4/11-4/15/16 Charts of the Week

Equity indexes performed rather well last week, with the Dow Jones Industrial Average, S&P 500, NASDAQ and Russell 2000 all gaining anywhere from 1.7%-3%. Gains were attributed to a strong week for oil, but that all may change in the near-term. Saudi Arabia has publicly stated that they will sell off US assets, such as treasury bonds and other financial instruments, should the US pursue action against The Kingdom for alleged involvement in the 9/11 attacks.

Monday morning the energy markets reacted poorly to the developments, with crude oil opening down 4%.

Aside from recent socioeconomic developments, some economists feel that technical indicators may be telling investors to head for the exits.

The first indicator signaling bad times ahead is the Shiller PE Ratio, also known as the CAPE ratio. CAPE stands for “cyclically adjusted PE ratio.” The CAPE ratio measures the smoothed earnings of companies over the last 10 year period. Shiller gained notoriety by announcing that the stock market rally of the late 90’s would come to an end, and it did in grandiose fashion. When we look at the historical CAPE ratio, you can see that it has peaked prior to every major market correction dating back to the Great Depression…

Shiller cape

Many economists believe that since the CAPE has been moving higher since the bottom in 2009 that a market decline may be in our future. Only time will tell.

The second technical that has economists worried is the S&P 500 PEG Ratio. The PEG Ratio is equal to price/earnings ratio of a stock or index divided by the growth rate over a designated time frame (5 years is used for the chart below)…

peg ratios

As you can see, the S&P 500 PEG is at an all-time high. That is not to say that the ratio can’t go higher, stock prices won’t continue to climb or that a market correction is going to start tomorrow, but whenever any index or statistical measure leaves its historical mean, we tend to believe that the numbers will revert back to a historical average rather than create a new normal.

Lastly is the spread between the S&P 500 and high-yield bonds, also known as junk bonds. Readers can note that junk bond prices started falling before the dot com bubble burst, and before the 2008 financial crisis hit. With junk bond prices beginning to fall back in the 2nd half of 2014, some believe that this could be the warning sign for another market selloff…

sp500 v hy

We have not been shy about our holdings over the last 12+ months in the gold and precious metals sector, which has performed very well year-to-date. Readers can note that from the bottom in mid January to present, the Philadelphia Gold and Silver Mining Sector Index is up well over 100%…

xau 2

There are additional signs that say the run may not be over. Not only does the sector tend to perform well as a safe haven investment during times of economic turmoil (which could be on the horizon based off the data provided above), but in addition funds have been flowing in to the metals sector for the entire 1st quarter of 2016…

gold etf

It is too early to determine if a market selloff is on its way or not, but when we watch where the money is moving, we are confident in our investment allocations.

If readers would like to set up a free consultation to discuss our services and your portfolio, we are always happy to do that in person, via phone or by email.

Happy trading!

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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