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The Stock Market Advisory System provides a risk assessment for the aggregate U.S. stock market. The risk assessment takes into account three risk factors: volatility, valuation and momentum. These ideas were developed in the article Triple Threat for Stocks?
The volatility measure is the Chicago Board Options Exchange Market Volatility Index, VIX. The valuation measure is Cyclically-Adjusted Price-Earnings Ratio, CAPE or P/E10, which was suggested by Robert J. Shiller based on earlier ideas of Benjamin Graham. The momentum indicator is market trend measured by the 200-day simple moving average. Data is for the S&P 500 Stock Index.
Risk metrics are the current value of the risk factor divided it’s own mean.
Here is the breakdown for the Stock Market Advisory System. For each of the three indicators, the table shows the ranges for each of the five advisory levels. Admittedly, the breakpoints for the various advisory levels are somewhat arbitrary.
| Color Coded Risk Assessment |
Volatility VIX VIXAVG=19.04 |
Valuation CAPE CAPEAVG=16.42 |
Momentum Index/200SMA |
|---|---|---|---|
| SEVERE Severe Risk of Stock Market Falling |
More than 40 | More than 30 | Less than .90 |
| HIGH High Risk of Stock Market Falling |
30 to 40 | 23 to 30 | 0.90 to 0.95 |
| ELEVATED Significant Risk of Stock Market Falling |
25 to 30 | 18 to 23 | 0.95 to 1.00 |
| GUARDED General Risk of Stock Market Falling |
20 to 25 | 15 to 18 | 1.00 to 1.10 |
| LOW Low Risk of Stock Market Falling |
Less than 20 | Less than 15 | More than 1.10 |
Current Risk Assessment
The latest risk assessment is shown in the table. Two of the risk indicators are elevated (yellow) and one is high (orange).
| Volatility VIX/VIXAVG |
Valuation CAPE/CAPEAVG |
Momentum Index/200SMA |
|---|---|---|
| ELEVATED 1.74 |
ELEVATED 1.25 |
HIGH 0.93 |
Current Yields and Expected Return
No discussion of risk is complete without expected returns. The latest return expectations for the S&P 500 are shown in the table. The average and median dividend yield of the S&P500 was 4.47% and 4.39%. The average and median cyclically-adjusted earnings yield is 7.12% and 6.34%. Both earnings yield and dividend yield are well below the average and median values.
| Cyclically-Adjusted Earnings Yield E10/P (Mean=7.12%, Median=6.34%) |
BELOW AVG 4.86% |
|---|---|
| Dividend Yield D/P (Mean=4.47%, Median=4.39%) |
BELOW AVG 2.04% |
