Each month I provide readers of this blog a quantitative reading of my Bear-o-meter. Most you you know the scoop, but for new readers – here is a brief on what the Bear-o-meter is, and how to interpret it.
The Bear-0-meter is a compilation of binary (quantitative) readings from the 12 indicators (truthfully, one of them is used in 2 differing ways, so its actually 11 indicators-but that’s semantics). These indicators fall under the broad headings of Trend, Breadth, Seasonality, Value, Sentiment, and Breadth-momentum. Each of the 12 indicators are assigned a score – which could represent a negative point, a neutral score, or a positive point. Add ’em all up, and you get a reading that lies between 0 – 8. The illustration below highlights this scale.
Note that those scores are broadly placed within 3 categories as high risk/ vs. reward potential, average risk/reward potential, and low risk/reward potential. If the score lies in a low-number range, it means risk is high relative to potential reward. Visa versa if the score is high. The pink divider lines show you transition points. So, if you have a score of 0, 1 or 2 – you know its a pretty high risk market. If you have a score of 3 – you are entering into a neutral risk/reward zone. Not high risk, but not quite “average risk”.
Do keep in mind that risk AND reward are always present at all times on the market (gosh, really?). This is important: Just because the score says “0” (for example), that does NOT imply markets can’t go up. Same with an “8”. That does NOT imply markets cannot fall. My best comparative is crossing the road by foot. Cross your quiet suburban neighborhood road, and you likely won’t get hit by a car. Still, one could be hit by a rampaging drunk who comes screaming around the corner unexpectedly. At the other end of the scale, crossing a major 4-lane each-direction super highway (8 lanes) with cars going 120 km/hour + does suggest more risk than crossing the street at home to borrow a cup of sugar. Still, you might just survive the walk across the the super highway if you are good at side-stepping the fast traffic in a synchronized fashion.
Again—Risk and reward are present at all times. Its just the degree of each that we are reading when we look at the Bear-o-meter. Ultimately, you need to pay attention to trend first, and take the signals you get by your trend analysis into context within the risk/reward environment.
With that in mind, lets quickly review trend. We look at a weekly chart of the SPX with a 40 week/ 200 day SMA. If the market is above its 40 week SMA, that’s a positive trend indication. Below the SMA is a negative. However, we also need to look at the peaks and troughs on the chart. We want 2+ successive rising troughs and rising peaks = a bullish trend. On the other side of the coin, 2 lower troughs and peaks = a bearish trend. Lets take a look at what the SPX has to say about trend right now:
As you will note on the chart above, the SPX barely broke 4100 recently. Sure, that is a “higher high”. But I like to see a minimum of 3 days above a prior peak (which is literally all we got in January). The fact that it failed so quickly poses a question as to its validity.
The other thing to note is the higher high from last summer, which was NOT coinciding with a higher low. Nor did it break its 40 week SMA. So – my rules suggested it was not a bull market breakout. I did not get suckered into that one. The current rally did occur after a higher high (above 4100) and low. That, AND a break above the 40 week SMA. This inspired us to leg in by one small step. We moved from 30% cash to about 26% cash. However…Since the recent break of 4100 was taken out so quickly, we have not acted to buy more equity – and remain heavily in cash.
Bear-o-meter reads positive risk/reward potential
The Bear-o-meter has jumped another positive point since last month. Its gone from an already positive “6” to a reading of “7”. So, the risk/reward potential on the market is not dire – like it was literally since the start of 2022 – when I warned you every month of the meter’s nonstop doomsday readings. In fact, the meter suggests risk is relatively low at this point, all things being equal. But, all things are not equal….
The reason I printed the trend chart above was because, like I said at the start of this blog – trend comes first. The Bear-o-meter must be taken in context within a trend. Last year, we saw a broken trend and lousy risk/reward readings from the Bear-o-meter. It was implicit that the only strategy to take was a bear market strategy with those two indicators screaming “RISK”. Right now we see a weak signal on market trend – but a very positive risk/reward reading by our Bear-o-meter. So … what to do, what to do?
The risk/reward reading is good right now. However – Trend is still kind of “iffy” – albeit not outright bearish. For this reason at ValueTrend, we retain a lower level of cash vs. last year. But, we are still pretty much one quarter cash in our Equity Platform. We are prepared to allocate more back into the market IF the SPX moves above 4100 with conviction (more than just a few days). Better to buy a bit higher than get caught in a bear trap. Please note – that’s a lower probability now than it was last year.
I’ve been doing this for 33 years now. Along the way, I have learned to trust my signals, and follow the discipline of patiently legging into or out of markets without emotional knee-jerk reactions. This strategy is how ValueTrend will continue to invest within this market. If you are looking for a change in your portfolio management service, you can contact us here. Or, if you are a do-it-yourself investor, then I strongly encourage you to take my trading course if you haven’t already. Positive feedback from the hundreds of readers who have taken the course verifies its effectiveness. Either through our money management services, or though the course, we’re happy to help you become a more profitable, lower risk investor.
I’m still expecting one more wave down on the SPX possibly heading down to around the 3000 level but I could be totally off. have you been charting a potential fifth leg down?
I recorded a video last week–should be out by the end of this week. In a nutshell, basic regression analysis suggests the potential for a substantial drawdown (a fancy way of saying a return to the mean or average long termed trend/return of the markets) –watch my video page for that edition – should be posted Friday. BTW–you are in good company–Jeremy Grantham is looking at something like 3000 on the SPX too. And he’s no dummy.
Me? I am systematic trend follower. I don’t predict anything. But…I do have a plan to prepare for any outcome. I assume you took my course–that’s the plan, man!
I love how the market is hyper focused on every word and utterance from the fed. and then react like today by selling. I think it’s a case of not seeing the forest for the trees.
How picky do you get with the gap between IYJ and IYT. Since the late 2022 to end Jan 23 rally the gap stayed reasonably consistent on a weekly chart but now seems to be slightly expanding with IYT showing a touch less support. Is a few percent a concern or do you look for bigger moves and if so is it five, ten or more percent?
I tend to go right to the Dow indices rather than the iShares ETF’s – as that is what the original theory used (transports should confirm the industrials). I am looking for divergences– NOT a divergence showing in the two ….. yet.
I look forward to your comments and am almost persuaded to accept your comments. I do have a comment to make that is like a caveat to me. My three children ages 35 to 45 have yet to see a downturn like 1990. They are so optimistic it scares me ((having lived thru a few big downturns.)
All their friends are investors too and are not at all frightened or more downturns , so that makes me think you might be premature on the bottom by 6 to 8 months or longer. Capitulation is not in their DNA it seems .
Just my thoughts. Am I out of touch with too much gloom (as they think)
Dale you are correct in that there are so many investors who have not been around long enough (as investors) to have lived through the 1999-2002 bear, or the 2008- 2009 bear–let alone the more moderate bears like 2015, late 2018, etc. They think that bears are like 2020 COVID crash. Down one month, then all back to normal a couple of months later. The current situation is more historically typical, but they are unaware of that reality. Now, as far as my timing, nobody knows. As I emphasize, I can project and postulate just as anyone can. But it is my system that will save me from myself. The SPX and TSX broke their 200 day SMAs last week. I give it a few days, but if they don’t recover, I step out again–raise more cash. My opinion is for a bit more downside, but my system has no opinion. And that is what I use to trade.