Bear-o-meter shows excessive market optimism

November 4, 201912 Comments

Sentiment indicators are contrarian. Essentially, if market participants (particularly retail investors, aka “dumb money”) are “too” bullish, its something to be worried about. Sentiment indicators are quantitative measurements of investor confidence. They look at moneyflow statistics, and confidence surveys. They play off of the “Greater Fool Theory”–which essentially says that a stock, or any asset (real estate, commodity, currency, country indice, etc) can go up and become more and more overvalued because there is always a greater fool ready to pay a higher price. However, once the greatest fool (or the final group of greater fools) has/have bought -there are no greater fools waiting on the sidelines to bid the asset up any higher.

I include 3 sentiment indicators in my Bear-o-meter compilation. They are the CBOE Put/Call ratio, the VIX volatility index, and’s Smart/Dumb money confidence spread.  Each one of those three indicators has moved in a negative direction (aka are now indicating high risk overly bullish sentiment) since last month. Officially, the Put/Call ratio is reading bearish.

That, along with the Smart/Dumb confidence spread.

The VIX is teetering on the brink of becoming “too low” but, as of today, isn’t there. My parameter is for a reading below “12” on that index. Its at 12.8 as I type this. One or two optimistic days could shove it down into a bearish reading.

Last month on October 2nd, the Bear-o-meter moved into a very bullish reading of “6” (out of a possible 8). The compilation correctly identified that the market was, on a relative basis, a lower risk bet than it had been for most of the summer. The SPX advanced 3% since that signal. Not bad for a month.

The Bear-o-meter is showing a fairly low reward/risk reading. Its reading a very low score of “1”. The diagram below indicates that we stand at the low end of the risk reward scale, at least according to this compilation.

Currently, the Bear-o-meter presents a much higher risk picture for the markets. Not only have the 3 sentiment readings turned bearish since October. Its also showing an overbought reading on the New High, New Low indicator. Normally, you want more highs than low – but if a market becomes overly enthusiastic, this indicator tends to show us that momentum is becoming overdone. And that’s the case right now.




I’ll finish this blog with a reminder. That is: the Bear-o-meter is not a pure market timing tool. Markets have risk and reward built into their structure at all times. A high risk market, like now, can go higher. A lower risk market, like we had last month, can still decline. The Bear-o-meter simply attempts to measure the odds. Right now, odds are we may get some noise on the markets. But, seasonality is very, very strong in November. So I might suggest that if risk does decide to make itself known, it may hold off for a month. Or not. Again, its a relative thing, this game of risk vs. reward. Anything can happen.

I’ll admit that we are almost fully invested in the ValueTrend Equity Platform right now. We hold about 14% cash in the Equity Platform (we raised some today), but thats substantially lower than our average cash weighting of about 25-30% over the summer. That smaller amount of cash we currently hold is there for some specific stocks should they hit our buy prices. Otherwise, we’re in. But we’re aware of the risk. Perhaps you should be too.


  • Always appreciate your comments Keith. I think back only to last year and the low was Dec. 24, our strongest time of the year supposedly. Anything can happen but you have to think this rally will slow down soon.

  • Oil typically does poorly around this time of year. However, the last few day it seems to be holding up well. Do you think it is a good trade right now?

    • Personally I’d like to see it break out. Even with the rally, its still a lower low. And the producers are not breaking out either. At best, this is continuation of a consolidation. But a bust by WTI of $60 might change that picture.

  • VIX is a very poor indicator of where the market is going. 2017 is a good example. It spent almost the entire year on a downward slope, mostly under 12 (twice jumping to about 16). But the S&P ignored the danger signals and rose right through till January of 2018. It’s use seems to be only when confirmed by other indicators. Interesting that it didn’t quite make the 12 mark. As of right now, it’s 13.

    • Hey Fred
      VIX in 2017 was an historic anomaly–it had never stayed that low for that long–Take a look at long charts on the VIX–you will see this is true
      But, to your point–literally NO factor within the Bear-o-meter is, by itself, overly useful in an isolated manor. Instead, it is the entire compilation that provides a more accurate picture (although still, nowhere near “perfect”) of the risk/reward tradeoff at a given moment. That’s because the compilation looks at 6 major broad market categories covering important aspects of technical analysis. Those categories (Breadth, Value, Trend, Momentum, Sentiment, Seasonality) are made up of a total of 12 indicators.
      Like I always say–no one indicator is the holy grail of analysis.

  • Keith,

    Great article and insights. I was wondering what are the positives factors you’re looking at besides November seasonality. Of course we have some of the major indices breaking through long time resistance. Besides that are there any positive indicators / signs you’re looking that are keeping you in your current position?

    • Positives:
      -Seasonality (as you note)
      -Breakout by SPX over 3020
      -Above the 200 day SMA and the 50 day SMA yet not overbought on the mid-termed momentum studies I follow
      -Dow Theory (INDU/TRAN) confirmation
      -Positive breadth (AD line)

      • Thanks Keith. The mid-termed momentum studies you mentioned are those free resources or subscription-based content (like Sentiment-trader)?

        • Richard–you need to subscribe to if you want the sentiment studies like smart/dumb money and others. But the VIX and put/call is available on
          So are all of the momentum studies I use–all available on
          The only caveat is the charts with the free version of are very short (historically) so I recommend buying a basic subscription to their service. It all comes down to how serious you are about conducting proper analysis. Spending a bit of money in the right way affords better analysis- which can save you in losses and increase profitability.

          • Definitely interested in the Sentiment Trader subscription. The momentum studies you currently use, do you list those in your book Sideways? I just completed Smart Bounce, excellent read, but don’t recall the topic discussed there but haven’t read Sideways yet (next book on my reading list).

          • Richard–the book Sideways is indeed a pure Technical Analysis book–so it does cover the indicators I use, and actually brings you through an analytical exercise – sort of like what I did in SmartBounce–but in the case of Sideways it has you go through a step by step process on looking at the market, and then drill down to the sectors and stocks worthy of consideration. It incorporates using the momentum indicators
            For what its worth, I feel Sideways is my better book–written for people like you who are students of TA!

        • Sounds great, thanks. Look forward to reading it, even more so since you say it’s better than Smart Bounce.


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