Been there. Done that.

May 27, 20134 Comments

Goldman Sachs hiked their 2013 target for the S&P 500 from 1575 to 1750, now that the market has reached their original target. Having worked for a large US brokerage in the past, I am familiar with this mentality of chasing a higher and higher targets as markets move upwards.  GS’s “valuation adjustment” was done because of “the extremely low interest rates” (as GS’s analyst David Kostin explained). Interesting that GS would raise their market target based on this rather old fact, given that interest rates have been at the same level for over 4 years now. While I remain a bull, I will say after 24 years of stock market investing – it has been my observation that the big US brokers are not always your best source for target accuracy or timing. My old firm had a 15,000 target for the DJIA for the year 2001. While that level was finally hit 12 years off projection (this year), their enthusiasm was more than a little inaccurate from a timing perspective.

Last Wednesday the S&P hit 1687 intra-day before reversing and closing lower on the day. The candlestick for that day looks like a bearish engulfing  formation. I believe that this may be the beginning of the much needed market correction within the bull market. Further, my newly introduced compilation of indicators known as the Bear-O-Meter -more on this below- suggests a slightly higher than normal risk/reward level now. A downside of between 1600 (50 day MA and first support) and 1550 (next support) might make sense for the S&P. For those who hold cash, this may become an excellent buying opportunity.

 

Introducing the ValueTrend Bear-O-Meter

Welcome to the ValueTrend Bear-O-Meter.

This simple device reads risk levels on the U.S. S&P 500 stock index. Its purpose is give advance indications of potential bull market conditions, or conversely, to warn in advance of potentially bear market conditions. I put this model together simply as a way to review a collection of the indicators that I’ve been using over the years in one quick glance. This indicator is NOT a near-termed model. Instead, it is a macro indicator that provides insight as to the risk/reward potential for the US markets. While I will not disclose the specific indicators and parameters of those indicators that are used in each category, I am happy to list its major components, and their weight within the indicator.

They are:

Weekly breadth: Score 0-1

Seasonality: Score 0-2

Fundamental value: Score 0-2

Momentum: Score 0-1

Trend analysis: Score 0-1

Sentiment: Score 0-1

The Bear-O-Meter is scaled from 0 to 8. A low rating suggests a high risk vs. reward scenario – stocks may be starting to become a more risky investment. A high rating indicates a high reward vs. risk potential. Again, the readings are not short-termed timing indications – traditional chart and indicator analysis is more adept for our short termed decisions. Instead, the indicator should give us some “colour” as to the risk vs. reward levels present on the markets at any given time. Looking at the indicator over the past 13 years, it read:

  • Bearish from March– September near the 2000 top,
  • Bullish approaching the Sept 2002- April 2003 market bottom,
  • Bearish between May 2007 to December 2007,
  • Bullish again between December 2008 and July 2009
  • In between those times it read neutral

The Bear-O-Meter reads 3 at this time, which is neutral to moderately bearish. Risk is entering into the markets. I will endeavor to post this meter periodically as the reading change in a meaningful manner.

4 Comments

  • Keith,

    This is a very neat mechanical model you’ve built, especially since it differs from most trend following models in two ways:
    – There’s been no false signals, especially in the last 5 years when there’s been higher than normal volatility and major trend & momentum breakdowns.
    – When you do get a signal, it happens before the peak/bottom. It looks like you achieve this with your sentiment & valuation components.

    Like you, I like the approach of using charts for trade timing and the mech models for a macro view of the market. Last month, I was watching the S&P500 reach it’s 13-yr resistance level while my mech models were both holding 100% equities. That was a sign not to overly bearish – yet.

    Look forward to watching your indicator.

    Reply
    • Thanks Gogi–it tends to be such a “macro” view that the readings stay put for long, long periods. But thats good from what I wanted to use it for.

      Reply
  • Hey Keith, thanks for sharing this info. Just one question. Was your Bear-O-Meter showing any warning signs just before the 16% decline in 2010, or the almost 19.5% decline we got in 2011 for the S & P 500.

    Reply
    • Good question Tony
      April 2010, before the correction that spring, the indicator was neutral (4) – no cause for concern
      July 2011, before that summer’s larger correction, the indicator was bearish (2). It went back to neutral October 2011.

      The components of this indicator are longer termed, and looking for big movements – as mentioned, its better to view traditional chart patterns etc for shorter termed timing. But the bigger 2011 bearish movement would have been signalled by this indicator, and a return to neutral (4) signalled that fall.

      Reply

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