Time has arrived to manage risk with more cash in hands until the right moment comes to buy the dip, advised multiple market indicators as U.S. financial markets are rattled by the longest stock selloff in decades.

The “Boom & Shock Index”, jointly developed by Maeil Business Newspaper and South Korean artificial intelligence (AI)-enabled fintech startup Qraft Technologies, on Sunday hit 70, an all-time high in more than two years since it hit 91 on March 23, 2020 when global financial markets were in rout due to the Covid-19 pandemic.

The Boom & Shock Index, which is released every week, is an indication of how Western investors who invest in U.S. stocks should manage their assets for that week. If the index is low, investors should increase their stock holdings and decrease their cash allocation and vice versa if the index is high.

For instance, if the index surpasses 50, it indicates greater market volatility, requiring more active risk management by securing more cash and waiting for the market to rebound.

“R, or recession, fear significantly upped volatility in the global financial market last week” said Francis Geeseok Oh, APAC CEO of Qraft Technologies. “(The Boom & Shock Index) hit 70 mainly due to the fall in one-month momentum for U.S. large-cap stocks and higher volatility in both stock and bond markets.”

The Boom & Shock Index has hinted at a market downturn since the end of April when it surged from 2 on April 18 to 36 early this month. The surge from 49 last week to 70 was due to continued selloffs in U.S. large-cap stocks. The S&P 500 index plunged 18.66 percent to 3,901.36 on May 20 from around 4,800 earlier this year.

Worse yet, global securities firms such as Morgan Stanley and Goldman Sachs are forecasting even further drops, indicating prevalent risk-off sentiment among Wall Street fund managers. According to a survey released by the Bank of America (BoA) on May 17, 6.1 percent of fund managers` assets were in cash, the highest in more than 20 years since the September 11 terrorist attacks in 2001.

However, when the Boom & Shock Index exceeds 50, it can also be an indication that investors should take this as an opportunity to buy shares at a low price.

“For the past five years, the Boom & Shock Index surpassed 50 a total of six times,” said Oh, adding that the index flashed strong warning signals for the six weeks between March 2 and April 6, 2020 when the U.S. stock market crashed. After the S&P500 hit the bottom on March 23, 2020, it more than doubled until early this year.

“Long-term investors may take such AI warning signals as chances for bargain hunting,” Oh said.

Investors are expected to take a cue from U.S. personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, on Friday.

By Moon Ji-woong and Susan Lee

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]