Research

Valens Market Phase Cycle Monitor & Corporate Credit Macro View for October 2018

Market Phase Cycle™ Investing Strategy

Halloween may be around the corner, but don’t be spooked by the market’s moves


Any time the market falls 6%+ in 2 days, investors justifiably ask whether something has changed that should impact their investment thesis. This is when a consistent framework like the Market Phase Cycle™ is most valuable.

That framework says that nothing has changed about the fundamental backdrop that has given us reason to consistently tell investors to “buy the dip” the last several years.

None of the key indicators we monitor have turned more negative. The only factor that has changed significantly in the last month is investor sentiment has gone from being bullish to extremely bearish, a classic sign of capitulation. All of the fundamental indicators that we monitor are giving positive signals.

We are in an environment with strong EPS’ growth, forecast to be 14% a year in 2018 and 2019, and we are seeing ROA’ improving to historically high levels, on a sustainable trend. At the same time, valuations remain low, with the market pricing in ROA’ to remain at 2014-2015 trough levels.

Management teams continue to get more confident about investing in growth, which is likely to continue to fuel a virtuous circle of increasing capex and therefore increasing demand, sustaining expectations for earnings growth.

Lastly, credit fundamentals remain healthy, and cost to borrow remains reasonable, limiting the risk of growth being stifled by credit markets.

Considering all the positive signals we are seeing for US corporations right now, this sell-off doesn’t appear to be a reason to worry about having been tricked by the market. It appears to be a treat for investors who are open to buying the dip yet again.