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Investing Indicators: Sep '19

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Jeff Gonion's Blog
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Risk Tolerance Indicator

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

As of Sep 6, the Risk-Tolerance indicator continues its recovery and currently stands at 0.655, slightly off from the recent peak in August.

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 19-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.

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 27 years is shown below.

As of Sep 6, the S&P is in over-priced territory, while the valuation channel continues to decline. It remains to be seen whether or not the S&P will fall with the valuation channel, which will not return to current levels until July 2020.

Because the valuation 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 1.9%).

Looking forward 2 years, the valuation channel is basically flat, implying that further growth from current price levels is not supported by capital flows. 

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