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

August 23, 2016

Market Phase Cycle™ Investing Strategy

ROA’ forecast revisions are a positive, but excessive investor optimism is a risk

After positive ROA’ forecast revisions, 2016 ROA’ is forecast in line with market expectations, as is growth, implying market expectations are reasonable. However, investor sentiment indicators have all reached excessively optimistic levels, signaling risk for a pullback. Credit indicators continue to not signal a catalyst, however with fully valued markets and excessive investor optimism, upside appears muted and downside risk is elevated.

Current valuations expect ROA’ stability at forecasted 2016 levels, with sustained subdued growth, which is reasonable

After positive ROA’ forecast revision in the past month, 2016 ROA’ is projected to return to 2013-2014 levels, halting the decline in ROA’ seen in 2015. This is in line with market expectations, as equity markets expect ROA’ to remain slightly above 10%, with continued subdued 2-3% Asset’ growth. While traditional valuation metrics are at the high end of warranted values based on the current environment, markets do not appear overly expensive. However, management confidence indicators continue to signal subdued growth, and this is confirmed by fundamental metrics. Without growth accelerating, equity upside is limited.

Investor sentiment indicators are excessively optimistic

Investor sentiment indicators are signaling that investors have reached levels of excessive optimistic. Investors are not focused on risks, as active investor allocation is at multi-year peaks, short interest are at low levels and correlations are spiking as markets make new highs, signifying a blow-off top. This combined with fully valued markets substantially increases the risk of a correction.

Credit fundamentals are supportive of equity markets, limiting downside risk

Even though valuation and sentiment signal potential risks to the downside for the market, none of Valens’ proprietary credit metrics signal risk of a credit crunch, limiting the potential any near-term selloff could turn into a bear market.

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