Bear-o-meter suggests some signs of concern

December 9, 20236 Comments

Today we’ll take the monthly reading of the risk/reward compilation known as the “Bear-o-meter”. Most of you know how this compilation works. It ranks a series of indicators under the categories of Trend, Breadth, Breadth-Momentum, Sentiment, Value, & Seasonality. A score of 0-8 is assigned, where 0 is a very poor return potential vs high potential risk, and 8 is a very high return potential vs low potential risk. The higher the score, the better.

 

The current reading on the Bear-o-meter is “3”. That’s the dividing line between the high risk zone, and the neutral zone (Star Trek nerd alert!). While a score of 3 isn’t a bad score – do keep in mind that the meter gets a 2 full points just because we are in a seasonally favorable time of the year. Plus, the meter got 3 points for the S&P 500 holding above the 200 day, and 50 day Simple Moving Average. So that’s 5 points – yet we total only 3 in the overall score.

Clearly, there were enough negatives and neutrals scores to keep our overall score low. In fact, two factors in the compilation were super close to ringing up negative points – which would have thrown the meter fully into the danger zone. I’d like to start off by looking at these indicators, which are the % of stocks above their 50 day SMA’s on the SPX. And the VIX.

We have a situation where the S&P 500 is up +18% for the year, and yet the average stock is only up +5%, while more than 40% of the index is still down for the year. That’s a bull market for passive index investors, but less so for everyone else. Breadth matters, and the last time that
concentration and bifurcation were this extreme was back in the 1999 tech mania. We all know what happened next. David Rosenberg

% stocks > 50 day SMA’s on the SPX

You’ll note on the % of stocks on the SPX ahead of their 50 day moving averages that the indicator was recently at my overbought level of 85. But todays reading shows its come down to 83 – which is still a lofty reading, but not at me official “negative score” level.

VIX

The VIX is assigned an official bearish (too complacent) reading if it breaks below 12. It closed at 12.35 on Friday. Again, not an official bearish reading according to the Bear-o-meter – which keeps things quantitative and binary to avoid opinions. But boy, its close to a sign of complacency.

 

Smart / Dumb Money confidence

Boy, the smart money is REALLY not in love with this market right now. Retail (dumb) money is, on the other hand, fully on board. The spread – shown below, sits at -0.5 (aka a ratio of twice as many dummies liking the market than smarties liking it right now). Generally this means trouble.

NYSE AD vs SPX

Its best to see the NYSE broad market Advance Decline line (black line) trail along in relative performance with the SPX (red line). If they start to diverge too much, like now, its a sign of the more concentrated SPX outperforming the better diversified index of the NYSE. Generally that isn’t great – see Rosenberg’s quote per above.

Dow divergence

This indicator, which pits the Dow industrials (INDU) against the Dow Transports (TRAN), is a timeless breadth indicator that is actually pretty good at spotting turning points on the market. The TRAN’s have been diverging negatively (underperforming) the INDU for 2 months straight now. Something’s gotta change to keep this market healthy

 

Conclusion

Hey, a system doesn’t work if you change the rules as you wish, so I stick with today’s low-neutral reading of “3”. We’re holding a bit of cash back, but we are forced to continue legging in so long as the trend stays intact. But there’s a reason why the Bear-o-meter reads only a 3, even though we are in a seasonably good time of the year AND the trend is up. Underlying all of that good news of late are some warnings. I think what this means is that we’d better be prepared to sell if the trend starts to reverse. The underlying structure isn’t there to support anything but a perfect environment.

6 Comments

  • You say:

    “dumb money is, on the other hand, fully on board”

    Well, me thinks I should shy away from the dummies. LOL

    Reply
    • Yes Mike, you should in all aspects of life!
      If I posted the two lines (rather than just the spread – diff line) you’d see a gap between the two groups almost as broad as the gaps between Trudeaus brain synapses.

      Reply
  • Hi Keith,
    After Fed Powell’s statements today, the S&P 500 percentage ahead of the 50 day moving average is now just over 89, and the VIX moved even closer to the complacency figure hovering just above 12.
    The market is pretty exuberant though now that the Fed seems to be signalling rate cuts.
    Did the Smart money start moving into the markets today based on Powell’s statements? Or with the above 2 indicators flashing a warning, was it mainly just the dumb money moving into the market today with the gap of the smart versus dumb money continuing to widen even further?
    Thanks for your insights.
    Wendy

    Reply
    • Wendy–I must admit we spent about half of our cash (now down to about 6-7%) in the morning yesterday (Wednesday Dec 13). We had no opinion on how the market would react to the Fed–but we did want to buy a few stocks that had come down to a point of great interest to us, no matter what the Fed did. The market’s thrust has been unbelievable. Its so overbought. But I have been there, done that in the past and have learned – don’t fight the Fed, don’t fight the tape. As I note in my conclusion on this blog–I think there are underlying problems BUT, our trend following rules force us to keep legging in. In other words, hold your nose and buy on dips. In this case, the morning on Wednesday was flat, with oil and other value areas bid down to support and holding. So we decided we did NOT want to buy into hype stocks. In fact, we sold a couple, including AAPL in the Aggressive Platform, which had gone up 10% in a month, so we took profits. Instead of stocks like AAPL etc, we decided we would buy a few stocks that looked to be value plays (Craig’s work) and starting to move off of a support level (my work)–in that way, avoiding owning overhyped stocks in case the gong show (this market) comes to a crash n’ burn. We still have cash to look for tax-loss selling victims in the NY. And we continue to look at oil (see todays blog). We’re also quite willing to sell again. Hope that helps.

      Reply

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