I’m lookin’ at you, SPX!

Typically, I post the Bear-o-meter risk/reward score for the US markets in the first week of each month. I delayed posting this Bear-o-meter report for a couple of reasons. First, I’ve been busy. Having said that, we can always squeeze in some time to do something if we really want to, can’t we? The bigger reason for not posting is that the indicators within the meter have read, and continue to read, EXACTLY the same across the board as they did last month (June). And the month before (May). Still, a quick review is warranted.

For newbies to this blog, please use the search engine to type in  “Bear-o-meter” to see past readings, and the description of how this risk/reward compilation works. Quick summary: the meter looks at indicators covering the broad categories of trend, breadth, breadth-momentum, seasonality, value, and sentiment. A score of 0-8 is assigned based on those readings – where “0” is super high potential for risk vs potential reward. Conversely, “8” is super high potential for reward when compared to potential risk. You rarely see those extremes. We did see several “0” readings in early 2022, giving us heads up for the bear market that ensued.

Bear-o-meter remains in cautious zone

Since early May, the Bear-o-meter has remained entrenched in the cautious zone. It remains at a score of “2”. The diagram below shows you three zones indicating the general risk/reward on the markets. The current reading of 2 suggests risk is high relative to reward. But its not in the panic end – which typically is seen in the 0-1 scores like we saw for 2/3rds of 2022.

I won’t bore you with the breakdown of the indicators, because they are literally the same as last month! You can read last months report here, where you will see my notations that breadth was improving, but sentiment was showing signs of investor complacency. Nothing’s changed. Here’s the chart of the SentimenTrader Smart/Dumb Money line telling us about market complacency. Note that Smart Money (blue) is hating this market, while Dumb Money (burgundy) is all-in. Note that this indicator doesn’t ALWAYS accurately predict a market correction – as witnessed during much of 2021.

Because we can’t trust any one indicator by itself, the Bear-o-meter looks at many indicators under each category (trend, breadth, etc.) for a compilation of scores. Sentiment is covered via the Smart/Dumb indicator above, along with the CBOE Put/Call ratio (which is neutral) and the VIX. The VIX came close to a sell signal recently, which is 12. It hit around 13. But, close is only good with horseshoes and hand grenades’, as they say. So, no negative score.

Still…it was very close, and when that 12 level is actually breeched by the VIX, it can be a very accurate portrayal of a poop-storm a-comin’. Here’s the chart:

 

Summary

Same old song. The market remains in a sub-optimal risk/return environment. But, as noted in recent blogs, some factors such breadth are improving. I continue to think there is room for a correction, especially in the rather overbought tech stocks. This week, the NASDAQ will be deciding on potentially re-balancing their composite. This could (assuming a reduction in The Magnificent Seven AI stock weightings) force index ETF’s and large institutional indexers to sell the stocks. This is all conjecture, as I can’t tell you if these changes will occur. But, if they do happen, the changes will take effect before the markets open on July 24th. And it could force a much, much needed market correction for any index with high tech weightings. I’m lookin’ at you, SPX!

Happy trading!

 

4 Comments

    • What to do?
      Keep money in cashable GIC or money market ETF?
      Then jump in at the bottom?

      Reply
      • I can’t advise you specifically Albert. We are holding about 25% cash, and have concentrated on sectors NOT related to the high flying tech/AI stocks. That’s all I can tell you.

        Reply
  • The dumb money often invests based advice spewed by TV reporters pumping stocks, such as Nvidia, etc. Those rarely caution investors on downside risks.

    Still, people will continue flying in 300 seat passenger airplanes, comprised of composite materials ( fiberglass in the wings, fuselage etc) despite the warnings given to Oceangate about their submersible using those exact same materials. We know the tragic outcome: a monumental implosion.

    Perhaps retail investors, as airline passengers are doing in fiber material constructed airplanes, not aluminum or titanium as was the case in WW II – getting comfortable in their seats- are getting boiled slowly like a frog in a pot, not noticing the evolution and risks.

    Authorities enforcing TV and radio broadcasts, might not be counted on, to protect those traveling or forking dollars over in their TFSA and RRSP’s.

    Reply

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