Anxiety is running high as financial media keep focusing on the Fed preparing to raise rates in September, on China, and on the “death cross” in some technical charts. Understandably, advisors are concerned as well – we answered several questions from our advisor clients in the past week.

At times like this it’s especially important to keep emotions out by using a tested, objective process. As a tactical manager, Model Capital is focused on protecting against significant market downturns. Because fundamentals drive equities in the mid-term (over 3-9 months), we use a consistent set of 22 fundamental factors to forecast market trends. At this time, our 6-month forecasting model is very positive on the S&P 500, primarily based on economic factors. The primary positive driver of the model’s outlook is the strong U.S. housing market; the job market is very strong as well. And yes, the market is somewhat overvalued – the Valuation component is negative in our model, but not as high as to offset the positive effect of economic factors.   

According to the AAII, for example, the ratio of bearish to bullish individual investors stayed above 115% for two months in a row – the first time this happened since Oct-Nov 2012 (see chart). Sentiment is contrary in our statistical model – high bearishness tends to precede higher market returns, as vice versa. The AAII Bears/Bulls Ratio in particular has a +2.4% contribution as part of our forecasting model.

To state the obvious, equities are volatile – the ride is often rough. Sit tight. When sentiment turns back to bullish, gains could be quick as people need to reinvest in equities. If you’d like to receive our latest Tactical Strategies report which includes much more details, please contact us.  

Model Capital Management LLC is a tactical investment manager. Please review the following pages for more information on Model Capital’s approach to tactical investment management and our tactical management strategies.