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.