As clients and long-time readers know, we do a great deal of deep ongoing analyses in our effort to ensure that our client portfolios reflect what we believe, in the aggregate, is the best overall risk/reward setup. That process — which includes both fundamental and technical analysis across asset classes, sectors, regions, politics, geopolitics, etc. — over the years has led us to creating proprietary indicators in areas such as the macro economy, financial stress and investor sentiment.
We’re presently constructing what we’ll call our equity market conditions index. We’ve settled into a dozen data points (for the moment [always subject to change]) that our experience has us believing capture, in the aggregate, the general state of overall equity market conditions.
We’re talking the dollar, interest rates, monetary policy, fiscal policy, valuations, credit market conditions and so on.
While we have yet to formalize, and thoroughly back test, this new barometer, we have been scoring it for the past few months. It’s presently scoring -16.67 (on a -100 to +100 scale).
So, according to our nascent indicator, overall stock market conditions are presently slightly net negative.
One area that jumps out, that, in a sense, comes as a surprise (although perhaps it shouldn’t) shows up in our assessment of credit market conditions: It’s the recent performance of HYG, the largest junk bond ETF (now negative on the year).
The following comes from a book aimed at traders, ah, but make no mistake, it applies equally to investors:
“The biggest challenge in trading is not choosing what asset class to trade, or when to buy and sell, or what percentage of your capital to risk on each trade. The biggest challenge in trading is to manage your self. You are a bundle of emotions, memories, history, knowledge, and bias. You can be smart and do stupid things. You can make a hard job impossible by making irrational and compulsive decisions.”
–Donnelly, Brent. Alpha Trader: The Mindset, Methodology and Mathematics of Professional Trading