Bear-o-meter in higher risk zone

The Bear-o-meter is a risk/reward indicator that I have been reporting on this blog for about 15 years. You can do a search on the blog to see past explanations of how its calculated. Basically, it incorporates individual indicators that cover the broad technical categories of trend, breadth, seasonality, value, breadth-momentum, and investor sentiment.

The meter is scored from 0-8, where 0 is high risk relative to potential reward, and 8 is low risk vs high potential for reward. The illustration below shows the scale. Note that there are 3 general zones of high, average, and low risk on the illustration.

Last month saw a Bear-o-meter score of 5 – which is a neutral to bullish score. The score was accurate, given the relatively flat to positive month in April. Since then, the Bear-o-meter has lost a few points. It has moved into the mid-bearish zone with a new score of “2”. This is significant. That’s because, as I noted in a blog a week ago, the market itself is showing technical signs of bearish momentum and technical resistance failure. Here is the blog–worth reading if you have not:

Neartermed SPX chart suggests pullback likely – ValueTrend

Why the move by the Bear-o-meter back to the unfavorable risk/reward zone is so significant is because we have corresponding bearish signals coming from the technicals – as described in the above noted blog. In other words, the odds of a market decline have bumped up a bit more given these combined factors.

New negatives include:

  • SPX trailing PE moved into a low level “overvalued” point
  • Seasonality (Sell in May, Go away) moved from bullish (winter) mode to neutral
  • Continued negative divergence in key breadth indicator Dow vs Transports
  • Continued negative divergence in key breadth indicator on broad market NYSE AD line vs. the more narrowly focused index SPX

One interesting signal that did not officially assign a lower point for the Bear-o-meter was a very low point on the VIX – seen a few days ago at 15.8. The chart below shows you how I determine an outright “complacency” signal as being 12 or below–illustrated by the lowest pink horizontal line. But I’ve also drawn an intermediate signal line of the chart (yellow line) at 20. I’ve found that the market often reverses negatively from a rally when the VIX gets too far below 20. In fact, you can see that the VIX hit 15 back in late 2021 – signaling the end of the bull market and leading into the 2022 bear market.

Quantitatively, I need a “12” or below to call an outright quantitative sell signal from the VIX. But history has shown that the recent levels of the VIX do tend to result in at least some type of correction. In conjunction with technical resistance on the major market indices and oscillators that are rolling over, I’d say this adds a bit more fuel to the fire to see at least some type of pullback.

 

Topics of interest

If there are any sectors that you’d like me to look at in an upcoming blog, please post a comment below and I will consider covering them. I will be out of the office for a few days, but back in action by Tuesday of next week. So if I don’t post your comment, its merely because I may not have access to the internet for reviewing my blog comments. Don’t let that dissuade you – when I am back I will read and post the comments. Thanks.

7 Comments

  • . when oil prices were ripping higher it was a supply issue.
    since the Fed started raising rates rapidly it has become an economic indicator.

    many analysts still suggest take advantage of energy when the price of oil sells off.

    what is your opinion of energy now?

    thanks
    mark

    Reply
    • WTIC is trading a range and testing a recent low. It has the narrow profile of a consolidating security. At some point it has to either sh#t or get off the pot–meaning break down into a tailspin losing trend, or break out into a big up move. I own some oil, but wont add more until the market indicates which way the wind shall blow!

      Reply
  • One sector I would like some input on is Canadian Energy.
    This would include the producers (ie Suncor, Cresent Point, type companies). Fundamentaly if China demand and the rest of the world demand is slowing down, this is weighing on the commodity price. Where is the commodity heading over a 6 month period, and how will this affect producers. Lots of free cash flow still.

    Pipelines sector. Here I think the likes of an Enbridge, TC energy, etc. I’d look for afirmation that i) likely small captial appreciation/or depreciation but ii) are the decent dividend yields for this sector sustainable?) As your bear-o-meter implies an overall market pullback, but with this sector having sustainable yields, and investors, be it retail or institutions, investing in this sector longer term, mainly for yield, low beta (I think), should we sell, hold, or buy this sector at it’s current valuation.
    Thanks Keith

    Reply
  • Thanks Keith. As always interesting blog.
    My question is about VIX. Do you think bthe recent introduction of Zero Date options, (ODTE) has affected VIX in a meaningful manner and therefore you are not getting that “12” reading in your Bear O Meter?

    Reply
  • Not a sector question but…..
    So you stated some time ago that there are 3 stages in a bear market. We have already had 2 stages of a correction. The bear-o-meter is suggesting a correction so lets call it stage 3 if it happens. I recall you referred to it as capitulation, and possibly a 15-20% correction. Knowing what you know today, do you think we will have a “capitulation” phase, and if so could you forsee 15-20% correction? I think for capitulation it needs some stimulus? Maybe the regional banking system? WTI price drop dramatically?
    I think if I saw a 10% reduction I might be tempted to deploy some of my cash. We can’t time the bottom right.
    Thoughts?

    Reply
  • I just have a general comment about inflation in the US and Canada. Over the last 9 months, monthly inflation in the US has totalled 1.86% versus 1.50% total for the 20 year monthly averages. If the next 3 months are equal to the 20 year monthly averages, inflation for the year would be 2.96% versus the 20 year average of 2.60%. For Canada the last 9 months monthly inflation has totalled 1.57% versus 1.3%. Again if the next 3 months come in at the 20 year monthly averages, inflation would be 2.27% versus the 20 year average of 2.00%. Why is the Fed and BOC not highlighting this versus scaring us with possible more interest rate increases?

    Reply
  • Seasonally XLK and XLC are the strongest sectors for the month of May (in the US at least). Could you please comment on whether that might be the case this year?

    Reply

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