PRO-EYEs Indictors Flashing High Degree of Caution
The Berman’s Call Pro-Eyes (Probability Return on Investment Index) indicators have moved into the highly cautionary range. The last time the index was at these levels was in November 21. Historically, forward based drawdowns within the next year are about 11%. This 20-factor model looks at valuation factors, business cycle factors and tactical market behavioural indicators. When multiple factors are at or near extreme levels as they are this week, the risk of a market correction in the coming months is very high. This does not mean investors should sell everything at all. Your long-term portfolios should never make those types of adjustments, but it may be prudent to rebalance some higher risk positions.
|Enterprise Value to EBITDA||69%|
|Equity Risk Premium||100%|
|Slope of Yield Curve||100%|
|High Yield vs. Investment Grade Credit Spreads||44%|
|NY Fed Weekly Leading Indicators||68%|
|Real Yields & Inflation Expectations||98%|
|Total Business Cycle Factor:||78%|
|5-Day Put/Call Ratio||89%|
|Speculative Position S&P 500 Futures||71%|
|Percentage Deviation from 200-Day Moving Average||89%|
|AAII Bull vs. Bear Sentiment Spread||73%|
|Seasonal Pattern (All Years) Since 1928||66%|
|Presidential Cycle (Current Year) Since 1928||88%|
|Current vs. Average Volatility (VIX)||69%|
|Current vs. Future Volatility (VIX)||90%|
|Percentage of S&P 500 Holdings Above 50-Day Average||89%|
|Percentage of S&P 500 Holdings Above 200-Day Average||62%|
|Breadth-McClellan Summation Index||69%|
|Overbought-Oversold 13-Week Relative Strength Index||82%|
|Total Tactical Factor:||78%|
Earnings period is a potential catalyst to be sure. We are watching the behavior of the leadership stocks like NVDA that had a major reversal last week, though that could be solely related to the NASDAQ 100 rebalancing. We saw a massive 6% price reversal pattern on Friday. It may suggest the leadership is getting extremely overbought and sellers are developing.
Seasonality has turned from being mostly a positive influence the first half of the year to being a headwind over the next few months. Volatility is suppressed and positioning a speculative activity is suggesting some extreme conditions.
Other sentiment indicators like the Put/Call ratio is extreme while opinion of bulls and bears in the AAII survey are close to historical extremes.
This is not a market where fear of missing out (FOMO) should be your core investment thesis. Missing out on returns is a real emotional response that many experience. This is why having a longer-term investment plan should be the basis for most investors working with a financial planner to help achieve it. But this is a high anxiety period as it was largely unexpected by many including me.
Despite the FOMO market, the probability of a recession is extreme in our models and we have to go with longer-term probabilities when it comes to forecasting what could happen with market outcomes.
ETF Capital Management: ETFCM.com