Bear-o-meter for October 3, 2023

Quick n dirty update on the Bear-o-meter. Then some other stuff.

The Bear-o-meter is my risk/reward quant model that we at ValueTrend use in conjunction with our trend and economic analysis when viewing market macro’s. Do a search on this blog if you want to learn how it works. Basically, if the score is low, risk is higher than reward, all things considered. Visa versa if the score of the meter is high. The three quadrants on the diagram below help you out with understanding the general atmosphere of the market risk.

Last month the meter measured at the low end of higher risk (3). We did get a selloff, so the meter was accurate. As of today, the meter has lost another point to put it firmly in the risk zone. Its sitting at 2. It lost 2 points for the SPX moving below its 50 day SMA, and for the cumulative AD line moving below its 200 day SMA. But the meter gained a point after moving from a predictive negative divergence between the transports and the industrials, to a more coinciding trend between the two.

The only factor in the meter that I wish to address today is the main trend indicator, which is the SPX vs its 200 day SMA. The market is, as I type this, very close to its 200 day SMA!! That line lies right at the 4200 support level and target I have harped on since July. If this SMA does not hold (4200) – and the SPX stays below it for a few days, that will subtract 2 points from the Bear-o-meter. As such, the meter will move to a rare “0” score. Last time it did that was in early April 2022. Recall that the market then fell another 20% from that exact point! Do a search on this blog to see for yourself how accurate that call was.

We’re not there yet. But, if there’s ever a time to keep your eyes on the ball, this is it folks. So..in bold and capitalized:

WATCH THAT SPX 4200 DOES NOT BREAK BY MORE THAN A WEEK!

With rates high, why buy stocks?

“Open Question – you’re 65. In the summer of 2021 you put $1 million in the stock market. You were down 20 to 40%, and now you’re back to even – but this time short term US Treasuries pay 5.10% vs. 0.25% back then. What do you do?” Larry McDonald.

I posted the question of “why buy stocks?” on a recent blog. I received a number of enquires regarding that question, including one that we addressed on the Ask Us Anything – Answers Video which is coming out shortly.  That question was answered here.

One thought on that subject: I am convinced that we are entering into an era of higher inflation (yes, inflation will come down, but not to 2% as I regularly repeat). I’m also convinced that we are in a new commodity cycle. This is like a bull market cycle. Not every stock sector rallies, and some fall during bull cycles. The stock market rotates through sectors while in a bull cycle. Healthy returns (better than bond yields) can be made in both bull and bear stock markets. Same with commodities- they rotate, and can be traded for fun and profit. 

Point is:  commodities as a group periodically outperform stocks as a group… and vis versa. I believe we are in the former. You’ll see commodities rotate like stock sectors. I expect commodity outperformance for a number of years. You’ve seen me post this chart below. Here it is again. The probability of a longer termed commodity cycle with relative outperformance to stocks is likely. Albeit with rotations and pullbacks along the way. Enjoy the ride!

 

BTW…I am not alone in my belief that we have seen the last of the rate hikes. This, despite one Fed Chair calling for 2 more hikes. Writing on the wall suggests a recession (mild or severe–hard to call) is coming, and that implies hiking is done. Rather than listen to me blabber on about WHY a recession is quite probable …. Here is a summary of the logic behind that sentiment: 6 Reasons Why a US Recession Is Likely — and Coming Soon – Bloomberg

So….having noted the potential for a recession/ slowing growth, does that mean inflation is crushed?  Is the base case for materials and commodities now moot? Well, keep in mind that the UK just entered into Stagflation. This has been ValueTrend’s base case for Canada and USA. Sure, inflation will likely continue to fall as the effects of current high rates are felt. But, NOT TO 2%! Factors such as OPEC cutting oil supply and now, shale producers cutting supply will drive prices higher. Of note: the shale producers stated they will stop new exploration given the crushing green mandates I spoke about here.

Why does OPEC and decreased shale exploration matter? Answer: decreased supply and higher prices. Recall that energy costs are spread throughout the economic supply chain, starting with production, then transportation, then distribution. That adds pressure on inflation. That, along with the mass labor union movement for higher wages. All in, inflation will decline. But not to the 2% levels wistfully hoped for by NA governments. Meanwhile, a recession means a slowing economy. Simple recipe:

Inflation + slowing growth = stagflation.

 

Happy trading!

11 Comments

  • Why is Consumer Staples (XLP) down that much and under performing S&P since Aug? Isn’t it supposed to be a safe heaven?
    People will still buy toilet paper and toothpaste during a recession… At least that’s the usual reasoning, no?
    XLY should be the one going down instead.

    Reply
    • Good question. True, XLP s/b a low beta play. My guess is that people are forced to buy less volume of staples due to inflation, hence profits will fall. If you saw the story the other day where Walmart sees smaller shopping carts in their stores–people are cutting back. So even though ya gotta eat – you eat less. Mondelez, pepsi etc are in that ETF. We hold it. And yeah, its been a bummer.

      Reply
  • Keith, where is this big commodity super cycle so many predicted? One of the few commodities to go up was oil while gold, platinum, palladium, now copper all look dismal?

    Mike

    Reply
    • As I noted in the blog–its like the stock market and sector rotation. We will see rotation in commodities. I think copper may be next to go up. Also keep in mind that super cycles have lots and lots of big drops – so 2021-2 was one up leg, then 2022-3 has been a down leg, but longer term if the peaks and troughs get higher, we are in a uptrend within the super cycle per that long chart of relative performance I posted –see chart

      Reply
  • Bringing Astrology (ancient symbol language) into things…The Saturn-Uranus cycle is entering into it’s incoming square phase. The last time that happened was in the mid 70’s which was a time of rapid inflation and a booming oil market. Interesting to see this pattern developing again…For more info check this link out…

    https://cyclesofhistory.com/structuralupheaval-1942-1988/

    Reply
    • There was a fellow I knew about 20 years ago that studied lunar patterns and how they cam into play with stock market behavior. The thesis as I understood it was things like gravitational pull, light, radiation/energy and other factors changing peoples behavioral patterns at a subconscious level. Interesting – personally never found it to be terribly useful for my style of trading, but if people find it works, its worth exploring. Thanks for the link, I’ll read it.

      Reply
      • I should warn you that the site I posted is very intricate and long…The incoming square phase is near the bottom of the link. Just an afterthought about Astrology. It has had a difficult time with, lets call it, public relations but the symbols don’t lie. We come into this world and are basically indoctrinated into a certain way of thinking, but I suspect there is a lot more going on beyond the narrow parameters that we operate under.

        Reply
  • Not wanting to burst your bubble, but where is the science proving that oil prices fluctuate depending on Uranus is doing?

    Reply
    • I didn’t say that it proved anything. What I did say was…’Interesting to see this pattern developing again’.

      The reason I mentioned the Saturn-Uranus cycle was that the late great Astrologer, Charles Harvey observed that this cycle ‘plays an important part in the timing of shifts in the U.S. stock market.”

      The following link describes the process of the aspect cycle of the transiting planets using the Sun and Neptune as an example…

      https://www.skyscript.co.uk/sun_nep.html

      And by the way, I don’t really use this as front line information, in that I’m more of a long term investor than a trader. But it did give me more confidence in holding on to WCP and TOU.

      Reply

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