As you probably know, I post a monthly reading for my Bear-o-meter in the first week or so of each new month. This month, we saw a similar risk-rating to last month, but for different reasons. We’ll get into that today.
Quick refresher for the newbies to this blog: The meter reads various indicators under the broader categories of TREND, BREADTH, BREADTH-MOMENTUM, FUNDAMENTAL VALUE & SENTIMENT. A score of 0-8 is assigned based on those indicators. Rankings of 0-2 are higher risk vs. reward periods. Rankings of 6-8 are lower risk vs reward periods. Risk and reward are present on the markets at all times. The Bear-o-meter simply presents the theoretical balance between them. Most of the time we tend to see 3 -5 readings. That’s because most of the time the market isn’t presenting anything special insofar as opportunities or risk. Like any bell-curve, there are few outliers towards either end of the spectrum, and that’s when we should pay attention.
The meter has been good at providing a heads-up (aka leading indications) of oversold (low risk) or overbought (higher risk) markets. Do a search of this blog in the search tool and type Bear-o-meter” and you will find the monthly readings. If you want the secret-sauce formula, read my newest book Smart Money Dumb Money – available on Amazon.
Last month, we saw a reading of “2” in the meter. This month, that score has not changed. Its still “2”. But the factors creating that score have rotated a bit. Either way, a “2” is not a brutally risky score, but it is certainly skewed towards caution. Lets look at the factors that changed.
Breadth – mostly improving:
Last month, my breadth indicators were bearish across the board. This month, we’ve seen some pickup in broader market participation. For example, the # of stocks in the S&P 500 above their 200 day SMA’s has risen from a very concerning 40% (meaning that 60% of stocks in the SPX were below the MA…meaning too few participants in the rally). Its currently about 54%. You will want to see my interview with Greg Schnell later this week regarding the importance of this indicator. Greg shows that sustainable new bull markets do not tend to emerge until the % stocks > 200 day SMA’s get well into 80+%.
The Dow Industrials are rising, as last month, but now we have the Dow Transports playing catch-up. They are in-sync, although it must be noted that the industrials are still outperforming the transports. Chart below:
Sentiment – heading towards complacency:
Last month, most of the sentiment indicators were neutral. This month, we have the Smart/Dumb money compilation (Sentimentrader.com) in the penalty box, although only for a minor infraction. The base warning level when markets are “too complacent” is below -0.25. Its at -0.23. Truthfully, then indicator usually gets much lower before it signals a sell. But, the Bear-o-meter uses quantitative data, and the reading is officially negative for this indicator:
The Bear-o-meter continues to reside in the higher, but not highest, risk / reward zone. Breath is improving gradually, but sentiment is suggesting early signs of complacency. Craig and I spoke about breadth this morning – noting that our own portfolios had some outperformance late last week despite what is now (temporarily) a very high cash weighting (37%!). That cash will come down closer to 30% again soon. The point is that our portfolio is full of value stocks, special situations, and certain commodities. These were overlooked in the recent AI madness. Now, they are seeing some life. This is a good sign for the market if it will expand its view beyond a half dozen hype-stocks.
The greatest thing we can do as investors is to remain disciplined. That discipline means a willingness to change. As the SPX moves ahead of 4200, we will look for further time above that point, continued breadth confirmation and an overall improvement in the Bear-o-meter. We are more than willing to deploy our cash as proof of a sustainable bull market arises. Its all about the data, not about an opinion.