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The Risk-Reward Market Report

S&P 500 Analysis for week of 6/6/11

Market Driver Index

Week of 6/6/2011 - version1.0

Indicator Rating Forecast
Risk Index 0 Normal risk
Economic Index 0 Slow growth
Value Index 0.5 slightly positive outlook
Current Concerns Index 0 neutral outlook
Total Score +0.5 Positive Outlook

Market fundamentals or drivers for equities and sectors are, economic growth, sentiment, valuation and risk vs. return. Investors need to think about the direction of changes. There is always a list of worries, some factored into the market, some not. Short, long term economic news and other factors do affect the market. Sometimes this is already baked into the market prices and sometimes it may be more of an opinion or forecast of possibles.

Interpretation: Total rating above 0 is positive. Each individual group has possible scores of 1. When 2 indicators are in a category each is awarded a value of .5 pt.

This is a very subjective analysis and how much of it has affected the market or may affect the market is left up to each reader. Aligning investment strategy with prevailing conditions is of up-most importance. Instructions of use: The Driver Index should help to guide you in direction changes or in confirming the present trends in the stock market. Use in conjunction with daily, inter-weekly market news, trend model and the short and intermediate-term indexes to help in decision making affecting your portfolio.


Risk: Suggests the level of financial stress in the markets based on weekly indicators.

  1. STLFSI: Current score +1. Their current rating -0.5.6 The SLSFI St. Louis Fed Stress Index (SLFSI). It has eighteen factors (real data) - rates, credit spreads, the VIX - all proven links to market risks. How to interpret the numbers. Any numbers shy of 1.0 or so is neutral territory.

Economy: Corporate earnings depend on the overall economy. The stocks closely follow their earning reports. Weak Recovery - slow growth - cautious medium to long-term outlook.

  1. The Philly Fed's Aruoba-Diebold-Scotti Business Conditions Index (ADS Index) "The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions." Chart of 91-day moving average of daily index since March 1960. Courtesy of Doug Short

WLI: The Weekly Leading Index (WLI) Growth indicator - Current Level 4.9 down from +5. Chart Courtesy of Doug Short

Market Value: Higher valuation may point to market declines. Low valuation may hint of a market rise. Cautious long-term outlook with guarded expectations. Likely return ~4%

    1. Porftolio123 broad stock market valuation: Current score +0.5. Their current rating 4.33%. It's bullish if the S&P 500 risk premium, defined as S&P 500 earnings yield minus the yield on the 10-year Treasury note, is greater than 1%-Explained
    2. Morningstar's Fair Value: Current score neutral 0. Their current ratio is 1.00. A ratio above 1.00 indicates that the stock's price is higher than Morningstar's estimate of its fair value. The further the price/fair value ratio rises above 1.00, the more the median stock is overvalued. SCORING: <9.8 is positive and a score of+1. Above 1.02 is a negative.

    FYI- Shiller's P/E10 historic average is 16.4. This ratio closely tracks the real (inflation-adjusted) price of the S&P Composite. Abbreviation - P/E10. Current P/E10 - 23.1

    Current Concerns Index: Current score 0

    Bull vs. Bear Sentiment: Contrarian theory states the time to buy is when fear and pessimism are at a maximum since this usually occurs near market bottoms.

    1. AAII Sentiment Survey: Current score is positive +0 .5. AAII current bullish% level: 25.6% up to 30.2%. This is the lowest level since August 25th 2010.
    2. SCORING: Less than 26% bullish and turns higher, scores a positive +0.5. More than 49% bullish and turns lower scores a negative -0.5 FYI: Option Sentiment: Put/call ratio VIX
      • Wall of Worry: Current score -0.5
      • US Debt
      • Lack of financial sector participation in the current market
      • Unemployment
      • Housing Industry in the dump


    Week of 6/6/2011

    Indicator Rating Forecast
    Risk Index 0 normal risk
    Economic Index 0 slow growth
    Value Index +0.5 slightly positive outlook
    Current Concerns Index +0 neutral outlook
    Short-term trend -1 neutral to negative
    Medium-term trend -1 negative
    Sector Index -1 negative outlook
    Risk-Reward Advice -2.5 Defensive Bias

    Financial Risk:

  • Outlook - Normal Risk

Watch Inflation & Interest Rates. Is another financial crisis is inevitable because the causes of the previous one haven't been resolved?

Economy Risk:

  • Outlook - Normal Risk

Caution: So far we have slow growth. If growth slows more this could turn negative.

Value Risk:

  • Outlook - Slightly Positive Risk

Long-Term: If prices in the market goes down we could see improvement in value. Overvalued now by P/E multiples??

Current Concerns Index:

  • Short-term (1 week) - Neutral outlook
  • Medium-term outlook - NA

This has been trending to the positive side with a slight easing of bullish sentiment. The two surveys cancel each other out for a total category neutral score of zero.

Inter-Market Analysis:

  • Short-term (1 week) - Negative - See trend model & MCSI
  • Medium-term outlook (2-4 weeks) - Negative to neutral - See trend model & ICSI

Sector Index: Of 67 Industries 30% were up for the week. For the month of May, of 64 industries, 23 (36%) were up. Seasonality: June is a weak month historically.

Overall Opinion:

Market Outlook: Defensive Bias with a Negative Outlook


Meant only for educational purposes only -- For more in-depth analysis and commentary visit our blog.


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