Regular readers of this blog will recognise my “Bearometer”, which is a compilation of 6 indicators that I watch to help give me a feel for market risk/reward. It is not a market timing vehicle. If the indicator reads bullish, it suggests less risk on the markets, if it reads bearish, it suggests greater risk than normal. A neutral reading, which is where it stands now, suggests that markets are not particularly low or high risk at this time. There are 6 components to the indicator: Breadth, Seasonality, Value, Momentum, Trend, and Sentiment.
As noted , seasonality is one of the 6 indicators that comprise the Bearometer. I assign 0-2 points to this component – a fairly heavy influence when compared to the other indicators. After this month ends, with no changes in the other 5 indicators, the Bearometer would move into bearish territory. That’s because the seasonality component will fall to a score of “0”. Meanwhile, the value and sentiment scores are in bearish territory based on my parameters at this time.
One sentiment study that may be of interest to readers is the asset allocation decisions by retail investors (aka “dumb money”). There is now $3.91 invested in equity mutual funds and ETFs for every $1.00 stored in safe money market funds as of according to the Investment Company Institute. That compares to a ratio of 3.09 in August 2000 and 3.39 in May 2007. Perhaps you will recall what happened to markets shortly after those two dates (hint: markets did not climb!).
We’re about 17% cash in the managed equity platform that I run on behalf of my clients, having taken a few profits lately. This affords us plenty of room for upside during the last weeks of the seasonally strong period, while keeping a bit aside as a precaution. The trend for the S&P 500 remains strong, and momentum is healthy. Most of the nearterm indicators I watch, as seen on the chart above, are bullish – with the exception of a slowdown in moneyflow (top pane, bottom pane). So we’re still bullish at this point.. But we’ve got a bit of cash on the sidelines, just in case…