Choppy Waters: KH Market Review

As the third quarter of 2014 closed, we witnessed a dramatic increase in market volatility. Is this the beginning of a market correction, indicative of underlying weakness in the economy, or both?

It appears that economic fundamentals are intact and generally improving; however, market volatility and recent moves in risky assets (stocks, commodities, etc) point to a correction which could portend a longer market downturn. KilterHowling manages portfolios to always focus on downside protection. So while we are not trying to predict the next market move – which is impossible – we are aware of changing conditions and how our portfolios are positioned.

In this post we review some market indicators and recent data.

Market Moves: Is the Turn Here?

Into the end of September we saw:

  • Volatility increase as measured by the VIX
  • Small and mid-cap stocks extended their losses
  • The long-run adjusted price/earnings ratio of the market reach all time highs
  • Bullish investor sentiment decline below it’s long term average
  • The price to sales ratio of the S&P 500 reach levels not seen since 2000
  • A near peak in investor bullishness and use of leverage to invest
  • A decline in the global stock index – the ACWI – below its 200 day moving average.

Each of these is shown in a chart below. Is it time for a market downturn or are we just in choppy waters?

 Volatility, 1 month  

Volatility, 1 month
 

s-p-500-price-to-sales-4aa719415dd9bb02.png
 Small and mid size stocks: 1 month return

Small and mid size stocks: 1 month return

 Cyclically adjusted P-E ratio:

Cyclically adjusted P-E ratio:

 Recent Investor sentiment survey

Recent Investor sentiment survey

 Price to Sales ratio of S&P 500

Price to Sales ratio of S&P 500

 Global Stocks – ACWI – fall below 200 day moving average

Global Stocks – ACWI – fall below 200 day moving average