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Risk Rose Slightly In January, But Has Decreased In February

 

By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. and
Editor of The Global Investment Pulse

Legend follows a number of risk indicators, including at least seven types of VIX indexes, the U.S. and European Financial Condition indexes, Five-Year Credit Default Swap charts (Contractual pricing of debt guarantees by third parties — the higher the price, the more risky.) of a number of countries as well as U.S. and European banking institutions, Golden/Death Cross charts on five major indexes, the TED Spread and Modified TED Spread indexes, Leuthold’s Earnings Advance/Decline Ratio (an indicator of whether we are nearing or in a recession), Leuthold’s Risk Aversion Index (below) and the Put/Call Spread Index.  Most of these indexes rose slightly in January, but have since returned near to their low year-end levels (In fact, most of these low levels of risk had not been attained since mid-2007.).  In some cases, despite the 5.72% decrease in the S&P 500 that ended February 3rd, 2014, (See the Risk Aversion Chart below for specific details.) some risk indicators did not increase at all during this minor downturn.

At present, when looking at the numerous risk indicator charts that Legend follows, despite high valuations for the U.S. stock markets and, to a lesser degree, for other developed stock markets as well as a mountain of margin debt on the New York Stock Exchange (Levels are similar to the 2000 and 2007 peaks.), it does not appear that we are likely to incur a major downturn (losses of 30.0% to 60.0%) or recession in 2014.  However, a possible correction of 10.0% to 20.0% could be in the cards.  Even if this were to occur, there is still a high probability of earning at least single-digit returns for equities in 2014.  Periodic minor decreases similar to the one in January and quick recoveries throughout the year can be expected.  2014 could be a year that thick skin may be required.




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