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Category: Chart of the Week

Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield

Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield. The 30-year  chart below shows US corporate bonds moving into negative yields.  That’s the result of the Fed policy to keep interest rates low to stimulate the economy. However, those  negative rates also are causing many individuals and institutional investors, including insurance companies and pension funds, to take enormous risks for higher yields. For instance, to make up for actuarial deficiencies for underfunded pension funds.  The shifting money away from the corporate bond market into areas like the overbought stock market and many real estate classes is pushing up asset values beyond reasons.  And, that raises questions about whether the low-interest rate policy will ultimately do more harm than good when these investments come tumbling down.

Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield
Fed Low-Interest Rate Policy is  Forcing Investors To Take Dangerous Investment Risks in Desperate Search For Better Yield

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When US Financial Conditions Collapse the Stock, Market Is Sure to Follow

When US Financial Conditions Collapse the Stock, Market Is Sure to Follow. As you can see from the chart below that goes back 30 years, when US financial conditions go down, the stock market inevitably follows. The chart, which was produced before the end-of-the-week downturn, is among many historically accurate indicators we’ve been using that have told us a big market drop has been coming. Although drops can take months after the indicators we use are signaling tops. Nevertheless, those indicators have been signaling us to take profits now and go heavily into cash in our Active Alts SentimenTrader Long/Short strategy.

The reason? Our strategy  seeks to minimize risks for longer-term profitability. So, that cash gives us the ammo to short weak stocks during downturns and at the same time keep big reserves to buy stocks near the next bottom.  How will we know when the markets have reached near bottom?  The same indicators we use to tell us when stocks are overbought tell us when they’ve become oversold.   In the chart, you can see the recent major gains by the of  S&P 500 index despite the huge drops in the nation’s Financial Conditions Index (FCI).  So, history tells us that a sharp stock market drop is all but inevitable. FYI, the FCI was created by Goldman Sachs because older models, such as the effects of short-term interest on the Gross National Product (GDP) have broken down in the last decades as a result of the growing complexities of national and international economics.  The FCI is defined as “a weighted average of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on GDP.”

When US Financial Conditions Collapse the Stock, Market Is Sure to  Follow
When US Financial Conditions Collapse the Stock, Market Is Sure to
Follow

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Low S&P 500 Short Interest is Another Sign Stock Investors Are Overly Complacent

Low S&P 500 Short Interest is Another Sign Stock Investors Are Overly Complacent. As you can see from the chart below, median short interest on the S&P 500 as a percentage of market cap is the lowest in years.  And that  means hedging against a downturn by shorting also is at its lowest in years. Why has that happened? As the stock market continues to move up an increasing number of investors are becoming convinced that there’s no downturn in sight. So, there’s no need to protect their financial well-being. Since investors historically are wrong about calling market tops and bottoms, for us, this is another warning sign among many we’ve talked about in recent weeks to take defensive measures, including cashing out on stocks with big appreciation.  Which is what we’ve done in the long/short portfolio we manage. (See this week’s LMTR sentiment update)

Low S&P 500 Short Interest is Another Sign Stock Investors Are Overly Complacent
Low S&P 500 Short Interest is Another Sign Stock Investors Are Overly Complacent

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IPOs at Record Levels Often Signal  Stock Market Tops

IPOs at Record Levels Often Signal  Stock Market Tops. As the chart below shows, an estimated $60 billion in initial public offerings that are headed for the stock market this year could be an all-time record.  That is raising eyebrows for many astute market veterans because historically when IPOs flood the market what follows are big declines.  Take a look at the huge IPO levels preceding the burst of the dot.com bubble in 2000.  Why are huge surges in IPOs worrisome? For one thing the extra supply sops up stock market liquidity.  There’s also the fact that IPOs that come to market at the top of an IPO bubble often are often the lousiest in terms of a sustainable investment. And those latecomers are a sign of how irrational investors have become, hoping for the next Apple or Google. Which tend to be relatively rare in the overall  IPO universe.  Why? Studies have found most IPOs turn out to be lousy long term  investments. But they are brought to market by investment bankers as long as investors believe the hype. 

IPOs at Record Levels Often Signal  Stock Market Tops
IPOs at Record Levels Often Signal  Stock Market Tops

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Low Dividend Yields Are Another Stock Market Warning Signal

Low Dividend Yields Are Another Stock Market Warning Signal. As stock prices rise, obviously dividend yields decrease as a percentage of the price you would pay. It is worth pointing out that over the last 100 years, half of the returns in the stock market have come from dividend yields. So, it follows that low dividend yields historically have been warning signs a correction is coming as stocks become less interesting for dividend-seeking investors looking to maximize returns. As you can see from the chart below, dividend yields are way down to 1.80%. That makes stock prices way too high for investors seeking income through dividends.

Low Dividend Yields Are Another Stock Market Warning Signal
Low Dividend Yields Are Another Stock Market Warning Signal

Over the last 100 years, half the return in the markets have come from dividends. When the market got hit in the spring it was one of the highest dividend yields in the last decade at 2.7%. However, those bargains are long gone as we now are in the lower ranger where the stock market struggled to move higher.

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