Hulbert: New Indicator Shows Now Is Time to Be Cautious on Stocks

Monday, 23 Sep 2013 08:47 AM

By Dan Weil

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The stock market may have hit record highs last week, but a new indicator suggests investors should dump their riskiest stocks, going for blue chips instead, says Mark Hulbert, editor of the Hulbert Financial Digest.

The new indicator was created by Vincent Deluard, an investment strategist at Ned Davis Research, Hulbert writes in The Wall Street Journal.

Deluard's index consists of the sum of the inflation rate, the unemployment rate and the Standard & Poor's 500 Index price-earnings ratio, based on trailing 24-month earnings.

Editor’s Note:
5 Reasons Stocks Will Collapse . . .

As you might guess, the stock market performs better when the index is low — when inflation, unemployment and stock valuations are low, Hulbert explains.

Since 1930, the index' median level registers 26.7, according to Deluard. When indicator totals are below the median, the S&P 500 has generated an average annualized return (including re-invested dividends) of 14.6 percent.

But when the indicator stands above the median, the S&P 500 has offered a return of only 4.7 percent.

It now stands at 28.1, Hulbert notes.

"[T]he investment implication is to exercise caution. Consider the stocks that performed well in the past when the indicator was close to where it stands currently," he writes.

So which stocks have performed best in the past when the index was close to current levels? Large-cap value stocks, a Hulbert Financial Digest analysis shows.

One factor that could affect stocks this week is the prospect of a government shutdown. That would happen if Congress and the president can't agree on a new budget by Sept. 30.

"It appears a government shutdown is ripe," Mark Luschini, chief investment strategist at Janney Montgomery Scott, tells MarketWatch. "Investors need to be cautious about that."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

Related Stories:
Doll and Yardeni: The Positives Are Still Adding Up for US Stocks

Tom Hutchinson: Turn to Dividend Stocks for Income

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