Bear-o-meter neutral, but risk is increasing

For those who have been following my blog regularly, you will know that I post a reading of the Bear-o-meter every month. The Bear-o-meter is a compilation of breadth, breadth-momentum, trend, sentiment, seasonal and valuation indicators. The objective of the meter is to present the current trade-off between risk and reward that investors face.

The Bear-o-meter is not a market timing vehicle per se’ , although its pretty good at giving us a heads up as a forward looking tool for major market moves. Its limitations lie more in the timing surrounding such moves. A bearish or bullish indication on the meter might take months before coming to fruition. Do a search in the blog search engine and review the past readings – you will find they are pretty accurate when the readings get extreme – albeit not precise in timing. For that reason, we tend to use it as a guideline on portfolio beta and cash allocations.  Readings are not treated as outright trading signals.

Before I get into the body of today’s topic, I wanted to post a link of my most recent video. I’ve decided that my video’s will focus on topics that have not been addressed in my blogs. The video format allows me to present more charts in a time-efficient manner.  The most recent video covers a basket of commodity charts presented one by one. The interesting thing I noted was that – while some commodities such as copper or lumber have shot to the moon – others are still entrenched in their base-formations. In fact, one was just emerging out of its base, suggesting a potential opportunity. Like individual stocks that make up the “stock market”, not all commodities can be painted with the same brush as the “commodity market”. I think you will find this video useful if you are holding or looking at investing in commodity stocks or ETF’s. And, like the blog, you can subscribe to be a regular follower. I try to keep them around 10 minutes – so its not a big time commitment to watch them. Here’s the link.

Bear-0-meter reads “3”

On April 3rd 2021, I calculated the Bear-o-meter points for the usual monthly reading. It came out as 4/8 – which is firmly neutral. Risk and reward were about as evenly split as possible, which suggested that portfolios should remain largely invested. However, the meter had moved down to “4” from its prior reading of “5” from March. And now its reading “3”.  So the direction of the meter has gradually moved towards a less-optimal environment, although still officially “neutral” in risk/reward potential. Further, on this blog I noted that the SPX is trading some 15% over its 200 day SMA. This is a classic overbought signal in my experience.

For those reasons, at ValueTrend we began to slowly shift some of our exposure out of US banks, energy and metals (NOT eliminate…reduce!) and slowly increase our exposure to cash and lower-beta stocks. BTW – for those who subscribe to our newsletter – we just sent out a new update explaining how beta works. In it, we noted that the ValueTrend Equity Platform now has an approximate beta reading of 0.90 right now – suggesting we have about 10% less exposure to market risk (and return). It is in this way that we use the Bear-o-meter. We do not “time” the markets aggressively on its signals. We make subtle shifts. However, if the market begins to show a breakdown in trend (consolidation pattern OR a break of the last low and/or 200 day SMA) we will raise more cash. This is called systematic investing. There ain’t no break in trend on this chart. Rules is rules!

Systematic investing vs. prognostication

I’ve been asked to speak for the CSTA conference in Montreal (by Zoom, of course).  In that engagement, I will be joined by Brooke Thackray – who I am sure many of you know as Canada’s foremost seasonal expert. Originally, I was asked to “debate” an analyst who has made headlines on CNN proclaiming that the SPX will fall 80%. I refused to do so. Beyond the sensationalistic media headline-grabbing side of that kind of prognostication, its not the debate that any systematic analyst will not enter into. I trade based on trend (base, uptrend, topping, downtrend). I  use contrarian sentiment work like the Bear-o-meter for a quantitative risk/reward picture every month to systematically adjust beta and cash. Why would anyone encourage investors to panic and sell when you have an up trending market, and a co-operative Fed?

If the market trades sideways (no new highs or lows), we will lower our portfolio beta further, and possibly add more cash. If it breaks the 200 day SMA, we will systematically move to even more cash. Simple. Until then, what is the point of making bold assertions regarding a market top, or an 80% downside target? We know the risks, we know the trend, we have a system to get us out. Want to sell at the top before “the crash?”. Ok, good luck with that.

If you are a member of the CSTA, you can join in the conversation. Its on April 12th at 7:00pm. Contact the CSTA for more information. Brooke and I will have differences in opinions, mostly on sectors we are invested in. But neither of us will argue with a market that, beyond being overbought and deserving a period of consolidation or pullback, is in an up trend.

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