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

August 4, 2017

Market Phase Cycle™ Investing Strategy

When sentiment reaches neutral levels (like now) in a Stage 2 bull, be buyer

In a Stage 2 bull market, momentum pushes stocks higher and investor sentiment rarely reaches negative levels.

Fundamental and management sentiment factors continue to point to a positive trend in underlying corporate profitability and growth, justifying current premium valuations. Also, investor sentiment indicators have moderated from overbought levels, a buying opportunity before momentum resumes.

Lastly, a lack of negative credit signals limit near-term negative catalysts, and downside risk is likely limited.

Investor sentiment has moderated, opening a buying opportunity

Short-term and medium-term sentiment indicators, including investor equity allocation, correlation, and fund flows have come in from levels that signaled an overbought situation, back towards historic averages. In a momentum market, this type of dip presents a buying opportunity.

Fundamental indicators point to earnings growth and fundamental growth trends that drive a momentum market

Strong management execution are driving forecasted ROA’ recovery and earnings growth in 2017 and beyond. Also, improvements in areas of headwinds like Energy, growing management confidence about investing in growth, and potential positive policy decisions, further signal reasons for growth expectations. The market is pricing in the forecasted rebound in ROA’ and Asset’ growth, meaning the market is fully valued to slightly overvalued, but if the companies can deliver on that earnings growth, it will be a catalyst for equity upside.

Credit risk is not showing any near-term warning signs to disrupt the potential for growth though longer-term issues are growing

Several signals, including HY CDS running ahead of fundamentals, negative trends in the senior loan survey, and 2018 debt maturity headwalls for smaller-cap companies, all point to potential credit risk in 2018 and beyond. However, none of Valens’ proprietary credit metrics signal risk of a near-term catalyst for a credit market seizure driving any credit crunch, limiting the risk for any significant sell-off.

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