A counter-intuitive signal from Short-Term Risk Levels

Key Points

• Our Short-Term Risk Levels indicator has risen lately
• While this is, in theory, an unfavorable development, we have found at least one iteration of this indicator that tends to bode well for stocks when it rises
• If history proves an accurate guide (never guaranteed), the recent action of the Short-Term Risk Levels indicator is favorable for stocks over the next six to twelve months

Short-Term Risk Level indicator rises (and why that's not a bad thing)

The chart below highlights all dates since 2004 when the 50-day moving average of the Short-Term Risk Levels indicator was above 6.3.

The table below summarizes S&P 500 performance results during the year after each signal date highlighted in the chart above (including all overlapping signals).

In the table below, note that since 2004, there have been 361 days when the 50-day average of the Short-Term Risk Levels indicator was 6.3 or higher. All 361 of these days (so far) have seen the S&P 500 stand higher six months later.

Note that for "all other days" (i.e., all days when the 50-day average for Short-Term Risk Levels), the 6-month Win Rate was 72%.

Towards a more systematic approach

The chart below highlights only those dates when the 50-day average of the Short-Term Risk Levels indicator crossed above 6.3 for the first time in six months.

The table below highlights S&P 500 performance following the signal dates highlighted in the chart above.

The table below highlights S&P 500 sector performance following the signal dates highlighted in the chart above. As with many "bull market signals," the technology sector has significantly outperformed following the abovementioned signal.

What the research tells us

In theory, higher "risk levels" should serve as a warning sign for investors. However, in this case, the performance results "are what they are." Speaking only for myself, as a proud graduate of the "School of Whatever Works" (good ‘ole SWW!) I consider the recent signal to be a worthy addition to the favorable side of the weight of the evidence ledger.