The Stock Market Is Poised to Move Lower, This Indicator Reveals

In early October, we discussed the limitations of using a high dividend yield as a tool for measuring the health of a company. We also questioned picking high-yield stocks as a sustainable investment strategy. We specifically looked at the utilities sector and warned investors that sector was faltering and that they should reconsider piling money into high-yielding sectors.

The Reality Shares Guard Indicator is a proprietary market-strength indicator designed to enhance risk-adjusted investment returns by identifying long-term directional changes in the stock market. On Nov. 2, the Guard Indicator showed that the utilities sector had entered negative territory (from a technical standpoint), further eroding any gains made in the first half of the year.

Although the Guard Indicator is relatively new, we have used it to back-test historical market data. Our tests show that over the past 17 years, this indicator would have signaled bearish markets during three periods: September 1999 to May 2003; January 2008 to July 2009; and September 2015 to May 2016. The average return of the S&P 500  index during these three periods was -18.4%.

In these cases, the Guard Indicator would have warned investors of increased volatility and market downturns. 

S&P 500 Performance

Source: Bloomberg, Reality Shares Research. December 1999 through September 2016. Past performance does not guarantee future results.

As of Nov. 9, the Guard Indicator once again turned negative overall as the third of 11 broad market sectors (real estate) entered negative territory, following in the footsteps of utilities and consumer staples. Reality Shares research expects additional sectors to enter negative territory within the next few weeks.

Source: Bloomberg, Reality Shares Research. Data as of November 9, 2016. Past performance does not guarantee future results.

It turns out the utilities sector offered an omen of potential future downdrafts in the market. Investors may potentially heed this warning and reduce some of their equity exposure in order to take advantage of a possible correction.

Guard Indicator Hedge

Click here to learn more about the Guard Indicator and how you can better anticipate future market swings.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

This material is presented for general information purposes only, and does not constitute an offer to sell securities.

This publication has been prepared and issued by Reality Shares Advisors, LLC ("Reality Shares"). Reality Shares makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Without limiting any of the foregoing and to the extent permitted by law, in no event shall Reality Shares, nor any affiliate, nor any of their respective officers, directors, partners, or employees, have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents.

This publication does not constitute general or personal investment advice or take into account the individual financial circumstances or investment objectives, or financial conditions of the institutional users who receive it.

Investing involves risks, including possible loss of principal. Performance data quoted here represents back-tested past performance. Past performance is not necessarily indicative of future results.

Other than disclosures relating to Reality Shares, the information and material contained in this publication has been obtained from sources that Reality Shares believes to be reliable, but Reality Shares does not represent or warrant that it is accurate or complete.

Reality Shares, Inc. keeps certain activities of its business units separate in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of Reality Shares, Inc. may have information that is not available to other business units. Reality Shares, Inc. has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. No representation is being made that any investment product will achieve performance similar to those shown.

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