Monday , 17 June 2024

These 6 Factors Suggest Avoiding Equities in the Foreseeable Future (+2K Views)

 The six factors discussed in this article suggest a near-term peak for equity markets, avoiding fresh exposure to equities at these levels and selling some of one’s equity holdings. Long-term investors can still ignore the volatility and buy quality stocks, however, it would make more sense to buy the same stocks after the markets decline 10%-15% than buying it at current levels. [Let me explain more fully.] Words: 665

So says the Economic Fanatic ( in edited excerpts from an article posted on Seeking Alpha.

Lorimer Wilson, editor of (Your Key to Making Money!) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say, in part:

Factor #1: The VIX

The first factor pointing to a possible reversal in the S&P 500 index is the fact that the VIX has touched a five-year low of 13.45 at the end of last Friday’s trade.

Click to enlarge

Five year chart for VIX

VIX, also known as the fear index, is a measure of the market participant’s expectation of volatility over the next 30 days. A low VIX would, therefore, mean low volatility expectation and should not really concern investors.

Factor #2: The VIX in Relation to the S&P 500 Index

My caution, however, comes from the observation and behavior of the VIX in relation with the S&P 500 index in the last 10 years [see below].

VIX and S&P 500 10-year Chart

As the chart shows, there has always been a reversal in the VIX index from lower levels and it has been associated with decline in equity markets. The period of 2003-07 was an exception as a globally synchronized boom was underway and equity markets trended higher.

Of course, just the past trend does not make me believe that the VIX will increase leading to a decline in stocks. Apart from encouraging statements, there has been a lack of action by central bankers. The global economy is also on a downturn and the next 3-6 months will witness policy action to support the economy and markets. These events do lead to increased volatility and markets can correct from near-term overbought levels.

Factor #3: S&P 500 P/E Valuation

There are several reasons to believe that markets are overbought. Before I discuss that, I would like to mention that markets are not terribly overvalued when it comes to P/E valuation. The markets are currently trading at 14 times TTM earnings.

S&P 500 four year chart

However, markets can correct after an 11% rally in the last two months in the absence of any significant positive cue. Markets are also trading at a four-year high, and it is concerning to see markets at these levels amidst a global slowdown.

Factor #4: S&P 500 Trading Volumes

Adding to concerns is the fact that the rally has been associated with declining volumes. I am not an expert technical analyst. However, I do understand that a market rally on low volumes is not a great sign.

S&P 500 trading volumes

Underscoring my point of near-term overbought markets are the next two charts.

The first chart gives the S&P 500 high-low index and the second gives the S&P 500 bullish percent index.

Factor #5: The S&P 500 High-Low Index

The S&P 500 high-low index is calculated by taking new highs divided by the new lows made in the S&P 500 index. The index has surged to 98.96 as of August 17, 2012, from a low of 43 in May 2012. Clearly, [as can be seen in the chart below,] there are a significant number of highs being made in the S&P 500 stocks compared to the number of lows. In general, this is a sign of markets topping out in the near term.

S&P 500 high low index

S&P 500 bullish percent index

Factor #6: The S&P 500 Bullish Percentage Index

The S&P 500 Bullish Percentage Index [see chart above] also points to overbought conditions. In general, a reading of over 70 indicates overbought conditions and a reading of over 80 indicates an even stronger overbought signal. Currently, the bullish percentage index is exactly at 70.


While I believe the S&P 500 index will do reasonably well over the next 3-5 years the above 6 factors combined make a strong case for avoiding the equity markets in the foreseeable future. Long-term investors can still ignore the volatility and buy quality stocks, however, it would make more sense to buy the same stocks after the markets decline 10%-15% than buying it at current levels.

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Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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