Warning Signs Returning!

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!

Screen Shot 2016-07-26 at 15.52.28

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)

Screen Shot 2016-07-26 at 16.01.19

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.

Screen Shot 2016-07-26 at 17.25.04

Investors also continue to pay more for “peak earnings” than in history

Screen Shot 2016-07-26 at 17.28.10

Putting all this together suggest negative outcomes for the FTSE-100

Screen Shot 2016-07-26 at 17.30.50

Which fits in with the assessment across a number of ratios and time frames that the index remains above fair value by some margin

Screen Shot 2016-07-26 at 17.32.04

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.






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