Valens Market Phase Cycle Monitor & Corporate Credit Macro View for August 2016

August 2, 2017

Market Phase Cycle™ Investing Strategy

Maybe sentiment isn’t too extended – Interest rates and leverage offer upside

Short-term sentiment indicators remain very elevated, and the US equity market remains fully valued. But investors have substantial dry powder available based on credit balances, and based on the trillions of dollars currently parked on zero-interest-bearing debt. If investors start deploying leverage as they have historically and move money away from fixed income, there could be more upside in this market, even though fundamental upside appears limited.

Longer-term investor sentiment is not as extended as short-term indicators

Short-term investor sentiment indicators such as active investor allocation, short interest and correlations are at very extended levels, However, longer-term sentiment indicators like investor credit balances are at multi-year low levels, signaling that investors may have room for greater optimism.

Current valuations signal limited fundamental upside, but ROA’ improvement is a positive market catalyst

For the first time in over a year, ROA’ forecasts are trending more positive in the past two months. Equity market valuations, which are pricing in ROA’ stability at peaks, with continued subdued growth and traditional P/E valuations flirting with aggressive levels, signal fundamental upside may be limited. However, the positive trend in ROA’ revisions is a real potential catalyst for market valuations and multiples going forward which could power the market higher.

Interest rates are supportive of equity valuations and a potential catalyst for further appreciation

None of Valens’ proprietary credit metrics signal risk of a credit crunch, including near-term debt maturity analysis, iCDS and CDS analysis and other fundamental metrics, limiting downside risk for the market. Also, with trillions of dollars currently locked into fixed income assets with negative interest rates, there remains opportunity for a continued reallocation of assets to equities, with substantially higher dividend yields, driving further multiple appreciation.


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