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Strategies & Market Trends : A.I.M Users Group Bulletin Board
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To: Zen Dollar Round who wrote (18798)12/5/2022 9:10:20 AM
From: OldAIMGuy1 Recommendation

Recommended By
Zen Dollar Round

   of 18928
 
Good morning ZDR, Re: Market risk and direction.............................

The v-Wave was created to replace something I'd built starting back in the '80s. It was a four component risk indicator that I attempted to marry (or at least encourage dating) to AIM. Mr. Lichello said any time was a good time to start a new AIM investment engine as long as one reserved adequate cash. In his various editions he suggested 50%, 33% and eventually 20% Cash Reserve when starting a new position or overall portfolio. How was one to choose?

In came my "idiot wave" as it was called back then. It measured valuations, speculation, investor sentiment and IPO/New Issues activities. It worked pretty well over the years since 1982.


Here's the IW all grown up and renamed the Market Risk Indicator (MRI). As noted here, it has moved to the "Caution" area this week with two components rising and two unchanged. Two are also in their own "Caution" areas - Relative Valuation and Divergence (sentiment). Divergence shows caution with lots of 52 week new highs and lows showing up together. Part of this is "tax season" changes. People sell their losses to offset their earlier gains and this makes the bad look worse and the good look better through money shifting. The rest of the Divergence Index pressure is just because the market participants are confused about what is going on. Right now half are betting heavily the markets well slide while the other half is betting heavily the markets will rise.

Relative Valuation Index shows a non-response to the rise in both inflation and interest rates. Price to Earnings will have to fall to compensate for those two. You can have a stable market with a P/E of 19 and 1% short term interest rates. You can also have a stable market with a P/E of 12 and 8% st interest rates. Right now we have a P/E of 16.3 (Value Line 1700 stocks) and interest rates of 4.4% and Inflation of ~7%. Neither of these combine favorably with the P/E. The median value of this component is 20 and anything above 21.75 is rather bearish. Below 18 is bullish. If we combine the larger of interest rates or inflation we find it to be bearish right now.

If we compare the MRI to the v-Wave we see a similar pattern through time but a little less fluctuation due to fewer moving parts.

The v-Wave is a bit more optimistic right now but certainly not bullish. Both the MRI and the v-Wave were intended to give us a barometer by which to gauge cash reserve starting and ongoing levels for AIM. I further have designated that individual stocks should carry more cash than mutual funds or ETFs and other diversified investments. In both histories, you can see that the Covid lows were suggesting new and ongoing AIM accounts were healthy with very low levels of cash compared to the Median value. Both has extended periods of caution and higher cash suggestions during the 2021 bullish period.

Personally I'm feeling that earnings are not going to soften up the P/E by rising more quickly than share prices. That leaves us with only share price reduction to get P/Es to come down. If earnings actually decline (recession) this will only worsen the P/E situation. However, instead of a major market decline from here I think we might just be stuck in an extended and possibly unhappy trade range until the FED figures out how it might fix its messed up monetary mistakes of the current millennium.

I concur with your political risk assessments. While I don't attempt to track them in either the v-Wave or the MRI, both have sensitivities there, even if only by referral. Thank you for engaging the conversation here. It's nice to find yet another AIM/Lichello fan here on SI.

Best wishes,
OAG Tom
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