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

October 26, 2017

Market Phase Cycle™ Investing Strategy

The weighing machine continues along, but the voting machine is overheating

Ben Graham said “in the short-term, the market is a voting machine, while in the long-term it is a weighing machine.” *

Corporate fundamentals are robust, with growing earnings, strong balance sheets, and healthy access to credit. These factors appear likely to remain in place for the foreseeable future, which is likely to continue to drive equity upside. The weighing machine continues to points positively.

But the voting machine is looking a bit overheated, and may likely need some down time… Many investor sentiment indicators currently are at extended levels, even after the recent slight market pause. There is reason to think consolidation is likely in order in the near-term.

Patience to buy the dip is likely the correct position to be in currently.

*Ben Graham did not actually write this, Warren Buffett just said that Ben Graham said this, in his foreword to Graham’s classic Security Analysis

Investor sentiment is overly bullish

Short-term and medium-term sentiment indicators, including correlation and short interest levels, are at very bullish levels, implying investors are not positioned for any downside surprise currently.

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

Strong management execution is driving forecasts for earnings growth in 2017 and beyond. Management is confident about investing in growth and this is leading to increased investment. The market is pricing in a rebound in ROA’ and Asset’ growth, but if companies continue to deliver on earnings growth, it will drive equity upside.

Credit risk is limited in the near-term

There are currently no near-term areas for concern in the credit markets. Access to credit, based on lending metrics, is positive, and corporate balance sheets and debt maturity schedules remain healthy. Absent credit issues, any sell-off cannot turn into a bear-market.

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