Do a quick search on the search bar for this blog and you will find plenty of entries under the Bear-o-meter. I try to read the compilation monthly. The last reading was on September 17th, where it had moved up from its August reading of “4” to a more bullish reading of “5”. Interestingly, the market did follow through with a bit of strength since my September reading. New highs, not seen since January, were achieved for the S&P 500 and finally for the DJIA.
Currently, a number of the previously bullish readings in the compilation have turned outright bearish. I’ll get into them below. The new reading on the Bear-o-meter now reads a very cautious “1”. That is quite a move for just a few weeks. Let’s dive into the details.
The Advance Decline Line is diverging—take a look at the chart below, courtesy of www.freestockcharts.com.
You’ll note that the S&P 500 (red line, top of chart) is rising in a neartermed channel. Meanwhile, the cumulative AD line (black line) illustrates flat peaks, and lower lows. This divergence is a change from my reading in mid-September. This change took a negative point from the Bear-o-meter. As an aside, I have noticed a bit of weakness in the Russell 2000 recently, indicating that a contributing factor to this divergence may be the small caps.
The Smart money/ dumb money combined confidence spread indicator – courtesy of www.sentimentrader.com – also subtracted a point from our compilation. A bearish signal is triggered if the confidence spread moves below -0.25. The current reading is -0.27, suggesting that the Smart Money is selling, while Dumb money continues to buy. Note that this indicator is not too deeply bearish – but it is below the trigger line for a bad score. The actual readings are 33% confidence by the Smart Money Group, and 60% confidence by the Dumb Money group.
Finally, a new negative score was seen for the VIX indicator. I assign a negative point to the VIX if it drops below 12. It too has marginally breached that level– so I must give the Bear-o-meter a negative score for that indicator. Note that the VIX is so whippy that this negative score could be reversed by the time you read this. That is something I can’t control, so I must read the indicator as to what it says today – and score the compilation at the moment of doing the reading. The VIX is easily the most “whippy” indicator in the mix – but its general level still gives us one more data point to the overall mood of the markets. Right now, the mood is a bit too risk-favoring. And that’s a bad thing.
All other indicators remained bullish or neutral. This included key indicators like the 200 day SMA and the overbought/oversold indicators. Seasonality remains neutral in score until November 5th. The Bear-o-meter currently totals “1” out of 8. This is on the low end of the scale, indicating higher than normal risk at this time. Because the negative indications coming from the VIX and the Smart/Dumb spread are barely into their “bearish” zones – and because these two indicators can be quicker moving, we might see the Bear-o-meter go back to a more neutral stance in the event of a short correction. More concerning is the divergence in the cumulative A/D line –but it is just one indicator.
I’m happy to be holding a 20% weighting in cash in the ValueTrend Equity Platform at this time. A reading of “1” is a little disconcerting, despite the lack of depth on some of the negative readings. Perhaps an opportunity awaits for deploying that cash in the coming month. We shall see.
Meanwhile, ValueTrend has just posted its gross numbers for the end of September, for those interested. Click here to visit that page of our website.
“Ask me anything”
As I have done a few times in the past, I’d like to open the floor to my readers to “Ask me anything” on the subject of investing, risk management, portfolio management and technical analysis. You can even ask fundamental analysis questions, and I’ll get Craig Aucoin (resident CFA for ValueTrend) to inject his two cents worth. Please don’t ask about individual stocks as I’m trying to keep the questions interesting to most readers. The exception might be in massively followed stocks like the FANG’s. Better to ask about sectors, world markets, asset classes, etc. For example: Cannabis, gold, European markets, or questions on technical/fundamental analysis rules, etc.
You can ask as simple a question as you wish. But feel free to ask the hard stuff! I’ll do my best to get as many questions covered as I can.
Please post your questions in the comment section below and I’ll cover them on Mondays blog.