Here’s What Our Proprietary Weiss Ratings Market Barometer Can Tell You About this Market

You may not need a weatherman to know which way the wind is blowing. But when it comes to determining stock market direction, our proprietary Weiss Ratings Market Barometer can definitely help!

If you recall, I first told you about our Barometer three months (and about 900 Dow points) ago. I wrote at the time that “the future looks bright” and that “the markets are structurally still on strong footing.” Sure enough, the positive trading action since then confirmed our analysis.

So where do things stand now? And how can you put the Barometer to work in your investing strategy? Well, as a refresher, Mike Larson and I came up with the Barometer to provide investors with a clearer overall picture of macroeconomic, credit, and financial market conditions. The goal was to analyze data trends on an absolute basis and in conjunction with other indexes.

Specifically, our Barometer includes data on five financial indexes, three credit indexes, and 15 economic indicators. We evaluate how those indicators have changed over periods of 1, 3, 6 and 12 months, and determine if the changes are statistically significant enough versus historical volatility. If so, we label the appropriate indicator as positive or negative in an underlying table.

Here is what that table looked like as of the end of April:

You can see that stocks have stopped going up with the same ferocity as six and 12 months ago, and that slightly more stocks are trading in bear territory (defined as being down more than 20%). A lot of those underperforming stocks are in the energy space or are small caps. At the same time, the Weiss Buy/Sell Ratio is improving nicely – a move that stems from improving fundamentals, better earnings growth, and stronger cash flow generation.

In terms of economics, sentiment is improving and there are some encouraging signs with regards to industrial production, unemployment, and building permits. But, as I mentioned previously, other “hard data” hasn’t been as good. Retail sales are flat, ISM readings are down, and payrolls whiffed last month.

Meanwhile, credit indicators are signaling caution. We haven’t seen further narrowing of the spread between yields on junk bonds and Treasuries, and Treasury yield curves are flattening. That means the bond market is expressing skepticism about expectations of strong growth and inflation.

So how do we look overall? Neutral. The Barometer isn’t saying you should go sell all of your stocks and be outright short … but it is suggesting that conditions are more mixed now than they were before.

Or in other words, stay nimble out there and be sure not to get too overextended.

Best wishes,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.