Last Update: November 29, 2021

Jump to section: Valuation | Business Cycle Factor | Tactical Factor

The combination of the overall PRO-II composite has moved down from very elevated levels in the past 2 weeks. So while we are now closer to neutral index levels, we always need to see terminal price action to confirm a degree of capitulation. It’s too early to buy the dip, though most are conditioned to buy every bit of noise. This move will likely be a bit louder.


Risk Level: 88%

Valuation generally remains extreme, but relative to interest rates, the equity risk premium is only slightly elevated. The valuation factor has never been a good timing mechanism, though it does suggest forward based returns will likely be far less than average. It argues for a more conservative equity exposure except that bond yields relative to inflation and duration risk do not offer a good alternative. Earnings expectations remain good and as earnings season has progressed the outlooks remain good. The Omicron variant presents a known unknown and is a reason for the ERP to rise a bit and multiples to fall.

Enterprise Value to EBITDA

A reading near or at 100% means the EV-to-EBITDA is the most expensive it has ever been. The average returns over the coming years will likely be well below average. While the market is expensive historically, this metric suggests returns will be well below average and should not be used as a timing indicator, but adds to the cautionary valuation environment. Enterprise value, is the sum of debt and equity capital a company uses less cash like holdings on the balance sheet compared to earnings before interest, taxes, depreciation and amortization. In other words, how much capital is used to generate free cash flow.


A reading near or at 100% historically means the average returns over the coming years will likely be well below average. While the market is expensive historically, this metric suggests returns will be well below average and should not be used as a timing indicator, but adds to the cautionary environment. The revenue a company generates is less subject to manipulation (financialization) like earnings per share can be and can be a better valuation metric than comparisons to earnings. Many industries have higher margins, so price-to-sales is not a perfect guide.

Forward P/E

A reading above 90% historically means the average returns over the coming years will likely be well below average. While the market is expensive historically, this metric suggests returns will be well below average and should not be used as a timing indicator, but adds to the cautionary environment. Earnings expectations are a key factor for market growth. Analysts are often too optimistic on forward expectations. Forward P/Es historically are 2 multiple points below trailing average. The historic average P/E for US large caps is about 16.5x earnings.

Equity Risk Premium

A reading around 70% historically means the average returns over the coming year will likely be slightly below average. Overall, the ERP increased 19.0bps last week. The yield of the 30-year bond declined 8.9bps. The earnings yield of the S&P 500 increased 10.1bps. We have been suprised by the long bond yield response in recent weeks. We see signifcant supply as a problem in 2022 with a funding need in excess of $1T over Fed purchases.


Risk Level: 59%

Overall business cycle factors remain stimulative. The change in Fed thinking (tapering) is just beginning to have an impact on business cycle factors like the yield curve and credit spreads. It’s likely several years away at a minimum before we see credit conditions tight enough to matter, but it’s the rate of change markets tend to react to. Omicron variant of Covid presents a new factor. It likely adds some uncertainty, so the Fed may be reluctant to accelerate tapering at the December meeting as the market was beginning to price in over recent weeks.

Slope of Yield Curve

A reading near 50% suggests the yield curve (3-months vs. 10-years) that is about average over history. A normal sloped yield curve is healthy and is a positive business cycle factor. A curve getting flatter over time suggests financial conditions are tightening. The recent trend has been steeper. Last week, the 3M-10Y curve was 7.7bps flatter. The recent peak in the curve came in March. The FOMC is now tapering QE and is targeted to be complete by Jun 2022. The path of tapering could be increased or slowed depending on how the economy develops. The response to policy actions have added to the curve flattening bias in recent months. But the curve remains very steep and is supportive for growth.

High Yield vs. Investment Grade Credit Spreads

Credit spreads are thought to be a leading indicator. At a reading around 70%, the risks are moderatly high and investors are not being adequately compensated for credit risk, recent decay is noteworthy. The recent new highs in the S&P 500 are no longer being accompanied by record low nominal high yields. The riskiest part of the credit markets are starting to diverge from equity markets as we get closer to a scenario where the Fed is less accommodative and no longer supporting credit markets.

NY Fed Weekly Leading Indicators

Over the past week, the NY Fed weekly leading economic index slowed. The trend over the past month is slowing at a faster pace. The recent trend suggests evidence of modest contraction. There are severe distortions in leading indicators due largely to the start stop nature of the COVID influence and massive start top stimulus. We are not paying much attention to leading indicators. Recent trends are pointing to contraction at the same time job growth is strong. A reading near 100% is extreme. For more details on the WLI see:

Real Yields & Inflation Expectations

Over the past week, real 10-Year Treasury yields increased 4.4bps. Nominal yields decreased -7.3bps, while long-term inflation expectations fell -11.7bps to 2.45%. Monetary policy is Extremely Easy. Short-term inflation numbers remain extremely elevated, while longer-term market based inflation expectations are elevated relative to the range of the past decade. The FOMC narrative of transitory inflation is well priced into market based indicators. The market is not priced for inflation expectations surprising on the upside. The Omicron variant may be a further catalyst for supply side inflation pressures, but offset by demand reduction.


Risk Level: 44%

The tactical factor fell 17 points last week on a rise in volatility and a general move in many factors. The holiday week illiquid conditions are a clear factor. We expect more follow-through selling until we get a better handle on the health implications of the omicron variant. We know is spreads much faster than Delta, but we do not yet know how the current vaccine regime will react. It likely leads to a buying opportunity, but do not jump in until we see some evidence of terminal price action closer to the September low and rising 200-day average.

5-Day Put/Call Ratio
Risk Level: 98%
The Put/Call ratio measures a degree of speculation and hedging in the options markets. A reading near 100% suggests an all-time extreme degree of speculation. The ratio of speculation in call buying relative to put protection remains elevated and has increased in recent weeks with markets making new highs. Social media influences remain very high and does not appear to be disapating as most go back to work. The Fed’s financial stability report remarked at the degree of less
Speculative Position S&P 500 Futures
Risk Level: 79%
Positions of speculators in the S&P 500 futures contracts offers a potential future source of supply or demand. Current readings are elevated, it’s not until the position gets to an extreme that it becomes a good contrary indication. As of November 16, S&P 500 E-mini speculators increased their net long position last week by 679.6 million dollars. These are the strongest long positions since prior to the Q4/18 correction.
Percentage Deviation from 200-Day Moving Average
Risk Level: 63%
Deviation from trend is close to neutral levels. The market rises above longer-term trends more than 2/3rds of the time. The recent correction has ended and fell well short of a test of the 200-day average. In Q4, that average looks to move up towards 4400 as long as we do not see the September lows break. Therefore, the September lows are now the more important technical support for the post COVID rally.
AAII Bull vs. Bear Sentiment Spread
Risk Level: 32%
When the percentage of Bulls is below the percentage of Bears by a minor amount, buying power is slightly better than selling power.
Seasonal Pattern (All Years) Since 1928
Risk Level: 8%
The 1-Month forward based return is significantly above average average based on the 4-year presidential cycle model. This year, there are several catalysts that support a challenging few months ahead, though Washington may have managed to kick the can into early December once again. Off cycle election results in key swing states suggests Democrats have a high probability of losing Congress in the mid-terms and a fiscal cliff looms large for 2022/23.
Presidential Cycle (Current Year) Since 1928
Risk Level: 67%
The 1-Month forward based return is below average based on the current year of the presidential cycle model. We are in a period where average seasonal returns begin to turn positive again. We are moving back to a buy dips bias from the sell strength bias we have seen in the past few months.
Current vs. Average Volatility (VIX)
Risk Level: 1%
Last week, volatility was 59.8% above the previous week. It was +54.7% compared to it’s 50-day average. The 50-day average is -5.2% below it’s long term trend. The omicron shock has repriced risk market quickly. We likely see some follow-through until more facts are known. Far too early to buy the dip despite the shock to VIX relative to trend. The last time VIX moved this quickly was in March 2020. Take notice!
Current vs. Future Volatility (VIX)
Risk Level: 17%
Last week, current volatility was 27.6% above the previous week. Future volatility was 10.4% above the previous week. The ratio of current volatility to future volatility is now close to inverted. The dramatic move in the VIX curve last week gave no indication it was a terminal move. If anything, it was an initiating move and we should expect some follow-through selling. The near inversion of the VIX curve is meaningful as a buy dips signal, but we need to see terminating price action. Most likely, a lack of liquidity on the holiday week was a major factor.
Percentage of S&P 500 Holdings Above 50-Day Average
Risk Level: 32%
The percentage of stocks in the S&P 500 above their own 50-Day averages is 52.5%, which is 9.9% below the previous week. It is 12.2% below the average of the past month. Tactically, not weak enough for a buy signal, but it’s close. It is extremely rare that we see such a low percentage of stocks below their own 50-day average with the markets at all-time highs. The leadership is very narrow. The Fed clearly added an end of cycle risk element as tighter financial conditions are now on the front burner for a market levered to massive liquidity.
Percentage of S&P 500 Holdings Above 200-Day Average
Risk Level: 43%
The percentage of stocks in the S&P 500 above their own 200-Day averages is 65.8%, which is 5.2% below the previous week. It is 6.5% below the average of the past month. More than half the S&P 500 is below its 200-day average after Friday’s sharp decline. The broad index should test the 200-day average below 4300 in the coming days if Omicron proves to be a significant curveball.
Breadth-McClellan Summation Index
Risk Level: 30%
The breadth of the market is very weak. Fewer stocks are participating in the advance. The divergences seen with new highs in the S&P 500 while the average stock has moved off its recent highs is notable. It suggests a high degree of caution. This could be the early stages of what McClellan calls a complex breadth structure where more companies are in distribution vs. accumulation.
Overbought-Oversold 13-Week Relative Strength Index
Risk Level: 56%
The 13-week RSI is high, but not extreme at 62. Overall, RSI has much higher signal efficacy at extremes and better at bottoms than tops. Another bearish divergence is developing with the early September highs before the recent 5% correction. The speed at which the market has moved back to new highs is both impressive and terrifying.