Bear-o-meter flashes high risk signal

In June, we saw the Bear-o-meter flash a largely flat reading from its prior neutral reading in May. The indicator went from “4” in May to “3” in June.

My, how things can change. We’ve seen a pretty dramatic move by the Bear-o-meter. Its flashing very, very bearish “0” right now.

What this means is that, all things considered, the market presents more relative risk than it normally does. Keep in mind that markets ALWAYS have risk. And they ALWAYS have upside. Bear-o-meter readings are a relative relationship between the two. Todays “0” reading suggests higher than normal risk. But its not saying that markets will unquestionably fall. The risk of a decline is higher than the potential for increase – but either scenario is still in the cards. Let’s examine why the Bear-o-meter is reading so negatively at this time.

The big changes were those in the sentiment and breadth departments. As noted on this blog – we are seeing a divergence between the movements of the Dow Industrials and Rails. Rails are diverging – meaning they are not confirming the new highs on the Industrials. This suggests a break in the Dow tenet that the averages must confirm each other . That’s changed from early June, where they were both in sync.

 

Next, we see that the number of new highs vs. the number of new lows for NYSE stocks are indeed healthy – but they are “too healthy”. In other words, we have too many stocks on this broader index making new 52 week highs. This is more of a momentum problem than a breadth problem – given that you actually want broad market participation. However, as one of my clients once said – you need to be worried when there are “too many happy faces” in a crowd of investors. Sooner or later, some of these stocks gotta give back.

 

Speaking of “too many happy faces”- you really don’t want to see too many happy dumb-investor faces (retail, mutual fund, and small-lot traders) at the same time as you see too many concerned smart-investor faces (institutional players, commercial hedgers, large traders). And that’s what we have going on right now. Smart/dumb money (www.sentimentrader.com) has moved from neutral to bearish recently. I will point out that this indicator has typically gone deeper into the red zone (too many confident dummies vs. smarties) before markets turn negative. Note the deeper levels seen before the drop earlier this spring, and that of January 2018.

 

Conclusion

I’ve gotta stick with my program here. Right now, there are a few more signs pointing towards risk. For that reason, I am looking to raise a little more cash and hold defensive securities. Sentiment may need to get a bit deeper into the red (ie markets may have to rise a bit more), as noted above, before anything happens. But all in, the environment is less attractive than it was just a month ago. Caution might be advised.

9 Comments

  • And yet the S&p seems to be holding above its recent breakout point

    Reply
    • Yes–markets could go on to new highs. As I note–the Bear-o-meter only indicates relative risk. Its not an absolute. Further, I noted that the smart/dumb indicator usually goes deeper into the “sell” zone before you get a market reversal, should one actually occur. Either way – its something to keep your eye on.

      Reply
  • Keith things are just starting to look better for your call on silver.

    Silver demand is just starting to be on the up & up, ETF starting to load up, time to go buy some silver coins which I still hold some in my collection.

    https://www.kitco.com/news/video/show/Kitco-NEWS/2469/2019-07-03/Back-Up-The-Truck-And-Stack-Silver-Says-Rich-Dads-Robert-Kiyosaki#_48_INSTANCE_puYLh9Vd66QY_=https%3A%2F%2Fwww.kitco.com%2Fnews%2Fvideo%2Flatest%3Fshow%3DKitco-NEWS

    https://www.kitco.com/news/2019-07-04/Gold-Silver-Precious-Metals-Daily-News-Briefs.html

    Market Nuggets
    Silver Sees Largest Daily ETF Inflow In A Year: BMO
    Anna Golubova
    Anna Golubova Thursday July 04, 2019 09:09

    Kitco News

    Share this article:

    Cheers & all the best,

    Marc in Gatineau

    Reply
  • Keith, a week ago I left a comment that the S&P would break 3000 in a week ….and here we are. I’m afraid in this case, your Bear meter is wrong. My indicators are showing the general direction of the S&P 500 is up into early Aug. Of course there will be some ups and downs along the way. This suggests the fed WILL cut at the end of July…..cheers chris

    Reply
    • Chris–it is not a case of wrong or right. The Bear-o-meter measures risk. Note that I stated “Todays “0” reading suggests higher than normal risk. But its not saying that markets will unquestionably fall.”
      You can possibly get drunk and run across an interstate highway at rush hour and still make it across. But your risk of doing so without dying under those conditions- vs crossing a quieter road in quieter driving times with no alcohol in your system is better. The busy road, alcohol and timing of your crossing decrease your likelihood of crossing successfully.
      Still– sober and all, you could get clipped by a car you didn’t see on a quiet road.
      In either case–you have potential risk and potential success. The only difference is that the odds are different.

      Reply
  • Are stocks like pipelines, telcos considered defensive? With the us job numbers today are these stocks more vulnerable with the potential of interest rates going higher?

    Reply
    • Defensives are typically utilities, staples, telco’s (per your list). Pipelines…these days…not sure if they are defensive (!)

      Reply
    • I 2nd Keith’s opinion. I could be wrong. The rumors are the European environmental groups want to stop OIL SAND production by 2045 (? not sure about the target year) An oil pipeline without oil to ship is just dead asset.

      Reply
      • James–I have heard some banter surrounding the environmental groups trying to shut down the oil sands. I haven’t much insight i can offer on that talk–other than its not the first time I have heard such stuff. Probably explains the unusually wide spread in our oil vs wti

        Reply

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