"Black Clouds on Wall Street - Selling."
A week ago the team around Professor Dr. Rudi Zagst and Oliver Schlick wrote to us. The capital market seismograph is still giving the green light for equity investments: "But that can change very quickly now. We have our finger on the sales button",
Today is the day. "The probability of a bear market has increased significantly. This has triggered a sell signal in our model. The model recommends significantly reducing the current equity quota," says Oliver Schlick.
As you know, the scientists distinguish between three phases in the US equity market: "green" (quiet market = buy), "yellow" (turbulent market with positive expectation = invest, but with hedge) and "red" (turbulent market with negative expectation = do not invest).
Last week, the likelihood of a quiet, positive US equity market fell from an extremely high 97 percent to 86 percent and now to 70 percent. The probability of a turbulent, volatile market with a positive trend ("yellow") rose from two to five percent to nine percent. The probability of a bear market ("red") increased from one percent to nine percent and now to 21 percent. "Thick black clouds now hang over Wall Street. It's simply too risky to stay completely invested," explains Schlick.
Since August 2016, the seismograph had continuously given the green light for stock investments on Wall Street. Since then, the various stock indices have risen by between 10 and 60 percent. Now this long, positive phase is over for the time being.
"This does not mean that a massive crash must now take place", Schlick continues, "there was a similar development in the late summer of 2015, for instance. Stock prices on Wall Street corrected by around ten percent during this increase in the likelihood of turbulence and then fluctuated sharply back and forth for only about a year without any further massive collapse.
It is not a question of an exact forecast of the index levels, but of the probabilities for the future development of the markets. "With a thunderstorm probability of 20 percent, it can of course stay dry all day long. But would you therefore go on a day hike without rain protection," asks Zagst.
The primary goal in the development of the seismograph was to protect investors from sliding into the next major downturn unchecked. "We noticed that the world was repeatedly surprised by massive price declines of between 30 and 60 percent - we wanted to change that," explains Zagst. If the probability of turbulence on the markets increases, this should initially provide an impetus to question one's own portfolio structure: "Am I perhaps too offensively positioned? Do I consciously take the risks in order to use the chance of a counter-movement? Or do I now change my portfolio structure and take some of the profits with me?
Last year, Oliver Schlick translated the scientists' findings into a concrete allocation model. "It's not enough to just sensitize investors. I wanted to derive concrete, rule-based instructions for action from the signals of the seismograph. (read more: Cool guys, private wealth, 04/2017)
Private wealth readers can now follow the result live. "Such a rapid change in the probability for a bear market from one to 21 percent signals: There's something in the bush," Schlick makes clear. "That's why we are playing it safe, reducing our equity exposure and looking at future developments from the sidelines. If the black clouds were to disappear, we would quickly increase our equity exposure again. Then maybe we'll have to buy back the stock a little more expensive. But I like to pay this price for the certainty that I will no longer be affected if there is lightning and thunder within the next days, weeks or months.
The seismograph signals further turbulence on Wall Street in the coming weeks. Should this change, we will inform you immediately at this point. We now await the results of the ifo business climate on 25 January with great interest. Should ifo business expectations then decline for the third time in succession, this would also be a sell signal for the private-wealth stock market indicator.
Note: Despite careful selection of sources, no liability can be accepted for the accuracy of the content. The information provided in private wealth is for information purposes only and does not constitute an invitation to buy or sell securities.