Bear-o-meter flashes danger

Bear-o-meter risk reward indicator - based on 12 indicators to assess risk vs reward characteristics of the marketsI posted my Bear-o-meter reading a couple of weeks ago when it showed a low- neutral reading of “3”. That is, the indicator suggested a flat market, with some caution. Things have changed – the indicator now reads a bearish “1”, so I thought I’d better update readers.

Just a quick refresher on what the indicator is comprised of. The Bear-o-meter is a compilation of 12 indicators.

  • 2 are trend indicators,
  • 4 are breadth indicators (although I use 2 of them as momentum indicators),
  • 1 is a value indicator,
  • 3 are sentiment indicators,
  • 1 is plain old seasonality (best/worst 6 months).

 

Each indicator can earn a positive, negative or neutral score. Some of the indicators are read twice—for example, I look at slopes as well as relative positions for the A/D line and moving averages.

 

Since my reading on May 1st, we’ve had 2 of the signals move from bullish or neutral to minor bearish. Specifically, The Advance/Decline line is now diverging bearishly vs. the S&P 500. This means that the market is, on the whole, comprised of more declining stocks than rising stocks. The chart below, courtesy of www.freestockcharts.com, illustrates the divergence. You’ll also note the move of the AD line (black line) below the 40 week / 200 day MA (red MA line). That was the second new negative signal on my list.

Bear-o-meter risk reward indicator - diverging advance/decline lines

 

Of note: The VIX was at around 10 – an extraordinarily low reading – less than a week ago.  The VIX has since then moved above 12 –a marginally neutral reading—so I’ll count it as neutral today. If I had read it a week ago it would have pushed the Bear-o-meter into a reading of “0”—which is quite bearish.

Bear-o-meter risk reward indicator - vix volatility index at low reading

Beyond that, most of the signals remain the same. Sentiment via the smart/dumb money spread is negative. We’re still above the key MA’s (200 day, 50 day) and they are sloping up. I will note that the distance between the 200 day MA and the S&P 500 was about 7%. While not a super-overbought level (which I tend to view as a 10% spread between the market and the 200 day MA) –its at around 6-7% spread where you do start to get into a potential for at least a neartermed correction.

Bear-o-meter risk reward indicator - distance between 200 day MA and S&P500 chart line

Conclusion:  we don’t have a massive sell signal in place, but certainly the Bear-o-meter is suggesting more caution at this time.

 

9 Comments

  • What is your estimate or guess on how much a pull-back might occur if it does, i.e. 5% 10% ?

    Reply
    • 2330, 2280,2250 are minor support areas
      2200 is major support if those are broken
      If thats broken….it would be ugly, but likely that represents the worst case from my current perspective. Time will tel…

      Reply
  • G’ Morning Keith

    I purchased TLT May 5th, felt it was nearing support & summer correction was a possibility; good place to hide. So your May 10th blog was comforting, nice to know I was not the only one seeing the potential of TLT. I bought more on the 19th, so far looks like a heck of a good call. Thank you for freely sharing your thoughts with the little guys. Checking your blog has become part of my morning routine.

    Reply
    • thanks Carey–and be sure to forward the link to others you think might like the blog too!

      Reply
  • $SPX
    “BEARISH MACD CROSSOVER (NEGATIVE MOMENTUM DIVERGENCE). BREAK OF MAJOR MOVING AVERAGES SUCH AS THE 20 AND 50 DAY PRESENTING WHAT COULD BE A DOUBLE TOP PATTERN. A BREAK BELOW HORIZONTAL RESISTANCE AROUND 2325 CALCULATES DOWNSIDE POTENTIAL TOWARDS 2250, INLINE WITH THE 200 DMA AVERAGE (2255)”

    EQUITY CLOCK, 18/05/2017

    Reply
  • Something bizarre right now is how oil and gas stocks like TOU, VET, PEY are sliding, while WTI is grinding back towards 50.0. Maybe investors are tired to be fooled by false starts. It feels like we are a week away from a wash-out in that sector.

    As for Canadian banks, many broke their 200 day moving averages, yet, I don’t see coworkers panicking. So I think we’ll get a good correction. As they say, the market likes to cause the most pain to the most people.

    I’m keeping 40% in cash.

    Reply
    • You probably know from my blogs and Investors Digest and BNN conversations that I’ve been bearish on the CDN banks for a while–and I’ve been bearish on the TSX–recall this recent blog.
      Yes, the price of WTI is disconnected from the producers. I guess its a lag –interesting because often the producers lead the commodity’s turning points.
      I guess the market does like to throw curve balls–like you said–causing most pain to most people– I like that quote–thanks for that!

      Reply
  • Hi Keith. I have been watching Stantec (STN.T) recently. I know in the past that you have used this as a trader. It seems to be on the way to it’s lower range and i wondered if you thought it might be getting lined up for a trade
    would appreciate your thoughts

    Reply
    • Kim–normally I don’t cover individual stocks on the blog-I prefer to do it on the BNN shows (next one is June 12)–but I have talked about this one before so I don’t mind revisiting it.
      STN does have a really nicely defined trading range. And yes, its heading back to the bottom of it. $29 support is where I become interested-I like to sell around $36—I prefer to buy as it bounces off of that $29 area–in other words, it hits $29, then goes up to, say, $30 to confirm support is likely to hold. Also–I tend to put a tight mental stop on it–you don’t want it to break $29 support by too much or for too long after you enter the trade. I have given it $28 as an acceptable low range, and will sell if it breaks below that.
      that’s been my approach to the stock in the past–keep in mind that they are influenced by the west coast oil business–not a pretty picture right now. But, that’s why its heading down.

      Reply

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