I last updated my short and longer termed trading systems in July. The longer termed system, which I like to call my “Bear-o-meter” was neutral at the time. Now it’s bearish.
Recall that the Bear-o-meter consists of various factors, including breadth indicators, trend indicators, seasonality, sentiment indicators and even a fundamental factor. These indicators are assigned different weightings. The grand total is tallied according to the values each indicator reads on a given day. From there, a zone of buy, neutral or sell is indicated.
Currently, we have a “SELL” reading on my “Bear-o-meter”. I re-tally periodically, and will report the results on this blog if we move out of this sell zone. But for now, we are in “sell mode”. Levels of the Smart/Dumb Money indicator, as illustrated on Monday’s blog and the extremely low readings on the VIX (CBOE volatility indicator that is comprised of options premiums), along with bearish seasonality for August/September tell us why the indicator is at the bearish end of its scale.
I’m also seeing a bearish reading from the Dow confirmation factor (Industrials are rising while Transports have weakened recently). However, the Moving Averages’ I follow and the broad market Advance /Decline line are bullish on all counts. Netting it out we have more bearish than bullish factors in the Bear-o-meter.
So what to do?
There are 3 ways to reduce an equity portfolio’s risk if your system detects an unfavorable risk/reward tradeoff.
- You can reduce exposure to equities by selling some stocks and raising cash.
- You can also hedge with an inverse ETF (single inverse is preferred over the leveraged types) – this effectively creates the effect of increasing cash without selling more equities. The inverse ETF will rise and fall opposite to the market. Thus, stocks with a high correlation to the market (i.e. beta 1.0) will be offset by the amount held in a single inverse ETF.
- Finally, you can elect to hold a greater component of low beta stocks for those equities you elect to keep. Lower beta stocks will move less than the market in a correction.
By combining actual cash with a small inverse position, we effectively moved approximately 40% of our ValueTrend Equity Platform into cash from the prior 20% weighting in mid- August. My battle plan is to use that cash to offset potential downside as/if and when markets decline – and to act as opportunity capital to be redeployed when markets offer favored stocks and sectors at lower prices.
Keith on BNN tomorrow: Wednesday August 24, 2016 at 1:00pm
Phone in with your questions on technical analysis for Keith during the show. CALL TOLL-FREE 1-855-326-6266.
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Keith Richards will be at The MoneyShow Toronto at the Metro Toronto Convention Center on Friday Sept 16th at 12:45
Keith’s topic: Have your cake and eat it too: Playing the risk/reward trade-off.
Yes, it’s still a bull market. No, it’s not going to be a simple buy-and-hold ride. The good news is, this type of environment is what investors familiar with technical analysis thrive in! Attend this seminar and learn how to think and act like a technical analyst by understanding the basics of market realities – and how to position your portfolio to limit your risk in the current investment environment.
I followed your lead and trimmed a stocks running into resistance, such as MIC.TO.
Thank you for the advice.
I’m just finished reading your book.
thanks Matt-hope you enjoyed the book.
Keith as always thank you for the blog, and the every interesting content. Would it not be an idea to buy the VIX if in fact we are heading into a sell off.
David–search the blog and you will see my notes when I last traded a VIX ETF. Andy asked me about that strategy on the BNN show last night. In a nutshell: you have to be be very accurate in the timing on the VIX to profit on one of those ETF’s, due to contango. In my case- i bought a VIX ETF (Horizons) late May and the VIX doubled after Brexit vote at the end of June–but I saw considerable deterioration on the share price due to contango-time erosion-so time worked against me despite my accurate call on the price of the VIX. I ended up down a little on the trade–again this was in an atmosphere where my price entry point would have doubled the ETF price had it not been for contango!!So—VIX ETF’s are not like a stock–where it wouldn’t matter how long it takes–a double is a double! Time is your enemy.
Most of the stocks I own made a significant reversal from down to uptrend on the same day: Jan. 11, 2016. I first noticed this about six months ago in the accumulation-distribution line. Why did this happen virtually all at once? Was it all those portfolio managers coming back from the holidays all brimming with good cheer and optimism? Or something more fundamental? Might make an interesting blog or BNN comment.
Keep up the good work!
Sometimes its a stampede of following the leaders Bruce–so if you start to see a clamoring to get into the market, or conversely a run for the exits, you will see other stocks follow and more volume as the crowd piles into that trading direction
always enjoy you when on BNN. You are on of two people I listen to and use you advise. Now following you blog.
Glad to have you following! If you follow us on Twitter (@Valuetrend) you will be notified of new blog postings
A BOLLINGER BAND OVERLAY EMPHASIZES HOW LOW VOLATILITY HAS BEEN. IS THE NARROWING OF THE BAND A LEADING INDICATOR OF A MEANINGFUL MOVE ON THE UPSIDE OR THE DOWNSIDE (20 YEAR, DAILY CHART SPAN)
BY THE WAY, IN THE FINANCIAL POST (10/08/2016, INVESTING PRO), DAVID ROSENBERG TALKS ABOUT “A COGNITIVE DISSONANCE IN THE MARKET”: “LONG BONDS, SHORT THE FED FUNDS FUTURES, LONG EQUITIES BUT LONG BONDS. LONG GOLD BUT LONG EQUITIES. LONG THE DOLLAR AND LONG THE PRECIOUS METAL”. THE PROMINENT ECONOMIST ADDS “IT IS NEXT TO IMPOSSIBLE TO MAKE SENSE OUT OF THIS (…) I AM NOT EVEN SURE BENJAMIN GRAHAM COULD IF HE WAS STILL ALIVE!” SCRATCHING HEAD TIME?
JP–its so much easier to be a simple guy following simple rules than Rosenberg’s comments. I like this rule:
Higher highs + lows = uptrend = go long
Lower highs + lows = downtrend = short or sell out
Meandering lows and highs = base, top or consolidation = wait and see.
I know you manage both a fixed income and an equity platform. If your bear-o-meter says sell equities, do you ever use the funds in the equity platform to buy a fixed income product that is inversely correlated to the market such as ief or tlt? Thanks
Eric I don’t buy bonds in the equity platform, but we do buy inverse ETF’s. In fact, we hold 5% in the HIU inverse right now–not a lot, but enough to equate to holding more cash by offsetting a bit more of my equity beyond the actual cash we hold.
The income platform is much more passive–we hold dividend payers that we accept will fluctuate–but we do look at long term trends to ensure they are in place – and will sell if they break. As such, we can charge a lot less management fee for the income platform, as we dont pay the large trading volume fees that the equity turnover (350% per year!) entails.
Hi Keith, are you still bearish on the s+p given how the market cannot close under 2160 even and dip buyers always seem to come in every time the market is down 0.5-0.6% intraday bringing the market back up by the close of day every time it looks like a correction/pullback may be commencing? It does not seem that bears are strong enough to pull the markets down so perhaps the market is simply digesting gains as it did in the 2050-2060s area (before running higher) when many were calling for the market to fall?
Thanks for your opinion and as always great job on BNN. You should be on more often as you do a terrific job teaching us about TA! Maybe you could get your own 30-60 min show on BNN teaching TA as there are no such shows and it would be extremely valuable to many viewers and maybe of great interest to BNN.
Brianna – the Bear-o-meter is a risk/reward measurement tool. so it tells us what the relative risk on the market is. I’ve emphasized before that its a pretty far-looking indicator, a macro-indicator of types. As such, this market can “melt up” further–and perhaps will never fall (don’t hold your breath on that one!) – but that doesn’t change the fact that the risk has increased –enough to make me feel that the reward potential isn’t quite as attractive
Having said that – we are 22% cash, 5% hedge (which effectively acts like 10% cash), and 10% precious metals right now–the balance is in stocks. Yes, we are lighter on equities than in a “fully invested” state but that does not imply we are fully out. Again–I measure the potential risk vs. reward, not an absolute knowledge of which way things will actually go.
One last thing–I’ve seen this before. My parameters suggest risk, the markets keep going up—until one day….