Bear-o-meter reading plummets

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.

 

Negative scores

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.

 

Positive scores

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.

 

My take

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.

20 Comments

  • Looking at the US market via SPY. It seems that for the last 3 years there is a minor correction some time around Feb.

    If a person misses a good buy in Sept then maybe wait until Feb to get back in.
    If a person wishes to sell maybe end of Dec or start of Jan is a good point.

    Your thoughts?

    Reply
    • Well, it is true that Feb is often a bit of a “breather” month –it kind of breaks up the best six months–so it can be a good point to do a trade sometimes–where you sell some stocks that might be rotational candidates in January and wait to Feb to do your rotation.
      I dont think I would hold cash until Feb–the Nov-Jan. period can be quite good.

      Reply
  • On BNN the last 3 months, all the EXPERTS were recommending US bank stocks.
    “US interest rates will continue to go up … this is good for US bank stocks”

    When I look at CDN ETFs which hold US banks:
    CALL CALL.B HUBL
    they are all down.

    When I look at US ETF
    XLF
    it has been sideways and recently down.

    The CAD/USD is not the blame, so what gives?

    Reply
    • Not sure Robert–I haven’t done an analysis of the mix in these ETF’s – I tend to buy either ZUB for US banks, or just buy individual bank stocks. Probably differences in holdings? We dont hold any US banks right now, but will consider them in the coming weeks when they come into seasonal rotation–chart dependant of course.

      Reply
  • Hi Keith i asked this question another time but don’t think i got a reply. do you have any info or advise about investing in shipping container rentals. they offer a legal written contract and guarantee a 12% yearly return on fixed longer term rentals or up to 15>22% short term rentals. it sounds good ?
    do you have any input
    Thanks kim

    Reply
    • Kim–unless it is a publicly traded security like a stock or an ETF or index that i can make a technical (price trend) assessment, I am not the guy to ask on shipping containers. Do you know of public stocks in the sector or an ETF covering it? Let me know and it might be worth covering in my Ask me anything post next week–thanks

      Reply
  • I’d like to invest in some Canadian ETF’s but it seems to me that most have too small of average daily volumes. Are they geared more for smaller investors with $10,000 or less to invest in a single ETF?
    What percent of the average daily volume is too much when making an initial investment in an ETF?

    Reply
    • This is a good candidate for my Ask me anything blog next week. Stay tuned!

      Reply
  • Keith, what do you think about investing in the Canadian banks for the long term with the HCB ETF? The weighting based on bank performance with the worst performers getting the highest weighting seems to have some historical merit.

    Reply
    • Don I think this is a pretty good concept. Normally I wouldn’t want to own the worst stocks (Dogs of the Dow has struggled in the past at times), but with the CDN banks it makes more sense–given that its still holding the basket, but placing more emphasis on the underdogs–which, to the point of the manager, can be turnaround candidates. You know that I have been putting BNS on my Top Picks as a long termed turnaround for just that reason–it continues to find support without cracking, and bounces, but then waffles in consolidation as other banks rise. My view is that this base will break out, given the long termed regression that outliers tend to have in that sector. So the ETF gives a similar approach. Very interesting. Thanks
      FYI: http://forums.redflagdeals.com/new-etf-hamilton-captial-canadian-bank-dynamic-weight-hcb-canadian-bank-investors-2227042/

      Reply
  • Keith, thanks a lot for your timely update on Bear-o-meter!

    Have you noticed that TLT had broken 4 year support line?
    I was wondering if you know of any studies on how breakdown in the bond market correlates with the stock market (e.g. S&P500)? Does it act as a lead indicator? Is there an average lead time before S&P500 follows breakdown in the bond market?

    Appreciate your thoughts.

    Reply
    • I will happily answer this one on my Ask me anything post–it is something that I have indeed been watching.

      Reply
  • Hi Keith,

    Thoughts on the cannabis bubble and the fact that it looks like it has popped. How do you view this sector and at some point would you actually look at this sector for a long term buy?

    Parm

    Reply
    • This is a good question–and I will put it in my “Ask me anything” post next week

      Reply
  • Hello Kieth
    for shorter term “swing trades” When using technical analysis, does it matter if the chart (hence indicators) include/separate after hours info? Does it effect the indicator readings?

    Carey

    Reply
    • I don’t have any experience using after hours data for incorporation into trading decisions–beyond noting that it is not always representative of the next days moves. After hours is a “thin” market, so things swing more –greatest example is US election night where Dow futures plummeted 800 points on news of Trump being elected – then the market opened down only 400 points, and then a couple of hours after that it was positive!!! So the after-hours movement did nothing to help predict the next days move. Even though this is an extreme example, I see too many other examples where after-hours moves did nothing to indicate the next days move.
      I suggest using only the data available for open hours –and of course, using a more robust trading indicator set than those used in Bear-o-meter for near termed trading. Do a search under ‘short termed timing” on this blog and you will see my own setup for refining trades–involving quicker indicators like stochastics, BB’s and RSI

      Reply
      • Thank you
        as a follow up question if I may, when looking at ETFs; I realize some ETFs hold liquid equities but show little volume, does low volume reduce the effectiveness of technical analysis?

        Reply
        • Carey–in a word…yes. Obviously a low volume profile indicates less traders involved, and because TA is the study of crowd behaviour, it is thus considered less accurate if you have less of a crowd to monitor.

          Reply
  • Hi Keith – for your ask anything blog, could you comment on gold and silver? They seem to be in a longer-term downtrend but ready for a bounce shorter term? Wondering what you would look for before buying some mining etf’s. Thanks!

    Reply
    • I’ll cover that in my upcoming “As m” blog part 2.
      thanks Fred

      Reply

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