Happy Halloween—scary markets and all!
What a difference a month makes. On my last Bear-o-meter reading, taken October 3rd, we got a decisive “High Risk” reading of “1”.. As many of you may be aware, the Bear-o-meter is a compilation of 11 indicators that are assigned positive, neutral or bearish numeral values. The Bear-o-meter is ranked from 0-8, and divided into 3 quadrants within that ranking as Lower Risk, Balanced Risk, or Higher Risk. You can see this ranking and the respective positioning in the 3 quadrants on the diagram below. Last month’s reading was very deeply bearish. Interestingly, the very next day brought the beginning of the current onslaught for equity markets. The S&P 500 Index has shed 8.8% in October, the Nasdaq Composite is down 10.9%, and both the Dow Jones Industrial Average and TSX 300 index are lower by around 6.8% as of last Friday.
Some of these indicators are more important than others, so they get greater weightings in their scores. For example, the 200 day SMA can get a positive OR negative rating of “2” depending on where the market lies in relationship to that line. The 200 day SMA offers no “0” rating – it’s either providing a strongly bullish or strongly bearish score of 2/ -2.
Conversely, reading of some of the sentiment readings such as the Put/Call ratio may receive a “0” or a +1 or -1. Clearly the 200 day SMA, with its 2-point influence (no “neutral” rating), is a more significant factor within my Bear-o-meters readings than an indicator like the Put/Call ratio.
As of Monday morning on October 29th, the Bear-o-meter has moved to a ranking of “4”. This reading, while not outright bullish, is a far cry better than the deeply bearish reading of “1” we got a month ago. A rebound over a few days that could pop the S&P 500 over its 200 day SMA ( sitting at 2760, vs the S&P 500 sitting around 2700 as I write). That would push the Bear-o-meter up by 2 points (assuming all other factors remain in similar positions) – creating an outright bullish signal. the chart below illustrates the 200 day SMA (red line) vs the market.
Here is a quick recap of the Bear-o-meter indicators that changed drastically over the past month:
- S&P 500 moved below the 200 day SMA (-2)
- Sentiment indicator “Smart/Dumb confidence spread” moved from bearish to bullish (+1)
- Seasonality moved from neutral to bullish (+2)
- Advance decline line moved from bearish to neutral (0, vs. -1)
- % stocks over their 50 day SMA’s on the S&P went positive (+1)
- VIX went from negative (-1) to neutral (0).
Conclusion
All in, the market is in much better shape than it was a month ago. A decisive move by the S&P500 over its 200 day SMA would trigger a very strong risk/ reward scenario. While the Bear-o-meter does not read high-risk at this time (in fact, it reads as neutral), that can change in either direction. Thus, we will wait for the trend indication by the 200 day SMA before executing any purchases with the cash we hold in the ValueTrend Equity Platform. It wouldn’t hurt to watch for a few momentum indicator hooks in conjunction with that strategy (RSI, stochastics). It’s the safest way to play the game, albeit less opportunistic than successfully guessing a market bottom at this point.
Keith on BNN MarketCall this Thursday Nov. 1st at 6:00pm
7 Comments
Hi Keith and thanks for this work. As I follow the markets daily I am continually drawn to the lethargic moves of the TSX in comparison to the American indexes. It is as if we are an afterthought. Of course the TSX has not risen with the US market so we do not fall as far but still the Canadian market almost has a “dead in the water” appearance. Would you comment?
Hi Terry
the TSX has two problems: first, its weighting in cyclicals (materials, natural resources)- and connected to that, its general economic environment, including the political climate–pelase read this blog for more on that challenge: https://www.valuetrend.ca/uh-oh-canada/
There should be points in the meter for breaking a long term trend line. S&p has now broken a trend line that goes back to 2016
Effectively, my compilation takes trend into account with two factors. I use the 200 day SMA, and the 50 day.
Trend Lines are a little too “artsy” to be quantitative enough for this compilation–you can draw them from wherever you want to start, and from whatever low you determine is the low you want to start with. The factors I use are largely “binary” (yes, no) and typically require no judgment as to when they can be measured from.
BTW–my more important rule for trend is the weekly chart significant low/highs. So a lower low AND a lower high is my official way of a acknowledging a broken uptrend. That said, that rule, too, is not as quantitative as the stuff in the Bear-o-meter
I’ll be watching for the hook upturns on the weekly chart RSI and stochastics
Hi Keith,
I wasn’t around for the close but the chart looks like a little bit of panic may be beginning to appear; V-bottom at the end of today.
Higher low on stochastics, daily chart for the Nasdaq 100. Sectors look like they are forming a range, possibly attempting to bottom: XLF, XLV, IBB, XRT, and others. Feeling less bearish….and now that I say that, the SPX will probably drop to Feb lows.
Maybe the market needs tech to flush and that could be happening now…?
Its certainly getting closer. as I note in the article, I am one to wait for some up days before jumping in. Better to buy higher and safer, but the conditions are getting better