Bear-o-meter suggests high risk market – with a neartermed bounce

Each month I publish the reading of my Bear-o-meter risk/reward indicator. The Bear-o-meter is a compilation of various indicators covering the broad views of value, seasonality, market breadth, breadth-momentum, sentiment and trend. It is quantitative in nature – no “opinions”, bias or conjectures. Only binary readings of these factors to help us measure the relative weighting between risk and reward. For those of you following this blog regularly, you know that the Bear-o-meter is often a pretty accurate reading of that relative risk/reward tradeoff for markets. Last month we witnessed a rare “High Risk Alert” signal, which turned out to be another accurate call by the indicator.

The title of this blog tells you where the meter stands today. Despite the risk that the indicators suggest, I have some good news for you. The neartermed indicators suggest a highly probable neartermed upside move, coming to a theatre near you. However, the longer termed picture remains bearish. Today we will look at the indicators that suggest the neartermed upside is positive.

I took this reading on Sunday May 8, meaning that the data was from Friday the 6th. Again – despite the emergence of bullish signals from three of the previously bearish indicators last month, the overall score moved up only one point from “0” (extremely high risk) to “1” (high risk). That’s largely from a loss of 2 points by the Seasonal factor within the meter. Below I have posted those three indicators illustrating these positive changes.

Of note, you can learn to construct the Bear-o-meter yourself by referring to my latest book Smart Money, Dumb Money.

Value

My market value reading for the Bear-o-meter is a simple one. I use the trailing earnings PE ratio for the SPX. Note that I do not use the forward earnings PE . That’s because forward earnings are a consensus of earnings analysts for the market  by analysts.  They can be/ often are- wrong. I only want to use quantitative non-opinionated data in this meter. Forward earnings are an educated guess. So I use trailing – which is historic earnings for the year. I use MULTPL.com for the PE reading. I assign zero points for PE above 23. If the PE is between 13-23, the meter gets one point. If the PE is below 13, this indicates an extremely undervalued market and it gives the meter two points. Now, at a ratio of 20.8, the meter gets one point. It is significant to note that a reading below 23 has not been seen for a very often. Markets have not been cheap, let alone fairly valued (as they are now) for a while. Here is their chart. Note that after valuation spikes, such as 2001, 2008 and the recent spike in 2021  – markets typically contract until the PE gets into the 15-20 range. In other words, there is likely room to go before markets settle down to a valuation that participants find attractive.

Smart / Dumb Money

Smart/Dumb money is a contrarian indicator. Essentially, when you see corresponding levels of high pessimism by retail investors with high levels of optimism by institutional and insiders, you have a buy signal. Or visa versa. Retail hates this market. Note the location of the red line (retail, bearish sentiment) vs  smart money (blue line, increased bullish sentiment). This discrepancy tells me that the potential for another neartermed bounce.  Perhaps that bounce will be a bit more sustained than the mini-bounce of last Wednesday.

 

Market Breadth

The Dow tenant that demands a confirmation of highs and lows between Industrial stocks and Transportation stocks gives us negative signals if the Transports are not keeping up with the Industrials. If the two are in sync, its a “normal” condition – where there are no points assigned to the Bear-o-meter. However, if the transports diverge positively against the Industrials, we are looking at a bullish indication for the markets. And that’s happened recently.

In April, the Dow signal showed us that Transports (black line) were diverging negatively vs. the Industrials. The signal (amongst others) proved to be accurate as a leading indicator for a selloff. In fact, I find that the Dow INDU/TRAN confirmation indicator is one of the more accurate indicators in the Bear-o-meter. Now, with the Transports diverging positively – we have a signal suggesting a neartermed up-move. The opposite from last months signal.

Conclusion

There is enough evidence from the above factors and a few other indicators ( not mentioned today) to suggest a strong potential for a bounce. For example, the AAII survey of individual investor sentiment is well into uber-pessimistic levels. That’s bullish.

Offsetting the bullish near termed indicators is trend. Currently, the SPX is below its 200 day SMA and has put in successively lower peaks and troughs on the weekly chart. The big picture remains bearish.  As noted in my last blog, if the SPX remains below 4600, the outlook continues to suggest a bearish market.

Keep in mind: If 4600 is taken out to the upside, we must CHANGE our strategy towards a more neutral or bullish outlook! Do NOT become fixated on a bearish theme. Instead, become fixated on what the market is actually telling you. It is OK to be bearish now, and then go right back to a bullish stance if the market meets the above conditions that I am suggesting. Meanwhile, I am assuming that the market is bearish until 4600 is taken out, and as such, I will use the probable rally suggested by the sentiment and breadth  indicators to sell more stocks.

Doesn’t get much more complicated than that, does it?

BTW- If you have not yet enrolled, please take my Online Technical Analysis Course. It will expand on my market-beating strategy that I only briefly cover through these blogs. The course is priced at $100 now, and it is going up in price within the next couple of months. So get on it, if you have not. I think that right now, it is more important than ever for investors to understand the active strategy that I teach in my course, and through my books. Or, if you want ValueTrend to help enhance your portfolio performance, contact us here. We will be happy to discuss how we can limit your risk, and keep your money safe in today’s uncertain markets.

 

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15 Comments

  • “I took this reading on Sunday April 8, meaning that the data was from Friday the 6th. Again ”
    Do you mean May?

    Reply
    • Yes thanks very much for pointing that out Larry–I wrote this one quickly–will correct it.

      Reply
  • This is specifically for the SPX but can we roughly say this same rating affects TSX listed companies?

    Reply
    • Yes and no, Lance. TSX is more energy/commodity focused. Nonetheless, it is still vulnerable, even if it outperforms the US markets

      Reply
  • Hi Keith,

    Hope you had a good few days off.
    What is the support level of S&P now, is it 3800?

    Reply
    • We are right at a neartermed support level in the low 4000 area–this is minor support from the charts, and it is also a round number which tends to be a psychological point. Given the capitulation action and the very strong neartermed sentiment signals for a bounce–I might imagine that markets will rally really soon- today may even be the washout before the rally I suggest. However, the next major support level is waaaaayyyy down near 3500 or just above that!

      Reply
    • I think I already answered that question Joy–4000 (now–round number), then somewhere near 3500-3600

      Reply
  • Hi Keith,
    I thought that you had mentioned that 3,800 or 3,850 was the next S&P 500 support level. No? Maybe I am confusing that level with something else. 🤷🏼‍♀️ Wow, 3,500 is still a big drop 😵‍💫

    I am very surprised that oil stocks are selling off so forcefully given that the price of WTI is still over $103 today. Thoughts?

    Reply
    • Oil stocks are not selling off on fundamentals–they are quite overbought and staging a perfectly acceptable and anticipated pullback

      Reply
  • Hi Keith

    I took your course and it was excellent. There is so much helpful information in it.
    I highly recommend it to anyone interested in learning about the market and protecting their portfolio. Thanks for sharing all your knowledge.

    Reply
  • So much for that 4000 level on the S&P. Soon both the dumb money and the smart money will exit this market

    Reply
    • We moved to 28% cash in our equity models a while ago and it STILL doesn’t feel like enough. However, today we see some morning upside–which lately has faded in the PM per the blog. If it lasts it will be a great opportunity for some short termed swing trades, followed by a further reduction in equity exposure. For today, we sit tight. Interesting to see today and Monday to see if we get the bounce starting.

      Reply

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