January 19, 2017

Valens Market Phase Cycle Monitor & Corporate Credit Macro View for January 2017


Market Phase Cycle™ Investing Strategy

Overly bullish investors point to the likelihood of a market dip, but be sure to buy it


Since the December Market Phase Cycle, where we highlighted that short-term sentiment had gotten ahead of admittedly bullish fundamentals, the market has been largely sideways. However investor sentiment indicators have not worked off their excesses, and remain exceptionally bullish, spelling risk for a short-term correction. But continued positive indicators around growth accelerating for the first time in years, and limited credit risk mean that any dip is an exceptional buying opportunity ahead of a 2ndstage bull market.

Investors are exceptionally bullish – increasing risk of a correction

All short-term and medium-term sentiment indicators, including investor equity allocation, short interest, and correlation, have extended to very bullish levels, signaling that investors are not focused on risks. Also, with investor credit balances recently having ramped materially, though off of low levels, near-term buying powder also appears dried up.

Current valuations already price in expectations for ROA’ recovery, and accelerating Asset’ growth

Market expectations currently are for ROA’ to return to a positive trend in 2017, and for Asset’ growth to rebound going forward. Considering strong management execution and improvements in areas of headwinds like Energy, growing management confidence about investing in growth, and potential positive policy decisions, this appears to be warranted, indicating that markets remain fully valued to slightly overvalued.

Credit risk is not showing any near-term warning signs to disrupt the potential for growth

None of Valens’ proprietary credit metrics signal risk of a credit crunch, including near-term debt maturity analysis, iCDSand CDS analysis, and other fundamental metrics, limiting downside risk for the market. Also, while credit quality, as highlighted by delinquencies, is rising, bank lending standards in Q3 2016 eased for the first time in five quarters: a potential positive catalyst for lending growth.

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