An Overvalued Market
The Bear-o-meter is a risk/reward measurement tool that I’ve been using since 2013. It’s a compilation of indicators falling under general classifications of:
- Breadth momentum
As many of my regular readers know, the Bear-o-meter assigns risk on a scale of 0-8. A reading of 3 or under is considered a higher risk market. A reading of 3-5 is about “average” for a risk/reward trade-off. Anything 5+ is considered lower than average risk. Surprisingly, the Bear-o-meter reading as of today (Feb. 3 2021) was positive. It reads “6” today. This, in spite of a number of shorter termed momentum indicators that might suggest an overbought market.
I do not doubt that markets are overvalued at this moment, and subject to some volatility. Sure, we could see a 5% or higher pullback. But the internal breadth and trend indicators trump all of the overbought noise I am seeing (for example, the SPX sits about 12% ahead of its 200 day SMA). Buy the dips.
Check out my weekly videos here. At the end of the week, I post a 10-minute video (to the point as I can make it) covering the blog topics presented over that week – but I try to add a few new charts and thoughts to those presented on the blogs. Here is the link to the video page.
Click here to see the updated performance of our Equity Platform, our Aggressive Growth Strategy and our Income Platform. I’m happy to report that we are performing quite well in the current environment. Our mandate is to achieve lower risk returns (Equity and Income Platforms). By using technical trading strategies (like the Bear-o-meter!) we typically achieve that mandate during turbulent times. Volatile markets are our strength. I’m also happy to note that our Aggressive Strategy, which is now being tracked on the website, is performing well.
Please comment on the following thesis: In an uptrending or downtrending market, moving averages are better indicators of support and resistance compared to horizontal lines, whereas the reverse is true in consolidating patterns.
Thanks a lot for your educational blog and new videos!
Yes Andrew, this is absolutely correct. I have noted many times (including in my book Sideways https://www.amazon.ca/Sideways-Technical-Analysis-Profit-Uncertain/dp/1926645685) that moving averages are mostly useless within consolidation patterns. To your point–you trade the range in that case.