Long-time readers of this blog know that I employ 2 models to get a handle on long term and short termed market risk/reward potential.
The first model I use is the Bear-o-meter. A number of you have received a copy of the research paper I did for the CSTA (Canadian Society of Technical Analysis) Journal. If you have not asked for a copy of the CSTA Journal with my write-up in it, and would like to get one—email me at [email protected]
The Bear-o-meter is a very big picture (macro) view of the markets. It’s not designed to be a precise market timing vehicle. Instead, it tries to read the relative balance of risk vs. reward present on the US markets at a given point of time. It gives you an edge, but not an absolute. A high rating on the Bear-o-meter indicates higher potential for reward than risk – and a low reading indicates the relative risk vs. reward is unfavorable.
As you are no doubt aware, markets always have the potential for delivering downside or upside—either can happen. In that way, they are a little like a casino. Nothing is known as far as the next trade, or the next roll of the dice. But if you are the casino (house), you have an edge. The edge is the statistics behind the games. The house does not know if you will win the next hand or on the next pull of the slot machine handle. It does know that over the next 100 card games or the next 100 slot machine pulls – it will average out ahead. Not you. In fact, slot machines are pre-programed to deliver a random, yet average rate of win/losses over a large number of pulls. I know this because a friend of mine is a casino executive, and he walked me through the logistics. So picture a high Bear-o-meter reading to be similar to the house programing the slot machine. In this case, the house has decided to give you the edge for a win rather than a loss on the next pull. But you could still end up with a losing pull.
On January 19, 2018, the Bear-o-meter moved to a bearish/neutral “3”. Prior reading to that was a “5” neutral reading taken on December 28 2017, Although the Bear-o-meter is not usually so good at predicting short termed moves, this one was a pretty good signal. More importantly, my Near-termed timing system signalled bearish around the same time. More on that below. After the January signal, the market did fall by a good 10%. The “3” reading is not an extreme bearish reading. So the relatively tame 10% pullback was in line with that reading. Interestingly, On February 9th, 2018, the Bear-o-meter moved to its highest reading ever. It hit “8” (bullish). Again, this was in line with a Neartermed timing system buy signal that I’ll cover below. I was in Florida when I got this signal, and couldn’t post this reading until the 15th . Here was my blog.
The buy and sell signals on the Neartermed timing chart below are indicated with vertical lines. Read the above linked blog for an explanation on how the signals are derived. Note that the period between September of 2017 and January of 2018 was really just one giant sell signal on the Neartermed system. This was a very strange thing indeed, based on a very strange market environment. I blogged on that a few times during this period, including here.
For those wondering where we stand right now with regard to the macro (Bear-o-meter) and short term signals (Neartermed timing system), the answer is: long termed bullish, neartermed neutral.
As of March 7, 2018 – the Bear-o-meter reads a solid 6. That means reward is skewed more favorably than potential risk. The neartermed chart shows us that my three indicators (Bollinger Bands, Stochastics, RSI) reside in the middle of their ranges.
Conclusion: ignore the ripples, and stay the course if you are long the market. The outlook from a risk/reward perspective is still in favor of the bulls.
hi Keith. do you use the slow stochastic or the fast stochastic and what settings do you use
what is the advantage / disadvantage of either. on the RSI do you use a 14 day or a 10 day setting
I use “full stochastic” – default setting on stockcharts which is a 14 day (daily chart) lookback for %K line, then the %D line being a 3 day MA of the %K line. Basically, I look for the two to hook up after reaching below its oversold line – and that usually entails the %D (3 day MA) crossing over.
A most interesting blog today. I note from the chart that you use a 10 setting for RSI instead of the default 14. Why?
Also, for interest, I put a Bollinger %B on the chart, which currently sits at 0.64. My understanding is that most exciting moves up or down, tend to happen when the Bollinger is below 50%. Do you use the %B?
Very observant of you to see the 10-day lookback on the RSI!
I use it rather than the 14 day default because it is faster moving. This is, after all, a neartermed timing system. I want the signals as close to the turning points as possible. Yes, the signals are more frequent so that’s why i use them in conjunction with the macro risk indications of the Bear-o-meter- but the faster RSI tends to line up better with stochastics for accurate and timely signals. Waiting for a slower RSI signal makes the signals move too slowly for the purposes of this particular system.
Next: Fred–I want to thank you for introducing me to the %B indicator. I just read the construct of it, and it makes sense. I placed it below my current Neartermed timing model chart and its over/under signals appear to line up nicely with the three I use. I’ll backtest it a bit to see if it helps refine the signals on my current system. BTW–its comments like yours, where I learn something new, and thus can pass that new concept on (after examining it myself for its usefulness) that make writing this blog even more enjoyable.
Thanks for that Fred.
I must give the credit for the 10 day RSI to your correspondent, Kim who questioned it first. But I did note the 10 day in your cha?rt.
Thank you for your comments re Bollinger %B. I have watched it in the past but took another look yesterday when you said you use Bollinger Bands. It seems to me that the Bands tend to be a bit of a guess whereas the %B is more precise. I would be most interested to see how your own research comes out. I hope you write an article, or at least a paragraph about it in the future.
Have you started your riding yet or do you still have snow in Barrie? We lost a number of days here because of rain (and a little snow) but have pretty much ridden all winter. Riding about 60 km. today.
Fred–I ride outdoors in the spring summer fall, but continue to ride on a trainer all winter. Mostly short termed intensity stuff.
I recently went to Florida and rode 1300 km in 2 weeks. Lots of it fast! Did a 100 mile (160 km) race 3 days after stepping off the plane–and won my age class. So these neglected indoor cycling legs aren’t doing too bad.
I’ll report on the %B indicator as I research it.