Roughly every month, I try to post the results of a compilation of financial indicators that measure the current risk/reward picture for US markets. Long-time readers are familiar with this compilation, which I call the “Bear-o-meter”.
For those new to my blog: The Bear-o-meter is a risk/reward measurement against the US markets. It is not a pure market timing tool – rather, it gives us an idea of the current environment stacks up against historical risk and reward tendencies. I rank 12 indicators that fall into 5 broad market macro Technical analysis parameters. They are:
The Bear-o-meter is ranked 0-8 from least attractive risk/ reward to highest. Three categories, which can be seen on the graphic below, shows high risk, neutral, or lower risk zones—all depending on the recent numeral reading of the compilation.
Of note: the Bear-o-meter isn’t a market timing instrument. Its a risk/reward indicator. As such, it isn’t something to trade off of. It can instead be used to reposition a portfolio in the light of risk/reward. Eg: If risk is signalling higher than normal – one could choose to raise a bit of cash, OR, one could simply reduce their beta (ie sell some volatile stocks, buy some defensive stocks). Markets can still rise in a high risk environment. Just look at late 2017 for an example of that phenomenon. It took until 2018 for the markets to materialize the high risk that was present for the last 6 months of 2017. I blogged about this phenomenon throughout the second half of that year. As we know now, the year 2018 started off with a significant selloff in January, followed by another peak and selloff in the last quarter of the year. Risk was signalled by the Bear-o-meter in late 2017, but did not materialize on the market until 2018. For this reason, the Bear-o-meter should be used as something to take into consideration – should the market trend change. A high-risk reading should not be acted upon by itself. However, should the market’s trend break, it might add to your conviction to sell.
I took a Bear-o-meter reading on Nov. 13th – and it showed in the neutral territory (4). This, after a very brief reading in the higher risk zone at the beginning of the November. This month, we see a continuation of the neutral reading of 4. Basically, risk and reward are about even right now, from the perspective of this compilation.
The only indicator that has shown any signs of change from my mid-November reading is the comparison between the Dow Industrial Index (INDU) and the Dow Transports (TRAN). You can see on the chart below that the transports (TRAN) are diverging negatively against a rising industrial index. Its early to claim too much pessimism based on this development. The two have been diverging for about a month – which is negative – but that happens on occasion. Certainly we should keep an eye on this indicator for continued divergence.
Markets are often a bit whippy after the Black Friday weekend. This year’s Black Friday retail sales look to be positive, which probably adds fuel to the fire for a continued bull market into the New Year. Any chop experienced this week might be a good opportunity to add to positions with cash.
We now have over 120 registrants for this Wednesdays webinar. Please email Aleks Bozic at our office if you would to register for the first of what we expect will be a teaching series in Technical Analysis. He will register you and you will receive a link to attend the seminar a day or two prior.
Keith, the market is down 400 points, BUT everything is rally off the lows and continuing UP
Confused and frustrated
As noted on the blog–the week after black friday can be choppy – although sometimes its not so you never know. I guess Trump gave the market its excuse to be choppy. But for my two cents worth, this looks like an opportunity over the coming days to place cash into quality positions so long as SPX holds about 3030.
Longtime lurker here, though I’ve enjoyed what you post. I’m wondering if you’ve ever compared your Bear-o-meter readings to actual somethings. I’m not sure if it would be best to compare it to the the market directly, or VIX, or some other more direct measure of risk. Basically, I suppose I’m asking if you’ve ever gone back and looked at how accurate the Bear-o-meter readings are at doing what they’re supposed to. I think it would be a really interesting read!
Alex–I do this periodically (compare SPX to Bear-o-meter signals)
Here is the update from May 2019: https://www.valuetrend.ca/a-brief-history-of-time-space-and-bear-o-meter-signals/
I’ll do it again in the new year.
Keith and Alex, thank you for all the prep work you guys did for the webinar. The audio sucked big time, and I tried on 3 devices (computer, tablet and phone). You crackled in and out, full of static, half the comments intelligible. Not like your usual self. Appreciating your intent. Lana
Yes- we discovered that my office has the worst reception for the modem- so the high bandwidth required for the audio didn’t work as well. So–lesson learned. Next webinar (January 10) will be done from another room closer to the modem.that will solve the issue. Meanwhile, we will re-record the webinar from yesterday and post it with better audio to this blog for anyone interested.
Frustrating for us for this to happen-but live and learn.
I know you are not constructive on the Canadian banks, what are your thoughts on the U.S. Financials.
I own the US banks via both an ETF and one individual bank–total weighting is about 8% I believe. So we like them, at least for now!
Hi Keith. It was a little tough hearing yesterday, but, thanks so much for doing that. Are you still backing U.S. financials? I believe you referenced XLF before. Is there a trade on that one?
Hi Tom–yes, we figured out what the problem with the audio was so we will fix it for the January 10th followup
We don’t hold XLF but we do hold some US bank exposure–still like them, for now anyway!