Bear-o-meter screaming low risk!

For those who follow my blog with some regularity, you’ll know that the Bear-o-meter is a risk/reward measurement tool that I’ve been using since 2013. Prior to the creation of this tool, I was using many of the 12 components independently to measure the relative attractiveness of market conditions. These components are nothing new to Technical Analysts. They simply represent the factors that I have found over the years to be helpful when assessing whether to be aggressive or more conservative when investing.

Bear-o-meter factors include:

  • Breadth
  • Value
  • Trend
  • Breadth momentum
  • Sentiment
  • Seasonality

The 12 factors are spread amongst those headline groups, and a score between 0-8 is assigned. A low score (0-3) is considered higher risk. That’s where the market was on my last reading in early January, when it had moved to “3” from a neutral score of “4” the month before. The timing of that lower score seems fortuitous now. We did move more into cash based on that signal. It might be noted that a score of “3” is not aggressively bearish, so we only moved 12% into cash. Again, this isn’t a crystal ball system. It was merely showing us that, all things being equal, risk was outweighing reward. At the end of the day, in order for markets to materialize that risk, you need a catalyst. And baby, did we get a catalyst in the Coronavirus. Very nasty situation.

On Friday’s BNN show (link here), and on last weeks blog, I noted that I would post the newest Bear-o-meter score on Monday. Well, its Monday. And boy have things changed since last month. But for the better. At least from a market risk perspective.

The Bear-o-meter has scored a 7 out of a possible 8 in its risk -outlook. That is pretty screamingly bullish. Here are the factors that changed the score by a whopping 5 points since last month:

Value: SPX P/E score has moved from neutral to bullish, adding 1 point to the compilation

Trend: The SPX moved below its 200 and 50 day SMA’s. That gave the compilation negative scores.

Sentiment: This was the biggie. Smart/Dumb score went positive. As did the VIX score, giving us a very bullish score when it hit 40 on Friday.

Put to call ratio also moved into the “fear” zone – that’s good for a positive point.

Breadth momentum: Both the New High/Low and the % of stocks > than their 50 day SMA’s went oversold, providing 2 points to the compilation.

I might add to this reading that on Friday, we saw a Hammer Reversal Pattern. This doesn’t necessarily mean an immediate turnaround (although it often does)! But it does indicate a certain degree of washout. I recall in 2009 we had a few of these candles that lead us near the bottom. The hammer basically shows us that the selling in the morning was taken out, to a large degree, by smarter money in the afternoon.

Conclusion

We’re darned close to the bottom now. We may back and fill a bit, but I don’t see another double digit selloff. It may be choppy, there may be a few percentage points (or not) left in the selloff. But to me, everything looks pretty positive. I plan on legging in, a bit at a time as the market proves to hold support. Friday’s low did test near the 2850 zone that I noted on my last blog. Lets see if that holds.

Recall John Templeton’s famous words…

To buy when others are despondently selling and sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.

 

Next week’s webinar

The next Webinar features ValueTrend Fundamental Analyst Craig Aucoin, CFA. He will discuss how we tie fundamental factors in with technical factors in selecting stocks. Link to sign up for the webinar here.

 

15 Comments

  • Hi keith,
    Good call re Monday’s reversal. How important will it be for the next couple of days to continue this recovery versus a negative day hammering the markets back down
    (kind of like “whack-a-mole).
    Thanks,
    Ross

    Reply
    • Thanks Ross. We bought some stocks early in the day yesterday. So far, looks like a decent decision. We still have about 6-7% cash. And gold.
      The next day or two would be good to see a bit of follow up. But the most important thing is to understand that we may have another test of the 2850-ish support level noted on my blog of last week. We hit that (well, actually a smidge over that level) on Friday’s intraday capitulation point. Yes, it could be a “v-bottom” where we don’t re-test, but not as likely as a more complex bottom like a double bottom or a rectangular/choppy look. So – yes, it’s good to see some follow up. But keep your eye on 2850 as support as your more important benchmark in light of a subsequent selloff. Thats what will count.

      Reply
  • Hello Keith,
    Fantastic call, the Bear-O-Meter was spot on. It;s like the market was looking for an excuse to sell-off and it did on the Covid 19 outbreak. You mentioned we ‘might’ retest the 2850 level again, which may happend the day the WHO proclaimes the Covid 19 is now an official ‘Pandemic”, which is almost certain to happend in the next weeks or months. On a humanitarian view, this is a real tragedy to peolpe everywhere as this virus has killed thousands of people throughout the world. The U.S is going to start testing thousands of people so my guess is viral infections will rise significantly in the U.S with this new testing. Covid 19 is the black swan that appeared out of nowhere, it always is that way.

    Reply
    • Good point Ray
      These things always come out of the blue
      Ironically, it’s what you don’t know that you should be afraid of.

      Reply
  • I would think as long as the vix holds 30 ish level the market has continued dangerous downside potential

    Reply
  • Again, thanks so much for your updates Keith. I think the last I read from you about gold was that you were going to start getting out. I think your caveat was if the market settled down, It sure doesnt appear to be. Gold stocks surging today. So short term, what are your thoughts on gold producer stocks short term.

    Reply
    • I’ve still got them. And a bit of silver (4% gold, 2 % silver). I may sell in a while–looking for anywhere between current levels and mid $1700’s. Might as well hold while the market works through its fears, as you say!

      Reply
  • Thanks for the advice Keith. I hope you done mind me asking about the short term outlook of the C$ vs. US$.

    Reply
    • Tom–I’ve been building a house in Florida over the past year. So you bet I’ve paid alot of attention to the dollar, and know its pattern!
      Its bouncing 1.30 to 1.35 range over and over since Q4 2018. So that’s 18 months of range-bound action.
      The top of the range is within sight now.

      Reply
  • DOES THE BEAR-O-METER HAS ANYTHING IN COMMON WITH THE CNN FEAR AND GREED INDEX?

    J.P.

    Reply
    • Good question JP
      It doesn’t incorporate that index–but it has some similarities in that it does measure investor surveys (smart dumb) and greed/fear (put/call, VIX)
      Sentimentrader.com does incorporate the CNN fear index into one of its collectives

      Reply
  • Hi Keith,

    I really enjoy reading your blog and seeing you on BNN!
    Is it possible to get an update on the what the Bear o Meter is currently indicating now that there is a Russia/Saudia oil production dispute?

    Thanks…PEP

    Reply
    • I’ll do an update later this week. thanks for the idea–normally I do one a month, but..these are trying times calling for different activity!

      Reply

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