The Bear-o-meter has been covered numerous times in this blog. Briefly, it is a risk/reward measurement against the US markets. It is not a pure market timing tool – rather, it gives us an idea of the current environment stacks up against historical risk and reward tendencies. I rank 12 indicators that fall into 5 broad market macro Technical analysis parameters. They are: Trend, Sentiment, Breadth/Breadth-momentum, Value, Seasonality. The Bear-o-meter is ranked 0-8 from least attractive risk/ reward to highest. Three categories, which can be seen on the graphic below, shows high risk, neutral, or lower risk zones—all depending on the recent numeral reading of the compilation.
I try to update the Bear-o-meter about once a month – although often I don’t bother if there is no change. Well, this month has seen a net no-change reading on the Bear-o-meter since the last reading on July 8th. The current reading was taken August 9th, and, as with last month, it still reads “4”. However, I still thought I would post its reading.
Changes to my parameters were a negative score on the VIX (after it fell below 12) and a positive score on the market vs. the 50 day SMA (vs. a neutral score last month). You can PM me if you would like a copy emailed to you of a research report I did for the CSTA on the Bear-o-meter. Hit the “contact” button on our website and I’ll get your request.
According to that reading of “4”, the environment remains relatively neutral for the US stock market—risk/reward potential at this time may be roughly equal. Normally, we would hold about 15% cash in such a situation. But, due to the added risk of August/September as potential corrective months (according to the seasonal experts out there), we’ve kept a bit over 20% cash in our Equity Platform. Seasonal trends are often poor for August and / or September, plus the rhythm of the market is suggesting a setup for a short termed correction – per this blog. The chart below shows us that the trend and moneyflow are slowing but still fine, although short termed indicators like stochastics are a bit overbought.
If the market doesn’t correct, so be it. I tend to play it safe by holding a bit of cash when the Bear-o-meter reads less ideally, and look for opportunities based on my observations to spend that cash. At the end of the day, it’s not an absolute that we see a correction in the next month or so– we shall see.
The rising wedge in the s&p looks like it could resolve downwards
Hi Dave
Rising wedges by themselves are not overly predictive–read Thomas Bulkowski’s book for the stats–but in personal experience, I find them so hard to actually define. What one person may see as a rising wedge, another person sees something else. Having said that – there are other reasons (per the indicators that comprise my short termed timing system) suggesting a correction–not to mention seasonality.
Hi Keith,
I’m a bit surprised the meter still sits at 4. The breadth or participation is not great, at least not for the $TSX. Geopolitical (not really measured) risks are increasing too.
Thx Ron. Since I wrote the article, you can see that the market has been up/down flat-ish. so – I would say so far it is right (4 is cautious but neutral). I hold 20% cash right now. That’s because, in this environment, it is not bearish yet, but not a screaming bullish situation either. Anything can happen–that is what “4” indicates.
Morning Keith,
A curiosity question specific to your line – “Changes to my parameters were a negative score on the VIX (after it fell below 12). It appears that the Bear-o-Meter calculates a falling VIX as a negative. I would of thought that it would be considered a positive. Can you clarify.
Thanks,
Good question Dave
A level below 12 indicates the market is getting complacent. so, while a falling VIX is good for a while, when it gets to a certain level (below 12 for this study) we have a level of complacency – as illustrated by low options premiums that the VIX measures –and that is a sign of caution.