Price
Source: DSHORT Blog, Moving Averages January Month End Update
As you can see from the chart above, the Ivy Portfolio Signals saw another asset class switch to cash at the end of January. It was VNQ, which seeks to track the performance of the MSCI US REIT (Real Estate Investment Trust) Index. Last month we mentioned the moving average for this ETF remained very close to indicating a cash position. IEF and VNQ simple moving averages now indicate "cash" rather than "invested." The remaining asset classes as represented by ETF's VTI, VEU and DBC all ended January signaling investors should be invested in these asset classes. It is worth pointing out that Friday, February 2 saw mid-caps, small-caps, energy, consumer staples and materials all trade below their 50-day moving averages (Bespoke provided the charts on their blog). Remember you don't want to rely solely on moving-averages for your tactical decisions; however, moving averages do help determine which parts of the market are starting to break down.
Sentiment
Source: CNN Money Fear & Greed Index
The CNN Fear & Greed Index ended January measuring 61, slightly more greedy than neutral. During January's melt-up this index revisited "Extreme Greed" with a high reading of 79. The selloff in the market during the week of January 29 - February 2 moved this index down to 40 indicating "fear." I'll be watching to see if this indicator dips below 20 during this correction in the market. Another sentiment indicator to highlight this month is the Bank of America Merrill Lynch (BAML) "Bull & Bear" gauge. Toward the end of January, many news outlets (CNBC, Reuters) reported it flashed an overheating warning signal at 7.9. BAML recommends selling when this indicator measures 8 or higher. This was the highest reading since March 2013. According to BAML, it has given 11 prior sell signals since 2002 and been correct each time. Average equity peak-to-trough drops in the following 3 months after the signal have been 12 percent. BAML suggested this time they expect a near term selloff to 2686 on the S&P 500 between February and March.
Valuation
Mark Hulbert published an article January 30, 2017 titled Opinion: This top stock-timing model says the best days for the bull market are past. In the article Mr. Hulbert writes that the "Value Line Investment Survey says stocks are most overvalued since 1969 - almost half a century." He writes:
"The model to which I refer is based on a single number published each week in the famed Value Line Investment Survey, published by Value Line, Inc. The number represents the median of the projections made by Value Line’s analysts of where the 1,700 widely-followed stocks they closely monitor will be trading in three- to five years’ time. Followers refer to this number as the VLMAP, which stands for Value Line’s Median Appreciation Potential."
"The VLMAP’s current level is 20%, far lower than its long-term average of near 75%. At the bottom of the bear market in March 2009, in contrast, the VLMAP stood at 185%."He ends his article with the following:
"Still, as the last several years have illustrated all too well, the stock market could continue rising in the face of a low VLMAP reading. But the evidence of overvaluation continues to accumulate. Someday, the sheer weight of that evidence will be too much for even this bull market to bear."Summary
Beginning February 2018 monthly moving average indicators reveal two asset classes (IEF and VNQ) have switched to cash from invested. Sentiment has pulled back from "Extreme Greed" in January to "Fear" as we start this month. Multiple asset classes remain overvalued. Let's spend a moment discussing emergency savings. For retirees, most planners suggest holding one to two years' living expenses in liquid reserves, with the remaining portfolio invested to meet your written investment policy statement. For people who are still working, most planners suggest keeping three months to twelve months worth of living expenses in easily accessible reserves. Please include the nature of your income when determining how much liquid reserves to set aside. As an example, a doctor, or someone who could easily find another job, might be able to have three months worth of emergency savings, whereas a sales representative, or someone who may have a more difficult time finding a job, might need closer to twelve months worth of savings. If you have any one-time expenses you'll have to meet within the next year, such as your property taxes, you'll want to designate additional assets for those, separate from your emergency savings.
Let's end this month with a quote from Stephen Hawking:
"I have noticed that even people who claim everything is predetermined, and that we can do nothing to change it, look before they cross the road."
As always, wise investing my friends.
Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.--------------------------------------------------------
Here's what I've been reading and watching recently:
- Trump's Tax Cuts Won't Offset the Impending Slowdown (Bloomberg)
- Becoming a 401(k) millionaire doesn't mean you're ready for retirement (CNBC)
- Up is Down: Jump in AHE Growth Confirms Economic Slowdown (ECRI)
- Jobs Report and 2018 Slowdown (ECRI)
