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Investing Indicators: Aug '18


Monthly Risk Tolerance Indicator and S&P Valuation Channel.

The Risk Tolerance indicator tracks investor confidence.

The S&P Valuation Channel predicts the fair valuation of the S&P 500.

Risk Tolerance Indicator

A more detailed description of this indicator can be found here.

As of Jul 29, the Risk-Tolerance indicator stood at 0.847, having fully recovered from the recent low in May.

The indicator ranges between +1..-1, and is based on the volatility spread between traditionally conservative and risky equities. Positive values indicate that investors are exhibiting a tolerance for risk, while negative values indicate risk averseness in the market. The indicator has historically given visibility into changes in market behavior at market peaks, but it is less useful at identifying market bottoms.

The full 18-year chart is below.

S&P Valuation Channel

A more detailed explanation of the S&P Valuation Channel Indicator with a complete 45-year history can be found here.

As of July 29, the indicator is positioned at the high end of the band, indicating the market is starting to get over-valued. Looking forward 2 years, the valuation channel is mostly sideways, implying that further growth from this price level is not supported by capital flows.

The valuation channel indicates whether the index is overpriced or underpriced with respect to (delayed) measurements of financial capital flowing into the economy. The valuation channel for the past 26 years is shown below.

Because the indicator is based on delayed measurements, future values for the valuation channel can be calculated from existing data by estimating the dividend yield of the S&P 500 (approx 1.77%).