Beck Market Valuation Index

Proceed With Caution

Equity markets will and have always been profoundly cyclical.  As equity prices increase, investors become excited, even giddy as the markets press higher.  Then, seemingly overnight, markets turns in the opposite direction, leaving investors with a sense of pessimism as markets lose their footing.  I have been a student of the market for decades, studying each move higher and subsequently lower.   Although there is no proven way to “time the market”, you can help place the odds in your favor when you understand the factors that create bull markets (stocks rise by 20 % or more) and bear markets (stocks decline by 20% ore more).

After a decade long run for the bull, it will behoove us to take a look at our history books and uncover the macro environment leading to all previous bear markets.  Looking at every bear market in U.S. history, they were the result of one of three factors:

  1. Recession
  2. Aggressive Federal Reserve
  3. Extreme Valuations

If we know why bear markets occur, wouldn’t it be wonderful if there was a single equity market valuation indicator that combined technical, fundamental and economic analysis into one easy to read index?  This is the primary reason for the creation of the Beck Valuation Index:  (below)

 

Beck Valuation December 2019
 

 

When looking at the above chart, the S&P 500 is the red line (left y-axis) and the Beck Valuation Index is the blue line (right y-axis).  The Beck Valuation Index is represented as an oscillator.  An oscillator is a wonderful technical analysis tool to uncover overbought and oversold conditions.  When studying an oscillator, a data point of 70 or higher represent an overbought condition and under 30, an oversold condition.  The Valuation Index has been a helpful indicator to tell you where the markets are at any point in time.   

The million dollar question is…where are we now in the current market cycle?  As you can see from the chart above, the Beck Valuation Index was greater than 70 before the market corrected in 2018.  Although past results are not a determinant of future performance, my study of technical, fundamental and economic data is telling me one thing:  proceed with caution.  A great analogy I like to use with my clients is the term defensive driving.  We’re not suggesting that you pull off the road, but please, make sure your right foot is hovering over the brake…