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
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.