A Yellow reading indicates that according to our indicators, the probabilities of being rewarded with an investment in US stocks is reasonable but the risk of loss is medium. Risk is 50% on.
When we have a Yellow reading or "caution", an aggressive investor could be 50% to 60% invested in stocks. A conservative investor might be half that allocation.
A Green reading indicates that according to our indicators, the probabilities of being rewarded with an investment in US stocks is high and the risk of significant loss is low. Risk is on.
When we have a Green reading or "risk on", an aggressive investor could be 90% to 100% invested in stocks. A conservative investor might be half that allocation.
Stock Market Risk Levels
A Red reading indicates that according to our indicators, the probabilities of being rewarded with an investment in US stocks is low and the risk of significant loss is high. Risk is off.
When we have a Red reading or "risk off", an aggressive investor could be 0% to 25% invested in stocks. A conservative investor might be 0% to 15% invested in stocks.
Our stock market risk level indicators are based on a variety of models that we use to assess the probabilities of risk versus reward in the US stock market on a short to intermediate-term basis. We update the risk level each month, based on the close. These indicators are provided as a summary of our general observations about the stock market. The indicators are intended to be a guide as to our current thinking about overall reward and risk opportunities in the capital markets. Our indicators include valuation, trend & sentiment considerations.
- Overall, market evidence continues to be bullish
- Our Risk Level is "yellow" primarily because valuations are extended
- Most of our risk metrics are "risk-on" (momentum, trend and breadth are positive)
- interest rates remain historically low (positive for risk)
- Shiller PE10 is dangerously high (30 versus LT average of 16), suggesting 7 to 10 year prospective returns will be well below average
- Bullish percent indexes on the NYSE & the S&P 500 are high which suggests caution
- The Dow Transports index & the Russell 2000 index (small caps) have rolled over and are diverging from the Dow Industrials. This is a warning sign