I am happy to present this week’s market commentary from FormulaFolio Investments. The goal is to give our clients and friends a simple way to see everything they need to know about the financial markets on a weekly basis, in 5 minutes or less. After all, finances should be simple, not complicated.
The broad markets continued falling for a second straight week to begin May, adding slightly to losses since the YTD highs of mid April. Even after the small losses of last week, most indexes remain positive (modestly) for 2016.
FormulaFolios has two simple indicators we share that help you see how the economy is doing (we call this the Recession Probability Index, or RPI), as well as if the US Stock Market is strong (bull) or weak (bear). In future posts, I’ll write more about how these indicators are built and why we feel they are important.
In a nutshell, we want the RPI to be low on the scale of 1 to 100. For the US Equity Bull/Bear indicator, we want it to be at least 67% bullish. When those two things occur, our research shows market performance is strongest and least volatile.
The Recession Probability Index (RPI) increased slightly in February, signaling a modest slowdown in the US Economy. The Bull/Bear indicator remains 33% bullish (67% bearish). Historically, this means our models think there is a slightly higher likelihood of stock market declines in the near term (think <18 months).
The S&P 500 has been falling back toward its downtrend ceiling the past few weeks after reaching a YTD high of over 2,100 in April. This is something to keep an eye on as we have run into resistance near the mid 2015 all time high levels.
If there is further movement to the downside and the ceiling is broken, it could signal yet another test of the current downtrend floor level near 1,825. Should the market stay above the downtrend ceiling near the 2,025 level, it could signal a new floor / support level which would likely lead to gains above the 2016 & all time highs.
This week’s chart
While market trends are useful for study, there’s always more to investing than just the charts. We still need to be a little cautious about earnings (they are broadly declining), the dollar (broadly declining also, sending oil back up), and an election that is right around the corner.
Most importantly, as investors we need to stay committed to our long term financial goals. All the short term news and market movements can be the most debilitating of all when it comes to making sound investment decisions; especially if we allow them to influence knee-jerk decisions.
More to come soon. Stay tuned.
Derek Prusa, CFP®
Senior Market Analyst