Bear-o-meter drops a point

December 10, 20182 Comments

Gotta admit I was a little surprised at today’s reading of the Bear-o-meter. My last reading of the compilation, which was taken at the end of October , showed an improvement in risk/ reward. The Bear-o-meter had moved into the “neutral” risk/reward zone with a score of 4 – that, from its prior reading taken in early October of high risk (a score of 1). Today’s reading shows a drop of 1 point from a month ago. It now reads a score of 3. This is still a “neutral” reading, but it is a little less attractive from a pure risk/reward perspective. That’s because, as you will note on my scale, a score of 3 is borderline “higher risk”. Don’t get me wrong, a 3 is still neutral – but barely so.

 

For those new to my blog: The Bear-o-meter is a risk/reward measurement against the US markets. It is not a pure market timing tool – rather, it gives us an idea of the current environment stacks up against historical risk and reward tendencies. I rank 12 indicators that fall into 5 broad market macro Technical analysis parameters. They are:

  • Trend,
  • Sentiment,
  • Breadth/Breadth-momentum,
  • Value,
  • Seasonality

The Bear-o-meter is ranked 0-8 from least attractive risk/ reward to highest. Three categories, which can be seen on the graphic above, shows high risk, neutral, or lower risk zones—all depending on the recent numeral reading of the compilation.

 

So what’s changed?

Well, just a couple of things.

On the positive – The New High/ New Low market breadth indicator for the NYSE is now showing an oversold condition. That wasn’t the case last month. We got a positive point from that indicator.

On the negative – The % Stocks Above their 50 day SMA’s has moved from an oversold level last month, to a neutral score. That lost the compilation a point. Subtracting one more point and creating our net drop over the month, was the sentiment reading provided by the CBOE Put/Call ratio. This indicator went from “too pessimistic” (providing a positive score of 1) to “neutral” (score 0).

All other indicators are the same.

 

Conclusion

Sometimes the Bear-o-meter gives us clear indications as to the risk on the markets. It flags us to be bearish if the sentiment indicators are showing excess optimism, especially in an environment of overbought markets with narrow leadership (aka late 2017!). My thoughts are that we will remain in a sideways consolidation pattern for some time. Caveat: as noted on my last blog, if the S&P 500 breaks 2540 for more than a couple of days, I might expect a genuine bear market to be verified—and will act accordingly….. aka sell!! Note that we are a ways off from that right now. For now, we are in a relatively neutral risk/reward environment, subject to change. As I emphasized on the last blog:

 “Do not prejudge that that scenario will happen. Just observe, and react accordingly.”

Good luck out there, fellow warriors!

2 Comments

  • Hi Kieth,
    The Trump tweet this morning (China talks going well) is obvious that is trying to ‘play’ the markets, so they do not continue to sell-off. I think the ‘futures’ are being manipulated by big Wall street firms to point to a big positie open so they can continue to sell off their equity positions. This market correction has nothing to do with the China/U.S trade. This is just noise for ‘retail investors’, the smart money is selling into these rallies. The smart money knows, we are in a massive ‘credit bubble’ along with European banks ready to implode. I really believe CNBC does retail investors a disservice as they do not report the ‘real issues’ regarding the global economy. This rally, will fade, and eventually the ‘dumb’ money will realize they are being manipulated by the smart money. Larry Kudlow is also behind this ‘market manipulation’….

    Reply
    • Ray–you very well may be correct here.
      I will say that no matter what happens, the charts will always present an unbiased quantitative way of trading, no matter what the move is based on.
      Like I have said in past blogs–so long as the S&P stays above 2540 the market remains in a consolidation pattern. Should it break – its a bear. In either case, we technical traders know what to do. And that is a very nice feeling, indeed. This type of environment is much harder on the one-plan buy/hold types.

      Reply

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