Bear-o-meter remains cautious

November 3, 20224 Comments

Today, we’ll look at the Bear-o-meter reading for November – along with a couple of other thoughts regarding market direction.

Bear-o-meter remains in the cautious zone

Last month, we saw a move up from the “0” score on the Bear-o-meter (high risk alert) in September to a more moderate score of 2 (caution) in October. So- how does November look? We’ve maintained that score of 2 this month, but not via the same metrics. In a nutshell, we saw two of the indicators in the meter move down a point (two points off the score).  Offsetting those negative points was the move into November – which assigns 2 positive points for enhanced seasonality positive potential on the market. Lets talk about the two indicators that dropped the score.

Dow Theory negative divergence

The recent failure for Transports to their hit prior peak as Industrials surged to hit their prior peak deleted one positive point from the meter. I blogged on the fragility of the strong move on the Industrials in my last blog here. When INDU is not supported by the TRAN index, we have a decidedly weak rally going on – illustrated by my historic notations on the chart below. My Online Course teaches you the many ways to interpret the relationship between these indices. Very important to know – as the Dow INDU/ TRAN confirmation rule is quite reliable. Stay tuned for a special discount announcement this weekend if you want to save some money when enrolling.

 

Smart Money/Dumb Money spread has gone to “0” from last month’s positive signal.

Offsetting these two negative scores were the seasonal points scored. November can be a positive month from a seasonal perspective. However, the combination of the new negative (INDU/TRAN) and the move down to neutral by the Smart Money/Dumb Money spread on top of the list of other neutral factors suggests continued caution based on the “2” rating. The chart below highlights the move from “bullish” (too pessimistic by the dummies)-  to “neutral” spreads between the smarties (large institutional investors, pro traders, commercial hedgers) and the dummies (everyone else!).

Having said that, we are well out of the flood of multi-month “0” scores we saw from April to September. All in, we recently sold our rally-play and are back to 38% cash in our Equity Model. However, any signs of extreme selloff OR a positive reversal will entice us back into the game. The current market environment is one to tread cautiously in, but not to be running away from at this stage.

 

Don’t fight the Fed

Just months ago, rates were sub-1%. Now….

“The overall takeaway from the FOMC is hawkish with Chair Powell explicitly stating he would prefer to overtighten, and have to subsequently back off, than to under-tighten and potentially let inflation get out of control. Changes to statement language indicate the Fed has a strong preference to slow the pace of rate hikes (to 50bp in December in our base case), but balanced any potential dovishness by reasserting that policy rates can continue to rise to levels sufficient to quell too-high inflation – and likely need to rise to above levels contemplated in September. We are revising up our expectations for Fed policy rates and project a 50bp hike in December, another 50bp in February, 25bp in March, and a final 25bp May resulting in a terminal rate of 5.25-5.50%.”Citi Bank

My take: We are close to the end of the Fed cycle, but the data will tell us when it’s over, not the Fed. The Fed message is not credible. They will follow the data, not their utterances from past press conferences. They promise nothing. So don’t get sucked in.

As an aside…Higher rates impact consumers. But it also impacts Government debt servicing costs. Here’s something to think about: Look at how aggressive the current Fed path is relative to past cycles (grey line below). Then think about the extra $50T of new leverage by Federal Banks across NA and the EU since 2018. How do you think this will play out? Feel free to add your thoughts to the comments below.

4 Comments

  • Hi Keith,
    I am a little perplexed as to what is driving the rally today.
    With employment numbers coming in so strongly in both Canada and the US, I thought that the markets would interpret these strong results as a negative indicator. Strong job numbers is a sign of a strong economy, and a negative signal that the Feds/BOC attempt to drive inflation down is not yet effecting the job market. I thought that the markets would fall on this strong data. Do you have any insight as to why the markets are rallying instead?

    Reply
    • Great question Wendy
      If you look at the makings of the rally – its all about commodities (Gosh, whoulda thunk it? Ha!). So–TSX up large, oil stocks up extra large, metals too. NASDAQ up very small. SPX (a mix) up medium-small.
      This rally is all about the news re china perhaps could possibly, maybe, hopefully randomly, stop with the COVID lockdowns. That’s a firm, almost, near, kinda commitment, of sorts, don’t ya know.
      Anyhow–if it turns out to be ‘real” – watch commodities lift off much faster than my prior predicted 2023 move.

      Reply
  • This is a really difficult moment for traders because a few stars are aligning for a short term rally but we’re still in clear downtrends on every time frame. If there were ever a time to be bullish fossil fuels and commodities, it’s now, but I think caution is seriously warranted (as you recommend). Despite awesome fundamentals and relative strength against QQQ and SPY, so many great energy companies can’t break out of ranges going back to July. I think the overall market is holding some of them back, so I’m reluctant to enter in size; however, when these types of equities DO move, they move VERY quickly and it’s easy to miss out. It’s a tricky environment.

    Regarding your chart of the sharp ascent of this hiking cycle, my guess is that central banks will slow down and then hold pat to assist current administrations in their bids for re-election. This will stop the steep increase in mortgage rates and maybe lessen the impact of the recession next year – which buys them votes (sigh). I think a more important reason for them to pause is that governments won’t be able to afford the interest payments on their massive debt loads with fed funds much above 5%. Isn’t that what long bonds are trying to tell us? The 10 or 20 year Treasury (can’t remember which) was down 30% a few months ago – its worst drawdown in 178 years! It doesn’t really indicate confidence in the federal government when T-bills – the second safest asset in the world – are acting like it’s the Great Depression or WW1. As it isn’t in anyone’s interest to let Treasuries go no bid or limit down, I think central banks will act to support bonds next year and let the USD come in. Just my two cents (except that we don’t make pennies anymore LOL!).

    Reply
    • awesome input Paula–thanks – you are correct re the oils stocks–need to break out! But the reason is there–probably will happen – like you, I am not moving til they do.

      Reply

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