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

August 3, 2017

Market Phase Cycle™ Investing Strategy

Corrections remain buying opportunities due of lack of investment alternatives

Correlation levels have spiked recently, signaling potential for continued near term volatility, especially with near-term sentiment indicators stretched. 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. Even with current fully valued equity markets, a rotation away from fixed income into the equity markets could facilitate upside.

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

Short-term investor sentiment indicators such as active investor allocation and short interest are very extended, while correlation increases are signaling increased volatility. 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 three 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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