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The Risk-Reward Market Report

S&P 500 Analysis

Market Driver Index

Week of 6/13/2011 - version1.0

Indicator Rating Forecast
Risk Index 0 normal risk
Economic Index 0 slowing growth
Value Index +1.0 positive outlook
Current Concerns Index -1.0 negative outlook
Market Driver Opinion 0 Neutral 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 several indicators.

  1. STLFSI: current level: -00.63 Driver Index Score: +0 The St. Louis Fed Stress Index (SLFSI) has eighteen factors (real data) - rates, credit spreads, the VIX - all proven links to financial market risks. How to interpret the numbers. Any numbers shy of 1.0 or so is neutral territory.
  2. KFFSI: current level: -0 from -0.52. Driver Index Score: normal +0. The Kansas City Financial Stress Index (KCFSI) is a monthly measure of stress in the U.S. financial system based on 11 financial market variables. A positive value indicates that financial stress is above the long-run average, while a negative value signifies that financial stress is below the long-run average.

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. ADSI: current levels chart. ~ -2 t0 -3. ~ -2 to -3. Want level >0 Drive Index Score: 0 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: current level: 4.1 Want level >o Driver Index Score: 0 The Weekly Leading Index (WLI) Growth indicator. Chart Courtesy 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: current level: 4.65%. Driver Index Score: +0.5 A broad stock market valuation. The level is 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: current level: .97. Driver Index Score: +.05 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.

Current Concerns Index: 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 Survey: current bullish% level: bullish% - 24.4% up to 30.2%. Driver Index Score: -0.5 AAii Sentiment Survey. This is the lowest level since August 25th 2010.

    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

  2. Wall of Worry: current level: negative. Driver Index Score: -0.5.
    • US Debt
    • Lack of financial sector participation in the current market
    • Unemployment
    • Housing Industry in the dump


Week of 6/13/2011

Indicator Rating Forecast
Risk Index 0 normal risk
Economic Index 0 slow growth
Value Index +1 positive outlook
Current Concerns Index -1 negative outlook
Short-term trend -1 negative trend
Medium-term trend -1 negative trend
Sector Index -1 negative outlook
Risk-Reward Advice -3 Defensive Bias

Inter-Market Analysis:

  • Short-term outlook (1 week) - Negative - See trend model & MCSI
  • Medium-term outlook (2-4 weeks) - Negative to neutral - See trend model & ICSI
  • Sector Index Outlook - Negative All key S&P sectors finished lower this week. All ten were down This says it all "chart." Defensive investments outperformed on a relative basis with utilities down just 0.5%. Currently, all ten sectors are trading below their 50-day moving averages, and only three sectors are not oversold. On the downside, financials (-3.9%) and tech (-3.1%) got hit the hardest. Selling was broad-based with only 57 companies trading higher in the S&P 500.

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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