After a more than seven-year bull market, investors can no longer rely on an S&P 500 index ETF for easy gains. According to NMG Capitals Ned Gandevani, the level of overall market risk these days means traders should be very selective when it comes to stocks.
Gandevani argues that the uptick in market volatility since mid-2015 is typically an indicator that the market will soon move up to new highs or move down to make a major correction. These days, he believes the risk is to the downside.
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Gandevani points out that the spread between earnings yield and dividend yield for the S&P 500 is currently around 1.97, and it recently dipped below its 10-year moving average. He views this drop as confirmation that the overall market has become a riskier investment.
Considering the dividend-paying stocks is a main asset in q fixed income portfolio, to have a low spread indicates investors for common stocks are taking more risk without proper compensation, Gandevani explained.
Although Gandevani sees downside risk to the overall market, he is not urging investors to go short the market or dump all stocks. He simply advises investors to selectively choose stocks that remain undervalued rather than go all-in on an index ETF like the SPDR S&P 500 ETF Trust (NYSE:SPY).
Disclosure: The author holds no position in the stocks mentioned.
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