A new health indicator for the S&P 500 Index of the largest U.S. stocks shows a rising likelihood of a broad, long-term decline.
The benchmark has fallen 6.8% this year, pulled down by an 11% correction from Aug. 17 through Aug. 25. Earlier this year, the S&P 500 SPX, -1.49% had been setting new highs.
Investors are now bracing for more declines as there are plenty of indications of trouble ahead. For one thing, the S&P 500 trades for 16 times aggregate consensus 2015 earnings estimates, which is near a 10-year high.
Read: Caesars Entertainment and five other stocks to sell short
Another headwind is the coming rise in interest rates by the Federal Reserve. Fed Chairwoman Janet Yellen said last week that she anticipated an increase of short-term rates “later this year, followed by a gradual pace of tightening thereafter.” The federal funds rate has been locked in a range of zero to 0.25% since late 2008. That, combined with the massive expansion of the central bank’s balance sheet, made stocks attractive to investors who might otherwise have been tempted by decent yields form other asset classes.
Reality Shares, a San Diego-based firm founded in 2012, has a new market-health indicator called the Guardian Gauge, which uses volatility and price-momentum data to give a long-term outlook for the S&P 500.
For the past 15 days, the Guardian Gauge has been in the red.
Reality Shares CEO Eric Ervin, in an interview Wednesday, explained it this way: “Guardian looks at the 10 sectors of the S&P 500. If three of the sectors go negative, it signals a very high probability of going into a bear market. Over the past 15 years, it would have predicted the tech wreck and the financial crisis.”
Read: Carl Icahn says ‘joyride’ for stock market is over
As of Wednesday, four S&P 500 sectors were “in the negative,” according to Ervin: energy, utilities, consumer staples and health care.
Here’s a description of the Guardian. Reality Shares has also provided a detailed white paper describing the methodology for the gauge.
Reality Shares says that, from the end of 1956 through the end of 2014, a market-timing strategy based on the Guardian would have produced an average annual return of 8.92%, against an average return of 7.62% for the S&P 500.
Of course, it didn’t really happen that way, because the Guardian didn’t exist. There’s also no guarantee that the market will follow familiar patterns, even those based on 58 years of data. But the better result for the Guardian strategy is impressive. Those differences can really add up in the long run.
Ervin said that for a three-day period during the tech bust 15 years ago, the Guardian would have turned positive because the IT sector had been “pulling down a few others with it ... so it would have only taken one strong sector to move the Guardian above the line.”
What Ervin sees now is a much broader-based decline. He expects the health-care sector to be in the red soon, which will push the Guardian score lower. “We’re seeing a broad destruction of wealth,” he said.
The benchmark has fallen 6.8% this year, pulled down by an 11% correction from Aug. 17 through Aug. 25. Earlier this year, the S&P 500 SPX, -1.49% had been setting new highs.
Investors are now bracing for more declines as there are plenty of indications of trouble ahead. For one thing, the S&P 500 trades for 16 times aggregate consensus 2015 earnings estimates, which is near a 10-year high.
Read: Caesars Entertainment and five other stocks to sell short
Another headwind is the coming rise in interest rates by the Federal Reserve. Fed Chairwoman Janet Yellen said last week that she anticipated an increase of short-term rates “later this year, followed by a gradual pace of tightening thereafter.” The federal funds rate has been locked in a range of zero to 0.25% since late 2008. That, combined with the massive expansion of the central bank’s balance sheet, made stocks attractive to investors who might otherwise have been tempted by decent yields form other asset classes.
Reality Shares, a San Diego-based firm founded in 2012, has a new market-health indicator called the Guardian Gauge, which uses volatility and price-momentum data to give a long-term outlook for the S&P 500.
For the past 15 days, the Guardian Gauge has been in the red.
Reality Shares CEO Eric Ervin, in an interview Wednesday, explained it this way: “Guardian looks at the 10 sectors of the S&P 500. If three of the sectors go negative, it signals a very high probability of going into a bear market. Over the past 15 years, it would have predicted the tech wreck and the financial crisis.”
Read: Carl Icahn says ‘joyride’ for stock market is over
As of Wednesday, four S&P 500 sectors were “in the negative,” according to Ervin: energy, utilities, consumer staples and health care.
Here’s a description of the Guardian. Reality Shares has also provided a detailed white paper describing the methodology for the gauge.
Reality Shares says that, from the end of 1956 through the end of 2014, a market-timing strategy based on the Guardian would have produced an average annual return of 8.92%, against an average return of 7.62% for the S&P 500.
Of course, it didn’t really happen that way, because the Guardian didn’t exist. There’s also no guarantee that the market will follow familiar patterns, even those based on 58 years of data. But the better result for the Guardian strategy is impressive. Those differences can really add up in the long run.
Ervin said that for a three-day period during the tech bust 15 years ago, the Guardian would have turned positive because the IT sector had been “pulling down a few others with it ... so it would have only taken one strong sector to move the Guardian above the line.”
What Ervin sees now is a much broader-based decline. He expects the health-care sector to be in the red soon, which will push the Guardian score lower. “We’re seeing a broad destruction of wealth,” he said.
