Risk System & Bellwether Shares Make Depressing Reading
My post earlier in the week highlighted the risks of using a single indicator; however now we see a number of historically reliable methods with large sample sizes pointing to negative outcomes from this point for the broader UK Equity Market as defined by the FTSE-100. As I mentioned earlier in the week I have added some new holdings – but with the caveat I had concerns for the broader market (so much so in fact I bought a leveraged ETF that provides an inverse return to the FTSE-100 to provide some protection for the equities I hold).
Lets start with some pretty high risk readings!
Breaking this down my view is that the FTSE-100 index is set for a reversal as
- It is above short and medium term moving averages
- It remains with 8% of its upper Bollinger Band – this is close to two standard deviations from its 52 week moving average where few observations persist
- The distance from the 5 year low understates risk as a result of a prolonged bull market that has lasted longer than usual
- Investors are complacent as indicated by a high FTSE/VFTSE ratio
- Correlation with the FTSE-250 has fallen away dramatically (see chart below with correlation the bottom indicator)
What about fundamentals?
I have written before about areas such as buybacks and payout ratios as being major risks and these are now joined by above average price ratios take a look at one of the most accurate (Price to Sales) and how a reversion to the min or mean produces poor prospective 5 year returns.
Investors also continue to pay more for “peak earnings” than in history
Putting all this together suggest negative outcomes for the FTSE-100
Which fits in with the assessment across a number of ratios and time frames that the index remains above fair value by some margin
All of these indicators provide enough evidence for me to be extremely cautious at present – there may be pockets of value in specific stocks or shares but looking at overall market conditions suggests that we should not be expecting too much from here.