Back in March 2008, I shared an odd piece of research with subscribers from Bespoke Investment Group.
It’s called the Torture Indicator.
Sounds ominous doesn’t it? Well, it proved to be!
The extreme reading at the time preceded a 54% drop for the S&P 500 Index from mid-May 2008 to early March 2009.
Why bring this all up today, some four years later? Simple. Because, once again, uncertainty abounds.
I mean, we kicked off 2012 with billionaire investors like Warren Buffett declaring stocks cheap.
Yet, at the same time, other famous investors like Jim Rogers and Jeremy Grantham were sounding the alarm bells. (Rogers predicted a depression. And in reference to high corporate profits, Grantham said, “The implication for the stock market is ugly.”)
So I figured now would be an opportune time to consult a reliable leading indicator to sort through the conflicting advice coming out of Wall Street’s best and brightest.
The End is Not Nigh!
There’s nothing fancy about the Torture Indicator. It simply measures the year-over-year change of the S&P 500 Index, the U.S. dollar, and the inverse of oil, gold and the CRB Commodity Index.
The thinking is straightforward, too. If the end of the world is nigh, stocks and the U.S. dollar should be falling, while oil, gold and commodities should be rising.
In other words, our collective net worth would be falling (represented by stocks and currency), while our costs of living (represented by commodity prices) would be rising. Hence the name, “Torture.”
Given all of the uncertainty in the market headed into 2012, though, we shouldn’t be feeling tortured at all.
As you can see, Bespoke’s Torture Indicator stands at -4.5%. To put that in perspective, the indicator fell to a low of about -45% in mid-2008. And its long-term average stands at about -2%.
Ultimately, the only time we should be worried is when the indicator trades at extremes, as it often indicates a major turn for the market. But the indicator’s not trading near either extreme currently.
So rest easy. There doesn’t appear to be any “torture” on the horizon.
And other market indicators are similarly flashing reassuring signs…
The VIX Volatility Index, for instance, is trading below 20. As my colleague, Karim Rahemtulla, pointed out, “During the crash of 2008/2009, the VIX moved to a level of almost 90.”
The average daily price swing for the S&P 500 is also at much more bearable levels – at about 0.79% per day, compared to a high of 4.02% per day back in December 2008, according to Bespoke.
Two Safe Investments for the Next Decade
They rank as the two least volatile stocks in the S&P 500 over the last decade. That shouldn’t be a surprise, really, considering both companies provide consumer staples – products we need no matter what’s going on in the world.
Both sport respectable yields, too. At current prices, Wal-Mart yields 2.4% and Kimberly-Clark yields 3.9%. Even better, both companies have increased their dividends every year since 1974.
Bottom line: From the ordinary to the obscure, all stock market indicators are pointing to less volatile times in 2012. If you’re still nervous, consider looking for safety and income with two battle-tested consumer staples stocks, instead of in cash.