- September and October are historically bad months for stocks, with increased volatility and falling asset prices.
- The OFR Financial Stress Index is a useful measure for stress in financial markets, with a positive index indicating above-average stress levels.
- The US FSI index is currently hovering near 0, suggesting caution but not yet reaching a sell signal, while the Hang Seng Index shows signs of stress and is a cautious sell.
In this article, the author discusses the OFR Financial Stress Index as a measure of stress in financial markets and its potential impact on asset allocation decisions. Here are the key points from the article:
- September and October historically tend to be challenging months for stocks, characterized by increased volatility and falling asset prices.
OFR Financial Stress Index:
- The OFR Financial Stress Index is a composite index that combines 33 financial market variables to measure stress in financial markets.
- A positive index reading indicates above-average stress levels, while a negative reading suggests less worrisome stress levels.
- The US FSI index is currently hovering near the 0 mark, indicating caution but not yet reaching a sell signal.
- Historically, a reading of 0.5 or above for the US FSI index marked a turning point and suggested negative equity returns.
- The author suggests that a cautious buy position for US stocks is appropriate until the FSI index reaches 0.5 or higher.
Hang Seng Index (Asia Pac Stocks):
- The Emerging Markets FSI index can be applied to the Hang Seng Index.
- When the Emerging Markets FSI index is below -0.009 (almost 0), it indicates a buy signal for the Hang Seng Index, and when it’s above that level, it suggests a sell signal.
- Currently, the Emerging Markets FSI index reads 0.323, indicating a cautious sell position for the Hang Seng Index.
- The author emphasizes the importance of following the rules-based systems rather than trying to anticipate results.
- For US stocks, the market is not yet showing significant stress levels that would warrant panic about equity positions, but it’s essential to monitor the index for signs of increasing stress, particularly during October.
- In contrast, the Hang Seng Index has consistently shown signs of stress in the financial system, suggesting caution in over-weighting stocks in emerging markets until stress levels decrease.
In summary, the article provides a framework for using the OFR Financial Stress Index to assess stress levels in financial markets and make asset allocation decisions, with a focus on both US and Asia Pacific stocks.
