Source: Bloomberg
The Bull/Bear indicator, designed by Goldman Sachs, provides “a reasonable signal for future bear market risk”, has risen since the great financial crisis in 2008 and stands now at levels not seen since late 1960s. The proprietary indicator is based on various inputs such as valuation, inflation, yield curve, momentum etc.
Goldman’s strategist Peter Oppenheimer explains no imminent crash is to be expected but more a long period of relatively low returns from stocks. He writes:
“Typically, high valuations – or an extended level of this index – imply the risk of a bear market or a period of low returns over the next five years….. This time we think that lower returns are more likely than an impending sharp bear market.”
We have had several strategist point out their indicators are flashing red. Citibank’s Tobias Levkovich recently wrote:
“It is always challenging to pinpoint the catalyst, but the vulnerability now exists.”
You can agree or not on these red flashing signals. What amuses us a bit is the fact corrections of 5% are mentioned as a possible scenario. A 5% correction would mean SPX was to retrace down to the 200 day average, approximately the 2740 level. Sure, a max long leveraged portfolio won’t enjoy such a move, but seen with a bit of perspective a possible 5% correction is practically nothing.
Source: Bloomberg
Believe it or not a 5% correction on a weekly 10 year SPX chart would only take the index down to the 50 week moving average. That would practically be just a blip on the chart below.
Source: Bloomberg
One of those canaries in the coalmine for the longer term views we have pointed out over past weeks is the implosion in Emerging Market FX crosses and the continuation of rising Emerging Market FX volatilities. These moves should not be neglected.
The spread between EM FX volatility and VIX continues to widen (despite VIX having gone up a bit lately).
Source: Bloomberg
The FX space is telling us something real about the economy in several of these countries. Just look at the Hong Kong index, just entered the bear market officially as the index now has retraced more than 20% from highs seen in January/February.
Source: Bloomberg
Chasing possible tops in the SPX is acting stupid, but being complacent here is even more stupid.
