Among the most important measures of relative strength are the core and cash percentiles, so today, we examine what they are and what they say about the current market environment.

The market has pushed higher over the last several months and years, but it hasn’t been the steadiest path to get where we are today. As investors, doubt is a natural part of investing, so having an objective process to prevent emotion from clouding decision-making is one of the biggest benefits of a relative strength approach. Among the most important measures of relative strength are the core and cash percentiles, so today, we examine what they are and what they say about the current market environment.

The "US Core Equity Percentile" measures how S&P 500 funds rank relative to the 133 other areas tracked on the Asset Class Group Scores (ACGS) page. Currently, the core ranks third among 134 groups, placing it in the top 98.6% of groups. The market’s current level above 90% has historically seen slightly below‑average near‑term returns, but the six-month return and onward for the group are notably above average. Specifically, the group has averaged an 11.6% one-year return, outpacing the 9.8% average by a healthy margin. It isn’t until the indicator moves below 50% that the market has historically experienced below average long-term returns. Every group above 50% has seen a one-year return of at least 11%, whereas periods below 50% have seen significantly lower or even negative returns. Even if the core percentile were to fall, it can represent a healthy consolidation until the indicator moves below the 50% level, or we see similarly bearish movement in other relative strength metrics such as DALI.

In addition to the equity strength, the market’s flight to safety can be an indication of potential future weakness, and the Money Market’s percentile rank within ACGS serves as a gauge of that fear. The percentile looks at where the money market funds group ranks relative to all the other groups within ACGS. Currently, cash is ranked 130th out of 134 groups, placing it in the bottom 2.8% of all groups. That is level is historically low, serving as a positive sign for the broader market, but eventual movement higher could warrant caution. The indicator and its corresponding cash triggers have been an ominous sign of worse things to come when they are in bearish territory. The above numbers look at the average performance when each of the following cash triggers is active:

• MMPR50: A cash trigger that occurs only when the Money Market percentile rank moves above the 50th percentile of ACGS.
• MMPR70: A cash trigger that occurs only when the Money Market percentile rank moves above the 70th percentile of ACGS.
• PR4050: A cash trigger that occurs when the Money Market percentile rank moves above the 50th percentile AND the US Equity Core falls below the 40th percentile.
• PR4080: Occurs when the Money Market percentile rank moves above the 80th percentile AND the US Equity Core falls below the 40th percentile.

Domestic equity performance is worse or negative across both short-term and intermediate-term horizons, demonstrating the cash triggers’ ability to warn of potential downside before it occurs. Meanwhile, all but the MMPR50 see a negative annualized return, with the market averaging a whopping 34.6% annualized decline on days when the PR4080 is active. It should be noted that these numbers are the average forward return from each day the cash trigger is active, in addition to the annualized return on days the trigger is met. To find the overall performance when using the cash triggers, you can read more here.

Lastly, almost every poor one-year period over the last 20 years has been foreshadowed by weakness in the cash and core percentiles. Specifically, there have been a total of 240 days since 2003 where the S&P 500 was down more than 20% a year later. Among those, 236 came when the US core equity percentile was below 45%, while 235 days came with the cash percentile above 15%. As a result, only 2% of those occasions came from strong territory, highlighting the indicators’ ability to signal downside. Granted, most of those down days came during the Great Financial Crisis, but it almost always signaled weakness when it should have. With the core and cash percentiles sitting in much stronger territory than the start of previous 20% declines, we should feel much better about the market holding up for now.