
FCWS View May 2018
Our Risk Odometer ticked up one notch, from +4 to +5 and we continue to remain bullish on equities. The increase does not change the conviction of our stance. The increase was related to sentiment and volatility coming down from extreme levels, a net positive for the markets. Reportable Positions category turned negative this month but is easily canceled by every other category which was positive.
We continue to believe the underlying strength of global economic growth and strong earnings growth are providing a solid foundation for the markets. The Big Three (Economic Indicators, Earnings, Technical Price Action) continue to remain positive.
Earnings this quarter have been extremely strong. To date, they have increased almost 25% from last year and nearly 80% of those reported were above analyst expectations (Thomson Reuters)! Despite this, global equity markets have not experienced much appreciation this year. We believe this is due to the good news already priced into the markets during last year’s extraordinary gains. The market cannot go up for eternity. Often times it takes a pause or corrects before continuing. We believe we are in one of those periods.
Our more technical indicators in the Odometer such as Technical Price Action, Volatility and Breadth have taken a hit but continue to remain above their positive “line in the sand”. These should be the first set of indicators that warn us of risk factors in the horizon. They are not flashing warning signals yet but we are monitoring them closely.
We continue to believe our Risk Odometer provides guidance in making better investment decisions because it keeps us objective and disciplined. We use this methodology and advise our clients to do the same. Emotions are our enemies in investing.
It is important to understand that our Risk Odometer is not designed to anticipate small to medium corrections, typically those in the 5-15% range. Instead, it monitors for conditions which have typically preceded larger corrections. We believe trying to anticipate small to medium corrections sounds attractive but more often results in lost opportunity than savings.
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