Well, it’s nice to put this whole “taper” issue to rest – for now. It felt like Chinese water torture going into the announcement…waiting…waiting. Bernanke came through – and better than expected, I must say. There will be no change to the QE3 program “for now”, says the Fed. This development probably puts some near termed upside into the interest sensitive areas such as long bonds, utilities, pipelines, preferred shares and others. Regular readers of this blog, and other media sources know that I’ve felt many of these sectors to be oversold.
I thought it might be a good idea to check out my “Bear-O-Meter”, as originally introduced on this blog: here
In a nutshell (in case you can’t be bothered to read the original blog post), I simply combine a group of indicators that I’ve been using for many years to try and get a feel for how risky the stock market might be over the coming months. Its less of a “timing” indicator, and more of a “potential risk vs. potential reward” indication. The Bear-O-Meter is comprised of: market breadth, a value rating, a trend indication, a momentum indicator, a seasonal input, and a contrarian sentiment indicator. A rating is assigned to each factor, the score is tallied up, and you get a reading of 0-8. A low reading suggests more potential risk is present than normal on the markets, and a high reading suggests less risk is likely going forward.
The Bear-O-Meter reads 2 at this time, which indicates risk remains in the markets. Interestingly, none of the factors were themselves overly bearish – instead, most remained in the neutral to only slightly higher risk territory. Nonetheless, they added up to a higher level of caution than normal. The factors that caused a higher-than-normal risk level were the seasonal reading (September is statistically more risky than other months), higher valuation (high Shiller PE), sentiment (a composite of mid-termed sentiment readings read cautious, although not bearish) and slightly overbought momentum. A near termed correction by or in October would likely take all of these factors back into bullish territory. The Fed’s decision will likely take the strain off of the markets for the next number of months, making any corrective actions a buying opportunity.
I will endeavor to post this meter periodically as the readings change in a meaningful manner.