The Bear-o-meter is a risk/ reward indicator. It’s a compilation of indicators falling under general classifications of Breadth, Value, Trend, Breadth-momentum, Sentiment and Seasonality. The Bear-o-meter assigns risk on a scale of 0-8. A reading of 3 or under is generally a higher risk market. A reading of 3-5 is about “average” for a risk/reward tradeoff. Anything 5+ is considered lower than average risk.
I try to read the Bear-o-meter once a month – near the beginning of each month. The Bear-o-meter has been holding steady at “neutral” risk/reward since the beginning of November. In fact, it’s mostly hung out between neutral risk to bullish risk/reward readings over the past 2 years. Only on three occasions did the indicator move into more bearish territory. The most foretelling of these readings was seen October 3rd, 2018. The market plunged substantially into Christmas of that year – and the decline began right around the time of the high-risk reading. Here is the blog from that date talking about the plunge in the indicators value from low risk to extreme risk that month.
The other two changes from neutral to high risk readings occured in February of 2019, and July of 2019. The February reading was a head-fake, although I guess that the risk indication did materialize by the spring of that year. Still, you wouldn’t have gotten further ahead by selling on the high risk reading that month. It took until April for the market to put in a minor peak before falling a few percentage points into June – which only brought the market back down to the point where the indicator flashed higher risk. In July, we saw a correction of about 3% or so on the SPX within a month following the high risk Bear-o-meter reading. So, in two of the only 3 high risk readings over the past two years the indicator did do its job in giving a heads-up. One of them was too early to be of any value.
This month, the Bear-o-meter remains at a neutral score of “4”. A couple of interesting notes I made from this reading.
First, the higher risk observations. The “Value” reading – which is simply the trailing PE ratio for the SPX (as reported by www.multpl.com), sits at over 24. Long termed indications suggest that a reading of 23 or higher on trailing PE for that index can result in eventual contraction. The other interesting observation is that most of the negatives from December’s reading remain in place. The Smart/Dumb money spread remains in record bearish territory. Despite the strong trend of the market, smart money is hedging strongly against a correction, while retail money continues to pour into mutual funds. The bearish divergence between Industrials and Transports (Dow Theory) continues to be a negative. Note the falling transports against a rising Industrials index – below.
Also interesting are the neutral ratings that seem to be deteriorating. For example, the level of the Put/Call ratio -which is another sentiment indicator I follow. The Put/Call ratio is not in bearish (overly optimistic) territory. But it’s getting closer to that level. As is the VIX reading, which sits at about 14. I consider it to be “too” optimistic if the VIX goes below 12.
The final indicator that hovers just above overbought / complacency levels is the % of stocks that are hovering over their 50 day SMA’s on the S&P 500. Its sitting around 74% right now. While a certain level of stocks trending over their shorter SMA’s is bullish, I have noted that levels exceeding 85% over their 50 day SMA’s can indicate overbought markets. The % over the 50 day SMA isn’t there yet, but it’s approaching a potentially overbought situation.
Otherwise, we have bullish indicators such as trend – indicated by the markets position over its 200 and 50 day SMA’s. We have bullish seasonality, and healthy but not overdone levels of other breadth indicators such as the Advance/Decline line and the New High/Low ratio.
Conclusion
I’m going to call this market a “damned if you do, damned if you don’t” market. There are enough indicators that show higher than normal risk to make me leery. Yet, the trend is bullish, largely with breadth backing that trend. And then there’s that positive seasonality stuff….
At ValueTrend, we remain invested. But we’ve diversified internationally, and we’ve bought a bit of precious metals to hedge a bit of risk. We’re keeping an eye on the charts. You have to stay in if trend stays bullish. If the Bear-o-meter remains neutral, we really can’t hold too much cash. But any change to the trend or a risk reading in the Bear-o-meter will inspire that stance to change.
Housekeeping
Performance numbers are posted for year-end 2019 here and here.
Orlando MoneyShow Friday Feb 7th: Here is a link to my presentation at the moneyshow entitled Discovering New Stock Breakout Candidates
This Friday at 2:00 PM EST we have a webinar on the Bear-o-meter and its construction. Here is the link for more info.
4 Comments
Hi Keith,
Today when I saw the market go up in the face of uncertainty, I bought the etf ZDM with half my cash. Unlike the SP500 it just broke out from a long base. It could retest lower, but can I take the chance? Such long base breakouts are too rare to pass 🙂
Matt
that’s about a broad a market play as you can get
Referring to your annual rates of return, what do you mean by north american index when comparing to your return rate.
You’ll see the benchmark breakdown in the notes below our returns. The NA index is essentially 85% TSX, 15% SPX –again, refer to the notes below the return chart