On an absolute basis, this indicator is actually somewhat encouraging. Although it remains high, it has pulled back to less extreme levels. On a change-over-time basis, however, downturns in this indicator have typically preceded market pullbacks, and once again, we see that here.
Data suggests a pullback, not a crash
Based on these five indicators, a deeper downturn is very much in play. The question is whether this will be a long-term crash, like 2000 or 2008, or a shorter-term pullback like 1987, 1998, or 2011.
At this point, a pullback continues to appear more likely. Not only do the economic fundamentals look solid enough to avoid a crash, but crazy valuations and sudden changes in margin debt just aren’t there. A pullback, yes, but not a crash, at least based on the data so far.
That said, these metrics provide useful guidance, and I’m thinking of doing this analysis on a monthly basis. In conjunction with my Economic Risk Factor Update, it should provide a broader perspective for investors. What do you think?
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan.