Price
Source: dhort blog, Monthly Moving Averages: June Month-End Update
For the Ivy Portfolio system three ETF's --Vanguard Total Stock Market (VTI), Vanguard REIT index (VNQ), and PowerShares DB Commodity Index (DBC)-- start the month of July signaling "invested" whereas two ETF's --iShares 7-10 year Treasury Bond (IEF) and Vanguard FTSE All-World ex-US Index Fund (VEU)-- signal "cash."
VEU lost value during June adding to losses in May. This further shows the decoupling of the global synchronized growth we saw in the markets in 2017. Emerging Markets --iShares MSCI Emerging Markets ETF (EEM)-- experienced an extremely difficult month dropping over 4%. REITs, as represented by VNQ, switched from "cash" to "invested" at the end of June. VNQ had been signaling "cash" since the end January.
Sentiment
Source: CNN Money Fear & Greed Index
Sentiment ended the month slightly more fearful than it started June. Currently, none of the seven indicators that comprise the CNN Money Fear & Greed Index are showing "Greed" or "Extreme Greed", four indicators are neutral, one reads "Fear" and two read "Extreme Fear." "Market Momentum" and "Safe Haven Demand" start the month reading "Extreme Fear." I repeat the question from last month: Will the S&P 500 need to reach new all-time highs for sentiment to read "Extreme Greed" again?
Valuation
I continue to hunt for different valuation indicators for this market. Today let's examine equity share of households' financial assets. Market Hulbert highlighted this indicator in an article titled Opinion: This is what the stock-market indicator with the best track record is telling us, published June 22, 2018. The table below shows the degree to which equity share has explained the subsequent 10-year S&P 500 return. The closer the number is to 1 the better it explains data where a zero means there is no relationship between two data sets.
Source: MarketWatch, Calculated by Philosophical Economics
According to Ned Davis Research equity share at the end of Q1 2018 was 41%. Mark writes in his article:
"There's been only one other occasion since 1951 in which this allocation was any higher than it is today: At the top of the internet bubble, when it rose to 47.6%.
Every other major stock-market top of the last seven decades, in contrast, occurred when households' equity allocation was lower than today's level. At the 2007 stock-market top, for example, the allocation peaked at 37.5% according to the Ned Davis firm.
One way to show the value of the equity share as a long-term stock-market forecasting tool is to contrast the S&P 500 return subsequent to those calendar quarters with the highest and lowest readings. Its average annualized 10-year return was 3.9% following the 20% of readings in which equity share was highest, compared with 16.4% following the quintile of the lowest equity shares. "
Source: MarketWatch, Opinion This is what the stock-market indicator with the best track record is telling us
Summary
As we enter July three asset classes (VTI, DBC, VNQ) signal "invested" and two (IEF, VEU) signal "cash." Sentiment has become slightly more fearful since the end of May. Valuations remain elevated for U.S. stocks. After a strong May performance technology stocks --ETF XLK-- lost ground in June dropping 0.26%. Foreign stocks continued to lose value in June.
The U.S. economic expansion since June 2009 continues and has exceeded 108 months. We'll continue to track this periodically during the monthly updates to see if this expansion will set a new record. Let's end this update with three quotes:
"To understand the heart and mind of a person, look not at what he has already achieved, but at what he aspires to do." -Khalil Gibran, writer, poet, artist
"Well done is better than well said." -Benjamin Franklin, American polymath
"Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones." -Benjamin Franklin, American polymathAs 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:
- Bernanke Says U.S. Economy Faces a ‘Wile E. Coyote’ Moment in 2020 (Bloomberg)
- Sustaining Wealth is Harder Than Getting Rich (A Wealth of Common Sense)
- Unusual Divergence in Commodities Spotlights Global Slowdown (ECRI)
- Greenspan's Radar Is Locked on 5-to-30 Year Yield Curve Slice (Bloomberg)
- Here’s when the yield curve actually becomes a stock-market danger signal (MarketWatch)
- ISM Manufacturing Index Surges Past Expectations (Bespoke)
- Guide to the Markets Q3 2018 (J.P. Morgan Asset Management)
