There are two indicators I would like to address today that describe the market landscape almost completely. These two readings tell us more about the market environment than most the other different indicators. The Money Market Percentile Rank (MMPR) means the level of strength of the Money Market asset class versus all other asset classes. Core Percentile Rank (CorePR) means the level of strength of the cloud of S&P 500 US stocks “at” versus all other asset classes. This knowledge gives us insight into what type of market we are experiencing currently.
Here, as an example of the readings in the 2007-2008 timeframe, you can see the MMPR average reading with the bolder red line and you can see the CorePR average reading with its bolder blue line.
For U.S. equity investors, a high blue line is a positive condition and points to a beneficial period for the market as the Core of the equity market is pumping on all pistons with larger cap US stocks providing a stable platform for other asset classes. A low blue line points to a dangerous period for equity investors.
A low red line is beneficial to all types of investors as the MMPR readings show that Cash is not in favor; rather, all other asset classes are preferred. A high red line means that Cash is more dominant and the average investor should not be participating in the mainline equity market.
As shown on the graph, the blue line or the CorePR fell below 40% at the end of the summer of 2007. This turned out to be disastrous for the average investor because their main anchor of investment is the Cap Weighted S&P 500. The blue line was also below the red line in mid-2007 demonstrating that the Core of the US market was not even as strong as a money market fund. As the blue line sank deeper and deeper, any strategy pegged to the long side of the S&P 500 benchmark was doomed. By the first day of 2008, most investors were in trouble, but didn’t realize it yet because the real burn down was eight or so months further down the road.
By the 4th quarter of 2007, the red Line was already dominating the blue line and its voyage through 2008 ultimately reached a virtual 100%, which meant that 100% of any investors holding the long side of the equity market were at maximum risk. Virtually all investment strategies failed miserably as the correlations of numerous asset classes (excluding Cash) moved to 1.
Keep in mind that in 2007, no one was concerned with the dark cloud that actually loomed ahead. As we stand today the CorePR is at 70%, an excellent strength level. The MMPR is about 5%, an excellent level that describes the big appetite for the market to want to take risks. The current “landscape” is seen as positive. Remember, however, that when things go wrong, things go wrong fast.
Until next time, cheers!
Jim