Market Indicators turn decidedly Bearish

Sentiment Indicators and Technical Indicators turn Bearish:

 
Alert:
Both sets of Indicators turned Bearish, indicating markets are not accurately pricing-in risk. Technical Indicators reached the lowest levels since early 2011. Sentiment Indicators have been Bearish for months though we have seen worse levels (see chart).  However, the combination of both Sentiment and Technical Indicators turning Bearish is what motivated us to publish this warning.
 
We believe now is a good time to take profits and adjust portfolio tax losses against capital gains. There is a high probability for the market to rise between now and January due to seasonal factors. For example, tax-loss selling usually ends by mid-December (maybe earlier this year as investors worry over changes to tax rates) and employees typically add to 401K/IRAs in January.
 
However, our charts are measures of risk and we believe risk is high, despite what the markets decide to do. Risk is high, not only for Equities but other investments/vehicles including commodities (oil, etc.) and High Yield corporate bonds.  The combination of a near-record high level of bond issuance, record-low bond yields and use of covenant-light structures give us further pause.
 
Markets are not pricing-in fundamentals.  We believe that markets are efficient most of the time, but not all. Presently, markets are not pricing in the U.S. Fiscal Cliff (deadline: 12/31/12). Nor is it pricing in a resurgence of the Euro-Crisis. While we agree that certain countries (Ireland) and the European Central Bank (“ECB”) have made efforts to contain the Crisis, the fact is that the large “core” Euro-Zone countries (e.g., France, Germany) are only now witnessing slowing economic growth. We believe risks will shift from the periphery to the core Euro-Zone countries as the ECB continues to aggressively support banks through cheap loans (i.e, more debt!) and sovereign bond purchases. A more recent, but not executed proposal would be to create a Fiscal union in the Euro-zone, which of course would be steered by the French and Germans. We are not so sure the Italians would like that!
 
Sentiment Chart:  It became moderately Bearish when the index declined below 5 earlier this year.  (Note: Refer to Background Information (below) to determine how we read the indicators.)
 
 
Technical Chart is below.  It became Bearish recently, as of 12/21/12.  We consider Bearish readings those that are below -2%.

 BACKGROUND INFORMATION:
As a long-term investor, I believe the time for Socially Responsible Investing is now…right NOW.  Long-term investors are not concerned over the current level of the stock market and whether the Market’s going to rise or fall the next day.

I propose investors be “fully invested” in equities most of the time.  Being “fully-invested” is different for different people depending on age, risk tolerance, etc.  As a Heuristic, I suggest being 75% long equities as a “base-case” level.  The remainder would be invested in bonds, real-estate, hard assets, and alternative/exotic investments (e.g., natural gas, platinum, rare-earth anyone?).

With that being said, there are certain times that are better to invest in the market.  Rather than choosing tops and bottoms based on certain fundamental criteria (e.g. price to earnings ratio), I have developed two Market Timing Indicators.  These indicators help me maintain objectivity with regards to my investment positions, as I have no influence on them.  They were designed during late 1992 and have been updated weekly since.

The two major indicators are:

1.    Sentiment:  based on human behavior, and supported by theories backed by Behavioral Finance.

2.    Technical:  which measures market breadth, or underlying strength in the broad market.

These indicators are used to obtain my Portfolio’s Investment Position.  Note, they do not know, or represent market levels.  They are measures of perceived risk, especially the Sentiment Indicators.  I have often taken mental notes of how everyone seems to clamor to buy things when their expected rate of returns are minimal compared to their inherent risks.

This website will include three simple colored (traffic) signals.  Green for “Buy” (i.e, low-risk levels) which means allocate your portfolio to a fully-invested equity position.  For me, that’s about 75-80% invested, but it could be lower for a more-risk adverse, or retired individual.  Yellow, means caution, risk levels rising.  Red means “High-Risk”; investors should reduce their investment positions to conservative levels perhaps 30-40% equity.  The remainder could be in treasuries, gold, high-grade corporate bonds, etc.

Sentiment Indicators say the Markets are in HIGH RISK mode

Alert:
Our Sentiment Indicator declined to 4 in February 2012.  This means the markets (including equities, corporate bonds, Fx, etc) are not considering the embedded risks.  For exampl, Banks are lending to companies with Covenant-lite loan structures.  Investors are buying bonds without demanding large premiums or spreads over treasuries, etc. Thus, this is Bearish, but note this is not a (short-term) timing index.

Since Feb’12, the Sentiment Indicator has moved slightly higher.  This is a normal movement, but we still consider the Markets in a high risk phase.

Macroeconomic backdrop:

The European Crises is likely to improve over the next few weeks.  However, unless a EuroBond (bonds backed by the Euro-zone countries) is implemented the Euro-Crises will return with a vengeance.  A EuroBond is a low probability solution given that the Germans want the weaker Eurozone members, such as Greece, to execute on their promised Austerity Plans.  This probably won’t occur given the political instability in Greece and upcoming (June) elections.  Other Euro-zone countries (i.e., Spain, Italy) have the same issues.
The “Eur-Lema”:
Europe is in a tough dilemma:  If it enacts Austerity Measures, economic growth will deepen the Recession (see Purchasing Manager’s chart below).  If (French president) Hollande’s growth-friendly agenda is supported in the Euzo-zone, Debt levels will continue rising, in turn causing funding rates to soar.  There is no easy solution!

Likely temporary measures:  We expect the European Central Bank to command a big part of a short-term “bandage” by:

  1. lowering interest rates,
  2.  supporting banks by lending to troubled ones,
  3.  and outright purchasing of bonds on the open market.
Source: Markit Economics

Sentiment Chart:  It became bullish when the index surpassed 7 in mid-August’11.  Since then, it has trended lower to the recent low of 4 during Feb’12.  That was the lowest since July’11. <click chart to enlarge>

Technical Chart.  It became extremely Bullish in August’11 as well, but moved to Neutral in Feb-April 2012.  <Click chart to enlarge>

 BACKGROUND INFORMATION:
As a long-term investor, I believe the time for Socially Responsible Investing is now…right NOW.  Long-term investors are not concerned over the current level of the stock market and whether the Market’s going to rise or fall the next day.

I propose investors be “fully invested” in equities most of the time.  Being “fully-invested” is different for different people depending on age, risk tolerance, etc.  As a Heuristic, I suggest being 75% long equities as a “base-case” level.  The remainder would be invested in bonds, real-estate, hard assets, and alternative/exotic investments (e.g., natural gas, platinum, rare-earth anyone?).

With that being said, there are certain times that are better to invest in the market.  Rather than choosing tops and bottoms based on certain fundamental criteria (e.g. price to earnings ratio), I have developed two Market Timing Indicators.  These indicators help me maintain objectivity with regards to my investment positions, as I have no influence on them.  They were designed during late 1992 and have been updated weekly since.

The two major indicators are:

1.    Sentiment:  based on human behavior, and supported by theories backed by Behavioral Finance. 

2.    Technical:  which measures market breadth, or underlying strength in the broad market.

These indicators are used to obtain my Portfolio’s Investment Position.  Note, they do not know, or represent market levels.  They are measures of perceived risk, especially the Sentiment Indicators.  I have often taken mental notes of how everyone seems to clamor to buy things when their expected rate of returns are minimal compared to their inherent risks. 

This website will include three simple colored (traffic) signals.  Green for “Buy” (i.e, low-risk levels) which means allocate your portfolio to a fully-invested equity position.  For me, that’s about 75-80% invested, but it could be lower for a more-risk adverse, or retired individual.  Yellow, means caution, risk levels rising.  Red means “High-Risk”; investors should reduce their investment positions to conservative levels perhaps 30-40% equity.  The remainder could be in treasuries, gold, high-grade corporate bonds, etc.

Market Indicators turn Bullish

Sentiment Indicators and Technical Indicators turn Bullish:

Note: Click here for latest reading..

Alert:
Both sets of Indicators turned Bullish.  Technical Indicators reach the highest levels in over a decade. 

However, we would caution from investing very high proportions into equities and bond markets as Fundamentals remain weak.  While we believe a U.S. slowdown is already factored into equities prices, the Euro-Crises has yet to see a resolution.  We believe the European Central Bank and other authorities will work on yet another “bandage” and short-term fix, with the best fix being Euro-Bonds.  However, this will not solve the European budget and economic problems.

We believe a good time to increase positions will be the next time Panic sets in.  This will likely occur in the next few weeks, based on historical ebb-flow of Euro-news.

Sentiment Chart is below:  It became bullish when the index surpassed 7 in mid-August’11.

Technical Chart is below.  It became extremely Bullish in August as well.

 BACKGROUND INFORMATION:
As a long-term investor, I believe the time for Socially Responsible Investing is now…right NOW.  Long-term investors are not concerned over the current level of the stock market and whether the Market’s going to rise or fall the next day.

I propose investors be “fully invested” in equities most of the time.  Being “fully-invested” is different for different people depending on age, risk tolerance, etc.  As a Heuristic, I suggest being 75% long equities as a “base-case” level.  The remainder would be invested in bonds, real-estate, hard assets, and alternative/exotic investments (e.g., natural gas, platinum, rare-earth anyone?).

With that being said, there are certain times that are better to invest in the market.  Rather than choosing tops and bottoms based on certain fundamental criteria (e.g. price to earnings ratio), I have developed two Market Timing Indicators.  These indicators help me maintain objectivity with regards to my investment positions, as I have no influence on them.  They were designed during late 1992 and have been updated weekly since.

The two major indicators are:

1.    Sentiment:  based on human behavior, and supported by theories backed by Behavioral Finance. 

2.    Technical:  which measures market breadth, or underlying strength in the broad market.

These indicators are used to obtain my Portfolio’s Investment Position.  Note, they do not know, or represent market levels.  They are measures of perceived risk, especially the Sentiment Indicators.  I have often taken mental notes of how everyone seems to clamor to buy things when their expected rate of returns are minimal compared to their inherent risks. 

This website will include three simple colored (traffic) signals.  Green for “Buy” (i.e, low-risk levels) which means allocate your portfolio to a fully-invested equity position.  For me, that’s about 75-80% invested, but it could be lower for a more-risk adverse, or retired individual.  Yellow, means caution, risk levels rising.  Red means “High-Risk”; investors should reduce their investment positions to conservative levels perhaps 30-40% equity.  The remainder could be in treasuries, gold, high-grade corporate bonds, etc.

Sentiment Indicators turn Bearish

Sentiment Indicators turn Bearish:   

To All readers of the Socially Responsible Investing website:

While I advocate always being invested in the market (see Background Information below),  my Sentiment Indicators  said we’re in a very HIGH RISK environment.  They turned bearish during April/May 2011, though I hadn’t the time to update.  Will promise to report to you as soon as they turn Bullish.

Remember, the higher the Indicator, the more Bullish.  Indicator levels below 3.6 are considered Bearish.

Note other indicators of Technical Analysis also turned Bearish including the well known Head & Shoulders’ Pattern and Dow Theory.

At the present time (early August ’11) it’s likely there will be a short-term bounce-back.  However, a new Bull Market is not likely to ensue until there’s a resolution to the ever expanding Euro-Crises.





Please see chart below (double-click to enlarge):

 BACKGROUND INFORMATION:
As a long-term investor, I believe the time for Socially Responsible Investing is now…right NOW.  Long-term investors are not concerned over the current level of the stock market and whether the Market’s going to rise or fall the next day.

I propose investors be “fully invested” in equities most of the time.  Being “fully-invested” is different for different people depending on age, risk tolerance, etc.  As a Heuristic, I suggest being 75% long equities as a “base-case” level.  The remainder would be invested in bonds, real-estate, hard assets, and alternative/exotic investments (e.g., natural gas, platinum, rare-earth anyone?).

With that being said, there are certain times that are better to invest in the market.  Rather than choosing tops and bottoms based on certain fundamental criteria (e.g. price to earnings ratio), I have developed two Market Timing Indicators.  These indicators help me maintain objectivity with regards to my investment positions, as I have no influence on them.  They were designed during late 1992 and have been updated weekly since.

The two major indicators are:

1.    Sentiment:  based on human behavior, and supported by theories backed by Behavioral Finance. 

2.    Technical:  which measures market breadth, or underlying strength in the broad market.  This indicator was Neutral-Slightly Negative as of 1/2011.

These indicators are used to obtain my Portfolio’s Investment Position.  Note, they do not know, or represent market levels.  They are measures of perceived risk, especially the Sentiment Indicators.  I have often taken mental notes of how everyone seems to clamor to buy things when their expected rate of returns are minimal compared to their inherent risks. 

This website will include three simple colored (traffic) signals.  Green for “Buy” (i.e, low-risk levels) which means allocate your portfolio to a fully-invested equity position.  For me, that’s about 75-80% invested, but it could be lower for a more-risk adverse, or retired individual.  Yellow, means caution, risk levels rising.  Red means “High-Risk”; investors should reduce their investment positions to conservative levels perhaps 30-40% equity.  The remainder could be in treasuries, gold, high-grade corporate bonds, etc.

Feel free to contact me for additional clarity or to answer other questions.