Our proprietary risk ratio indicator is still flashing a warning signal at the moment BUT is beginning to get to levels that are more normally associated with intermediate term bottoms. While this indicator is very slow to move because it is built on weekly data – it has been a good overall risk management tool for the increasing and decreasing of portfolio risk associated with market movements.
The indicator is a weighted average of volatility, bullish to bearish sentiment, advances versus decliners and price momentum which is then smoothed to give an indication of market risk.
Back in April when we first published this indicator to the public we addressed that it was time to remove money from risk assets and overweight cash and fixed income. This has provided a good hedge for the summer volatility up to this point. Now, the markets are beginning to show enough weakness to begin hitting our radar for a potential buying opportunity within the next couple of months provided some crisis doesn’t assert itself and push the markets into panic mode.
We will watch our indicator closely and look for it to turn UP from some level which will be our indication to begin increasing risk based assets to portfolios. Caution is still advised as all of our signals are still on a SELL signal at the current time. We still recommend an overweight position in cash and fixed income at the current time and underweight equities with a bias to lower volatility, defensive positions.