumulative negative return.

The best “worst case” year is with the Dalio All Weather portfolio with both the JP Morgan and Research Affiliates assumptions, but it has an unsatisfying most likely return below 5%.  The highest most likely return is the Swensen Reference portfolio, which has a 99% chance of a positive 10-year return under JP Morgan assumptions, but has a small chance of a negative 10-year cumulative return with assumptions from Research Affiliates.

The Bogle 60/40 with global stocks fares well under JP Morgan assumptions, but has a small chance of a negative 10-year return under Research Affiliates assumptions.

The Swensen portfolio and the Bogle portfolio have the highest current yield, which is somewhat of a hedge against the downside, at 2.35% and 2.36% respectively — essentially the same yield.

Overall, for the more risk averse folks who can tolerate returns below 5%, the Dalio All Weather portfolio is attractive.  For those who require return of 5% or more, with limited risk of a 10-year negative return; the Swensen mode is attractive.  The Bogle 60/40 with global stocks is a close runner-up to the Swensen model, but not quite as attractive based on the two sets of assumptions we used.

The 90% stocks approach from Buffet is just fine if you very young and have more than 10-years for “time in the market” to work for you; or, you are wealthy enough to start, and would continue to be wealthy enough with no retirement lifestyle change even if you had a cumulative 5% annualized 10-year negative return.  Otherwise, 90% in stocks may be a bit to aggressive for most investors over 50 to 55 years old, particularly at this time in the market cycle.

Here is a different way to look at the same data.  These next two tables are color coded to show 10-year annualized returns:

  • greater than 7% in dark green
  • from 5% to 7% in light green
  • below 5%, but positive in light pink
  • negative returns in dark pink.

With JP Morgan Assumptions:

With Research Affiliates Assumptions: 

And here is yet one more way to use color coding to gain perspective on the relative merits and demerits of the portfolio models.  All of the returns taken together are coded red, yellow or green on a sliding scale from lowest in red to highest in green.

With JP Morgan Assumptions:

With Research Affiliates Assumptions:

Now for the grand reveal.  What is inside each of these portfolios?  Focus on the category, not just the proxy ETF. We did the projection without any specific security in mind.  The securities we show here as proxies are not the only ones that fit into those models, but they are representative of those that do.

The ETFs used to label the allocation in this next table are simply short-hand to identify the asset classes from the table above.  The numbers are all percentages.

I’d to ask each of you to think about these projections for these model portfolios as general approaches, and tell me which appeal most and least to you as they relate to your Broad Core sleeve (as distinct from the Income Core sleeve and Tactical Opportunity sleeve of your portfolio) to see if we are still on the right track for your personal situation and needs.

Looking forward to our discussion.


[symbols identified in this article: SPY, VXUS, VWO, VGIT, TIP, VNQ, GLD, DBC, VGLT, BND]


How to prepare a portfolio for war with North Korea

August 10th, 2017

QVM Clients:

I have received some calls asking whether and how to prepare portfolios for possible war with North Korea. Whether a war is likely is beyond my capacity to respond, but whether portfolios should be prepared for extreme market conditions resulting from any number of catastrophic situations is something on which I will comment.

Let me state right out of the gate, preparing a portfolio for a generalized Black Swan or catastrophic event is prudent. We should all have a protective component of our portfolios, all of the time – more for the older of us and less for the younger of us, based in great part on the time horizon before calling on the portfolio for withdrawals. However, tailoring a portfolio against a specific catastrophic event is generally not prudent, unless you are dead certain it will happen. And in that case, everybody else is probably dead certain too, and the event would already be substantially priced into the market.

So, while I can suggest a portfolio specifically tailored for a war between the USA and North Korea, I do not recommend implementing it. Such a portfolio would not represent your long-term strategy (which should include a protective component), and if that specific event did not materialize you could find yourself way off course.

With that caveat, let’s think about what a portfolio specifically tailored for an anticipated war between the USA and North Korea.

Don’t think me cold-hearted in discussing portfolio war preparation, because the tragic death of 100’s of thousands of people, including thousands of US troops stationed in South Korea would be horrific almost beyond imagination. According to former US Defense Secretary Cohen today, North Korea could lay waste to Seoul South Korea in about 1 minute from the 10,000 artillery pieces trained on that city at all times. But some of you asked about portfolios, not human tragedy. I am not inclined to plunge into portfolio war preparation, unless an individual should prevail upon me to do so, but I am prepared to say what portfolio might fare better in the event of such a war.

So whether it is war with North Korea, or worldwide plague, or hackers shutting down our electrical grid and somehow disabling our Internet for a prolonged period; the assets that provide clear defensive protection are:

• Cash (insured bank accounts or Treasury money market funds)
• Gold (proxy: GLD)
• Treasury bonds (proxy: VGIT).

Holding any of these three assets creates a current drag on portfolio income, and with the possible exception of gold, a drag on total return. Any form of protection (like insurance) has a cost, and that cost is a lower long-term total return than a flat-out equity market exposure. Except for investors with a very long time horizon before entering the withdrawal stage, some level of cash and bonds is appropriate in any event

Now for the specific war preparation portfolio, keep these index weights in mind, which will help interpret the allocation suggestions below:

  • South Korea is almost 15% of the Emerging Markets index followed by iShares; but 0% of the index followed by Vanguard
  • South Korea is almost 5% of the non-US Developed Markets index followed by Vanguard; but 0% of the index followed by iShares
  • China is about 29% of Emerging Markets indexes
  • Taiwan is about 16% of Emerging Markets indexes
  • Hong Kong is about 3% of non-US Developed Markets indexes
  • Japan is about 21% to 23% of non-US Developed Markets indexes
  • Apple is about 4% of the S&P 500 and about 5% of the Dow Jones Industrials

Changes one might consider (excluding shorting and options) to specifically prepare for possible war with North Korea are:

  • Above target cash
  • Target or above target level gold (proxy: GLD)
  • Above target intermediate-Treasuries (proxy: VGIT)
  • Add defense industry exposure (proxy: ITA)
  • Below target Emerging Markets allocation – to reduce China, Taiwan, Hong Kong and South Korea Exposure
  • Within reduced diversified Emerging Markets allocation; Hold VWO not EEM – to eliminate South Korea Exposure
  • Within non-US Developed Markets exposure, hold EFA not VEA – to reduce South Korea Exposure
  • Possibly replace diversified non-US Developed Markets funds with Europe funds (VGK) – to reduce Japan exposure (proxy: EWJ)
  • Reduce broadly diversified US stock holdings (proxy: SPY) beyond lowered target levels, and rebuild to lowered target levels with sector funds, not including technology sector (proxy: XLK)
  • Sell single stock Apple holdings (AAPL).

Note, there may be significant non-recoverable tax costs to such a portfolio reconfiguration in regular taxable accounts. That would need to be evaluated in terms of each investor’s embedded gains, and how much of which assets are held in tax deferred or tax-exempt accounts, as well as other aspects of the investor’s general tax situation.

Why sell Apple or reduce technology sector exposure? Because, South Korea (think Samsung) is a key part of the technology supply chain (including parts for iPhones). It could take a couple of years to build replacement chip foundries to supply the needed chips for Apple, unless they could find non-Asia suppliers.

Think of the war a step farther out. China decides not to fight the USA on behalf of North Korea, but does decide the war is the perfect time to invade Taiwan to reclaim it. The USA might well be unprepared to defend Taiwan while fighting North Korea, and might accept the invasion of Taiwan in exchange for China not involving itself in the North Korea conflict. Such an invasion could further damage the technology supply chain. Then, of course, Vladimir might decide to take the rest of the Ukraine or some other land grab, which would be very hard on the Europe stock markets.

What happens after the early war stages is unknowable, but as past wars have shown, the world rebuilds, and capital continues to work. So be prepared to restore equity allocation once hostilities are clearly over and stock markets begin to recover.

There would, of course, be no option to do those things to the portfolio once a shooting war opened up, as the pricing adjustments would be near instantaneous. For myself, I am not making such drastic single scenario preparations, but rather holding some level of generally protective assets along with a diversified global equity exposure. That is what I suggest to you.

This is a quite unpleasant topic to contemplate, but to make sure we’re always thinking, this is what we can fathom at the moment, as preparation for first order effects. Where second and third order effects go, is beyond pure speculation.


[securities mentioned in this letter: GLD, VGIT, ITA, VWO, EEM, VEA, EFA, VGK, SPY, EWJ, XLK, AAPL]


QVM Market Notes: Bull and Bear Markets and U.S. Large-Cap Stocks Valuations

June 16th, 2017

QVM Clients (May 6, 2017):

The current Bull market is the second longest with the second largest cumulative gain since 1900. In another 16 months, if it continues as according to the “Street” consensus, it will be the longest running Bull since 1900.

(click images to enlarge)


Augmented valuations based on expectations of Trump getting his key economic agenda implemented soon (including tax reform, overseas capital repatriation, and massive infrastructure investments) is substantially diminished at this time due to all the conflict and dysfunction at the Federal level. Accordingly, most or all of any “Trump Bump” in U.S. stock valuations may be unwarranted.

There are also many risks facing stocks. I have my list. You have your list. They are both good. Both lists are significant, ranging from Central Bank actions, to globally shifting national political profiles, to spreading terrorism, to highly indebted governments, to disappointing strength of GDP growth, etc.

Valuation is an issue, but not likely to be a cause of the next Bear market. Markets can remain overvalued or undervalued for extended periods. A market peak is created not by overvaluation, but by an event or circumstance that causes investors to lose confidence or become fearful.

Of valuation and inevitable Federal Reserve actions, famed investor Bill Gross, formerly CIO at PIMCO, said last week “Instead of buying low and selling high, investors are buying high and crossing their fingers”.

Independent of the Trump goals, there is growth in the U.S. and the world, which is keeping stocks moving forward, but in the U.S. stocks may be a bit ahead of themselves.

In the face of most U.S. stock valuation multiples being well above median levels, one key measure is much better than median and helps keep money flowing into stocks — that is the spread between the yield on Treasuries and the earnings yield (earnings divided by price) of stocks. One other key measure is in the attractive zone:

  • Earnings yield spread to 10-Yr Treasuries yield is well above the 50-year median, and the internet era median, and only a bit below the 145 year median — ATTRACTIVE
  • Dividend yield is approximately at the median level during the internet era — ATTRACTIVE
  • BUT, other price multiple measures are in the expensive range.

Earnings Yield Spread

Due to depressed interest rates, stocks continue to generate an earnings yield greater than Treasuries — and in a world where investors chose between alternatives, they are choosing stocks while the yield spread is positive in favor of stocks.

Very few living and currently active investors have more than 50 year of investment experience, which means for almost every investor, the current earnings yield spread makes stocks more attractive than bonds from a return perspective (although not from a maximum drawdown risk perspective).

Before the 1960’s (and before the academic field called “Modern Portfolio Theory”) investors required a lot more yield advantage from stocks than bonds. Will those days every return? Probably not, but it is not impossible.


S&P 500 Large-Cap Valuation Multiples in the Internet Era

  • Price to Earnings
  • Price to Cash Flow
  • Price to Sales
  • Price to Book Value
  • Dividend Yield

All multiples are above median, except for dividend yield which is at the median level. Only price to sales is very high in historical terms. Conclusions, S&P 500 is expensive by these measures (except for dividend yield), but is not excessively expensive.



Here are 10-year charts of the trailing and forward P/E ratio of the S&P 500 from FactSet.  Both are well above their 5-year and 10-year averages.




Growth at a Reasonable Price

Five-year forecasts are aggressive, because they see historically high earnings growth rates, and earnings continuing to outpace sales signficantly – that can’t go on perpetually. The S&P 500 is priced in the upper part of the mid-range of history with the 1 year forward P/E ratio about 1.5 times the 5 year earnings growth forecast (the “PEG Ratio”).

Here is the forecast from the most recent Standard and Poor’s spreadsheet for the S&P 500 (Standard and Poor’s opinion only).




Yardeni Research publishes a S&P 500 PEG ratio time series from 1995 forward.

It shows that the high (most expensive based on forecasts) was between 1.65x to 1.70x reached in 2015 and 2016. The low (least expensive based on forecasts) was in 2008 during the last crash. The median is in the vicinity of 1.30x to 1.35x. The current ratio is about 1.4, — just a bit more expensive than the median market in the internet era.

Mean reversion of valuation multiples is a powerful force, and mean reversion of all of the above measures (except for dividend yield), when pressured by outside forces, would cause U.S. stock prices to either decline, or slow down for economics to catch up. The problem is predicting when mean reversion will kick in.

We will keep an eye out for change.

Directly Related S&P 500 Funds: SPY, IVV, VOO, VFINX


21 Lowest and 21 Highest Cost US Large-Cap ETFs In The Current Expenses Price War

May 1st, 2017

There is a price war going on among fund sponsors with some ETFs now having expense ratios from 3 basis points to 5 basis points.

Keeping costs low is key to long-term returns generally, and specifically to index funds.

Here is a list of the 21 lowest expense ratio and 21 highest expense ratio US large-cap ETFs that have at least $100 million of assets under management.

(click image to enlarge)

The largest ETF (the S&P 500 tracker, SPY) is among the least expensive at 9 basis points, but more expensive than two other S&P 500 ETFs (IVV at 7 basis points, and VOO at 4 basis points).

For a $1 million position, 1 basis point amounts to $100 per year; or $200 extra return per year with IVV and $500 per year extra return with VOO.

If all you want to do is buy and hold the S&P 500, VOO probably is the most sensible approach.  On the other hand, if you want to be able to sell covered options on your S&P 500 position for income, you need to stick with SPY.

Schwab has a US large-cap and a US broad market (also large-cap) ETF at 3 basis points.

Before you know it, some very large ETFs may have zero expense ratios — it could happen.

How so?  Two things possibly:

  • Some sponsors may chose to offer “lead funds” such as a US large-cap fund at zero expense (operating at a loss) to gather assets on the assumption that if they can capture a core assets, they have a good shot at capturing other assets that are operated profitably — certainly that has been the case with money market funds for the past 8 years.
  • The combination of mega-size and revenue from securities lending should make is possible to operate at least marginally profitably on some funds to either gather assets, or compete to retain assets against others who lower fees to gather assets.  When funds lend securities, they earn a fee, which is shared partially with the manager in most cases (not shared at Vanguard).

iShares, for example keeps from 15% to 28.5% of the securities lending revenue on it funds.  If sponsors could live off of the lending revenue share alone, and also make certain competitive asset gathering or retention decisions, expense ratios on some funds could go to zero.

Here is some of what iShares published about securities lending by ETFs:

2017-05-01_ishare sec lending dist



Whether sponsors do or do not keep a share of securities lending fees, as expense ratios approach zero (and 3 basis point to 5 basis point expense ratios are approaching zero in effect), the impact of securities lending begins to have a significant effect on the tracking error of an index fund — such that on occasion the fund could outperform its benchmark even with the drag of a management fee.

Other important factors that impact tracking error include the amount of cash held for liquidity; the effectiveness of sampling if index replication is not used; and the timeliness and accuracy of rebalancing and reconstitution.

Anyway, we are approaching the time where Warren Buffet’s concern about Wall Street drag on returns, and the damage to investors, may be approaching an end for large index funds.  It is typically said that you cannot buy an index, only a fund tracking an index.  Well, they two are approaching the point of being one and the same.

Overall, the highest costs US large-cap funds, with expense ratios from 48 to 64 basis points did not do worse than the lowest costs funds.

In fact if you simply average the returns (not asset weighted), the highest cost group did a little bit better than the lowest cost group.  That was not due to better management, but to somewhat specialized large-cap strategies that did better, such as technology oriented NASDAQ exposures.

That shows that it is possible for higher fees to be justified in some cases by deviating from the broadest indexes, but that is a case-by-case situation.

If you are buying broad indexes, pay really close attention to expenses as one of the primary drivers.  For specialized funds, category relative expenses can be important, but absolute expenses may not be as important as for broad index funds.

Securities Mentioned In This Article:








What Is Asset Allocation For Everybody Else?

April 19th, 2017

(click images to enlarge)




Breadth Character of the US Stock Market

March 27th, 2017
  • Major stocks indexes still in intermediate-term up trends
  • Breadth indicators suggest problems underneath with prospect of near-term corrective move
  • Maintain current reserves in anticipation of better entry point for broad index positions


Stock market breath indicators  measure the degree to which the price of a market-cap weighted index, such as the S&P 500 index, and the broad equal weighted market are changing in harmony — looking for “confirmation” or “divergence”. With confirmation, expect more of the same. With divergence be prepared for the path of the index to bend toward the direction of the path of the breadth indicator.

It works in a way similar  to the physical world as described in Newton’s First Law of Motion, which says that an object in motion continues in motion with the same speed and direction unless acted upon by outside force. The object is the stock index price. The force is the breath indicator.

There are multiple forces acting upon the object (the stock index), and it is the sum of those forces  that determine the speed and direction of the  index. Breadth indicators are among the more  powerful forces, because they reflect the effect of other forces (such as earnings and growth prospects and microeconomic news) on each of the index constituents separately.

Breadth indicators tend to be more effective at signaling impending market tops than market bottoms.

As more and more of the broad market issues move in the opposite the direction of the market-cap weighted stock index, the greater is the probability of reversal in the direction of the stock index.  The breath indicator represents the equal weighted broad market, which normally peaks before the market-cap weighted indexes peak..

Additionally, when breath indicators reach extreme values in the same direction as a market-cap index,  the market-cap  index is thought to be overbought or oversold, and subject to moderation back toward the moving average.

Let’s look at a few breadth indicators that we follow weekly to see what they might be suggesting at this time about the Standard & Poor’s 500.


First, let us stipulate that the S&P 500 is in an uptrend. Actually most major indexes around the world are currently in up trends (see a recent post documenting trends around the world).

Figure 1 shows our 4-factor  monthly intermediate-term trend indicator in the top panel in black (100 = up trend, 0 = down trend, 50 = weak or transitioning trend).  (see video explaining methodology, uses, and performance in a tactical portfolio since 1901).


(click images to enlarge)

2017-03-27_SPY trend



Percentage of S&P 1500 In Correction, Bear or Severe Bear

We  look for divergences between the direction of the combined constituents of the S&P 1500 broad market index with the direction of the S&P 500 index.

In Figure 2, we plot the percentages of constituents  in a 10%  Correction or worse;  in a 20% Bear or worse;  and in a 30% Severe Bear or worse versus the price of the S&P 500.

This measure’s how much bad stuff is happening in the broad market.  The weekly data is a bit noisy, so we also plot the 13 week ( 3 month) average shown as a dashed line over the weekly data.

Leading up to the 2015 correction, these indicators (particularly the 10% Correction or worse indicator) gave an early warning of developing risk of a market reversal.

After the 2015 correction, those indicators continued to deteriorate, event though the &P 500 recovered; once again giving a signal that not all was well, which led to the 2016 correction.

After the 2016 correction,  those indicators improved rapidly  until the period before the 2016 election where concerns were rising. After the election, the indicators once again improved very rapidly, but now those issues in Correction, Bear  or Severe Bear  are rising again, suggesting caution about the possibility of another market reversal.

(click images to enlarge)



Percentage of S&P 1500 Stocks Within 2% of 12-Month High:

In Figure 3, we plot the percentage of S&P 1500  constituents within 2% of their 12 month high, versus the price of the S&P 500.   This measures how much good stuff is happening in the broad market.

That breadth indicator  began to decline months before the 2015 correction and continued to decline even as the market recovered from that correction, portending the early 2016 correction.

The 13 week average turned down before the larger part of the corrective move preceding the 2016 election and rose after the election, but now it is  rising again, suggesting the possibility for a corrective move in the near term.

FIGURE 3:2017-03-26_2pct

S&P 1500 Net Buying Pressure:

Figure 4 presents another breath indicator, which recall “Net Buying Pressure”.

It measures the flow of money into rising and falling prices of the constituents of the S&P 1500 for comparison with the  direction of movement of the S&P 500  index.

The chart below plots  the Net Buying Pressure for 3 months, 6 months, and 12 months.

We multiply the price change in Dollars of each of the 1500  constituents each day, and multiply that change by the volume of shares traded each day. We sum  the negative products, and sum the positive products.     We then divide the sum of the positive products by the sum of the positive and negative products combined. If the ratio is more 50%,  that means there is more positive product than negative product, which we called Net Buying Pressure.   If the ratio is less than 50%,  that means there is less positive product than negative product, which we call Net Selling Pressure.

You can see in the chart that Net Buying Pressure began to decline in advance of correction in 2015 and continued to decline even as the index recovered before going into a second correction 2016. Since then net buying pressure has risen until just recently, when it has begun to decline again. That suggests to us trend in the S& 500  is not well supported by the broad market, and may be ready for a corrective move.




Bottom line for us is the view that the broad market foundation of US stocks is materially weakening, making the major market-cap indexes (dominated by the largest stocks) increasingly, visibly vulnerable to a material corrective price move; which suggests a better time later to commit new capital than now.