On Monday, the capital market seismograph remained unimpressed despite the three-day sell-off on the stock markets. "The seismograph was not in panic mode. The start of a real, fundamental crisis that would lead to a bear market could not be deduced from the input factors at the time," recalls Oliver Schlick, who calculates the model every four days.

Now that has changed. "All input factors have deteriorated further in the past few days. The increase in volatility was particularly extreme. From Thursday last week to Wednesday this week, we experienced five days on which the trading range of the S&P 500 was above five per cent - in some cases even significantly higher. This has only happened very rarely - for example in 1987 and 2008,‘ analyses Schlick and explains: ’This constellation now actually makes large, existentially threatening impacts on the stock markets appear possible and indicates a much more defensive orientation."

As you know, the capital market seismograph distinguishes between three phases depending on the development of various input variables: Green signals a calm environment in which investors can invest in a relaxed manner. Yellow indicates a positively turbulent market with higher fluctuations. Red indicates the probability of negative turbulence. High values threaten a significant price collapse.

A much more defensive approach is recommended, as in this case, regardless of the value of the probability of negative turbulence, but among other things when this probability increases rapidly without significant interruption. "This is exactly the case now. The absolute level of the red probability is not yet extremely high, but the speed of the increase is worrying,‘ explains Schlick and continues: ’Now that some of the price losses on the stock markets have been recovered in the last two days, this is actually not a bad time to sell." After all, the seismograph has been positive without interruption for 21 months and a high equity weighting appears advisable. "Those who followed this trend have benefited disproportionately from the significant rise in share prices since July 2023. Now you could position yourself more defensively and secure the return," concludes Schlick.

The conclusion for investors:

In the combination of the economic component and the valuation of the German stock market, the private wealth stock market indicator currently suggests a corridor for the equity allocation of 55 and 85 per cent of the individually planned equity allocation.

Within this corridor, the capital market seismograph - the third component in the private wealth stock market indicator alongside the economy and valuation - defines the exact equity allocation. As this now suggests a very defensive orientation, which suggests a significant underweighting of the equity allocation, the equity allocation of the private wealth stock market indicator falls from the upper to the lower edge of the outlined corridor. It is now reduced from 85 to 55 per cent.

An example: For investors who consider an equity allocation of 50 per cent to be optimal in the strategic allocation of their assets, the model would suggest investing only 27.5 per cent in equities (55 per cent of 50 per cent results in an equity allocation of 27.5 per cent). The cash portion, 22.5 per cent, is available to buy more cheaply in the event of further setbacks.

Sincerely,
Your
Klaus Meitinger

Note: Despite careful selection of sources, no liability can be accepted for the accuracy of the content. The information provided on the private wealth stock market indicator is for information purposes only and does not constitute an invitation to buy or sell securities.