Market risk neutral… for now

 

Regular readers of this blog will recognise my “Bearometer”, which is a compilation of 6 indicators that I watch to help give me a feel for market risk/reward. It is not a market timing vehicle. If the indicator reads bullish, it suggests less risk on the markets, if it reads bearish, it suggests greater risk than normal. A neutral reading, which is where it stands now, suggests that markets are not particularly low or high risk at this time. There are 6 components to the indicator: Breadth, Seasonality, Value, Momentum, Trend, and Sentiment.

Bear-O-Meter

As noted , seasonality is one of the 6 indicators that comprise the Bearometer. I assign 0-2 points to this component – a fairly heavy influence when compared to the other indicators. After this month ends, with no changes in the other 5 indicators, the Bearometer would move into bearish territory. That’s because the seasonality component will fall to a score of “0”. Meanwhile, the value and sentiment scores are in bearish territory based on my parameters at this time.

One sentiment study that may be of interest to readers is the asset allocation decisions by retail investors (aka “dumb money”). There is now $3.91 invested in equity mutual funds and ETFs for every $1.00 stored in safe money market funds as of according to the Investment Company Institute. That compares to a ratio of 3.09 in August 2000 and 3.39 in May 2007. Perhaps you will recall what happened to markets shortly after those two dates (hint: markets did not climb!).

S&P nearterm

We’re about 17% cash in the managed equity platform that I run on behalf of my clients, having taken a few profits lately. This affords us plenty of room for upside during the last weeks of the seasonally strong period, while keeping a bit aside as a precaution. The trend for the S&P 500 remains strong, and momentum is healthy. Most of the nearterm indicators I watch, as seen on the chart above, are bullish – with the exception of a slowdown in moneyflow (top pane, bottom pane). So we’re still bullish at this point.. But we’ve got a bit of cash on the sidelines, just in case…

4 Comments

  • LISTENING AT RALPH ACAMPORA THIS MORNING, I REMEMBERED THAT THE DJTA AND THE THE DJIA MOVE TOGETHER (DOW THEORY). BUT WHILE THE “TRANSPORTS” INDEX IS AT RECORD HIGHS, THE “INDUSTRIALS” INDEX HASN’T BROKEN ABOVE IS DECEMBER 31, 2013 CLOSE, ALTHOUGH IT CLOSED TUESDAY JUST 3.66 POINTS SHY OF IT.

    NOW, DESPITE EQUITY PRICES HAVIND GAINED 15% (S&P500) BETWEEN MID-OCTOBER TO THE PRESENT, TREASURY YIELDS AND PRICES ARE ESSENTIALLY FLAT OVER THE SAME TIMEFRAME (THE YIELD ON THE 30-YEAR TREASURY BOND CONTINUES TO HOLD SUPPORT AROUND 3.5%, UNCHANGED OVER THE PAST SIX MONTHS). IS THIS DIVERGENCE SUCH AS THIS A WARNING SIGNAL FOR EQUITY MARKETS AND DO YOU SEE A LARGE SCALE HEAD-AND-SHOULDER TOPPING PATTERN ON THE CHART OF THE 30-YEAR TREASURY BOND YIELD PROVIDING THE PROSPECT OF LOWER RATES AHEAD, RATHER THAN HIGHER?

    Reply
    • Hi John Pierre
      The Dow theory does suggest that you want confirmation between the transports and industrials, so yes, a non-confirmation is likely another “heads-up” for a selloff. At this time that is not the case.
      Further, the bond market has certainly put in a near-termed base–or from a yield perspective, a near-termed top. I don’t believe it will last forever, but for now its bearish for equities–the summer is also the seasonal time for bond outperformance, and stock underperformance.
      All in, there are some growing causes for concern. But bear in mind, any correction should be taken as a buying opportunity within a grander bull market thesis.

      Reply
  • Hi Keith, is there any way you could keep the bearometer on the blog full time for quick reference?

    Reply
    • Hi Mark–It doesn’t change enough to merit posting it too often, but I will make a greater effort to post it a bit more frequently–particularly when it changes–thanks for rattling my cage on this!

      Reply

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