Every month I report on the risk/reward reading coming out of my 11-factor Bear-o-meter. On a scale of 0-8, where the risk/reward tradeoff is least attractive at “0” and extremely attractive at “8” – we saw the indicator fall to “3” last month. That level is the “entry” level into a higher risk environment for the market. As I noted in last months Bear-o-meter blog, we may get a correction in September, despite the bigger picture being in a bull trend. The Bear-o-meter has proven correct in that prognostication.
I divide the meter into 3 zones. Anything 3 or lower is progressively more concerning as far as risk is concerned. If the reading falls between 3 to 5, that is considered neutral – and a reading of 5+ we are seeing an above average risk/reward environment. It should be noted that readings of 3 and 5 are transitionary levels. They hold the line between the more crucial readings of low, neutral or high risk.
Bear-o-meter neutral at “4”
Now that the market has corrected about 5%, the Bear-o-meter has moved back into a more traditional neutral reading. Currently, it sits at “4” – which is right smack in the middle of the risk/reward tradeoff. Interestingly, the only thing that has increased the meter into a lower risk reading is one of the sentiment readings. Recall that sentiment is a contrarian form of analysis. You want to move in the opposite direction of the herd. The Sentimentrader “Smart Money/ Dumb Money” compilation goes a step further by comparing the institutional/commercial investing herd (smart money) to ordinary investors (dumb money). It does this by tracking large orders and hedging activity taken on by sophisticated investors like pension plans and commercial hedgers, and compares it to mutual fund and ETF flow -which are investments most often used by retail investors and less sophisticated investors. This month, the Smart money/ Dumb money indicator moved into a bullish zone. This, as retail investors fled the markets, and sophisticated investors began to swoop in and buy into their panic.
It should be noted that true “buy” signals that come out of the Smart/Dumb money indicator usually occur after the computation reaches an extreme. The chart below shows us the strong buy signals coming out of the December 2018 selloff, and the March 2020 capitulation. Given that the indicator has just barely crossed the bullish zone, it is my opinion that the signal is weak. Still, the Bear-o-meter is quantitative. It uses a binary over/under the line readings. Because the Smart/Dumb reading crossed the bullish line, it gave the Bear-o-meter a positive point. And that’s the point that swung my compilation out of the bearish zone and into the neutral zone. The chart below shows a cross above the upper “buy” zone line.
Conclusion
I’m not bullish yet, despite the move back to neutral by the Bear-o-meter. Still, its a good first step to see the meter move back up, and smart investors begin to step in. Many of you know that ValueTrend has held a fair amount of cash coming into September. This, along with our focus on inflation-based investments, afforded us substantial outperformance as noted above. I anticipate patiently stepping back into the market in the coming weeks. For our part, we will leg in through 3 increments. I’d expect to see more volatility in October, so the pullbacks should offer some potential to “buy the dips”. Patience, grasshopper. patience.
Housekeeping
New video posted on the Emerging Markets – an emerging opportunity, or submerging bear market? I examine the charts.
Performance figures are being posted for the VT Platforms today. Of note, our Equity Platform had a positive return in September vs. wide losses in the major markets. We are also ahead of the markets YTD and long term. Here is the link.
A reminder
You know that ValueTrend offers a unique process to keep your money safe and growing. If you or your friends & family who are not getting the type of Portfolio Management that we offer through unique tools like the Bear-o-meter, and our in-depth fundamental and technical analysis – perhaps you should take a closer look at our Portfolio Management services. Everyone’s a hero in a bull market. It’s the volatile markets that separate ValueTrend from the masses.
7 Comments
If that was the correction that was nothing only about 5% on the S&P. Hardly worth touching the portfolio for that
See my reply to Rick, Dave. The broad markets are down 5%, but some stocks are WAY more volatile and offer interesting trading opportunity.
Hi Keith, thank you for your most recent market alert video. Now that congress has kicked the can down the road for a few months, would you now delay legging back in to the market with your cash?
Rick–I knew somebody would ask that!
We are playing it by ear…we are doing a few shorter termed trades right now. So we bought 6% new positions (of our 17-18% cash) a number of days ago, now we are seeing a rally, and may sell these -or other- stocks again shortly to raise the cash again. In fact, we sold 2% yesterday bringing us back to about 13% cash. It seems to me that this month may be very good for active on-off trading. We do not do a lot of short termed stuff — as its not our mandate, but we will do some this month as it might make sense. The debt ceiling is not the only thing. If employment stats come out to suggest tightening–who knows. Lots and lots to get the markets anxiety up. Trading makes sense with that in mind. What that means is that we could be back to 15% or more cash in November after going down to various low levels of cash during the month.
Or not….-we may be fully invested. Hard to say. We watch the daily charts for support, resistance and watch the neartermed indicators like stochastics and Bollinger Bands for trading clues in the short term. That’s all I can say.
Truthfully–I just love this market right now. I believe its possible to outperform in with a little brain power applied.
Hi Keith, if the Biden Administration actually follows through with their statement about banning US crude exports, I’m assuming US and Canadian oil and gas stocks would be downgraded. What are your thoughts on the likelihood of this happening and how would you play this to capitalize on the unintended consequences and a likely rise in Brent crude prices?
I cant answer this – I’ll ask Craig for some input and post another reply if he can offer any insight. Us technical people need only look at the chart of the equities of which you speak. That will tell us what we truly need to know–but, I will add more to that thought here if Craig has insight.
Here is Craig’s response:
In short- not very likely that Biden Administration will ban US exports. Currently the sharp rise in energy has increased pressure on OPEC+ from consumer nations and the White House , for them and oil producing countries to “do more” to ease the situation. However, the current energy environment plays out we will continue to let the charts guide our decisions. We are not planning on establishing a thematic position ahead of a potential event.