Risk is a 4-letter word.

You read in my most recent Bear-o-meter report that the score has moved from a 3 (weak-neutral) to 1 (higher risk). A couple of other quantitative risk models for market to look at today. Seems my Bear-o-meter is not alone in a sudden change in risk profiles. Read on for details

Bear-o-meter reads 1: Higher risk

BearTraps risk model suggests “Raise Cash”

Larry McDonald of BearTraps has a multi-factor quant model measuring market risk. He has used this model very profitably over his career – starting as Head Distressed Debt Trader with Lehman’s – where he gained a reputation as one of the top traders in the world. That –AND– as the guy who confronted Richard Fuld, CEO of Lemans warning of the impending disaster in subprime. Oh, and the impending market collapse. I interviewed Larry last week, and strongly recommend ALL readers watch it.

Click here to watch:  An Interview with Larry McDonald of BearTraps – ValueTrend

Larry’s system is signaling another high market risk reading:

BearTraps Risk Score: 9.7 out of 10. Crash /20% drawdown risk is high looking out 3-months.

 

CNN’s shorter termed risk compilation reads neutral

The Fear & Greed Index is a compilation of seven different indicators that measure some aspect of stock market behavior. They are market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand. This meter suggest risk/reward is balanced for the time being.

 

Sentimentrader’s medium term correction-risk optix

The sentimentrader risk compilation suggests high risk of correction in the mid term (aka next few months).

From Sentimentrader:

“The Correction Risk Level is a quick way to gauge what our indicators and studies are suggesting. The higher the risk, the more likely the market is to decline.

Another way to look at it is in terms of cash. If the Correction Risk Level is 0, then we would be more inclined to keep 0% of our portfolio in cash (i.e. we would be fully invested). But if the Correction Risk Level is 10, then we would be more inclined to keep 100% of our portfolio in cash (i.e. no exposure to stocks).”

Note that current levels have been floating in the higher risk of correction zone since January, with the exception of a reprieve in risk after the April correction. Recall this is a forward-looking, mid termed compilation. As such, it has a 3 month or so viewpoint.

Valuation risk

I harped on breath-risk in this blog. But a couple of other worthwhile things to add to those comments:

One stock is more valuable than the fund of the single greatest investor of all time? Come on, people!

“Over the past 32 trading days, NVDA has gained more than $1 trillion in market cap. To put that into some sort of perspective, the 6-week gain is greater than the total market cap of BRK.A, which Warren Buffett has spent 6 decades in building.” Jesse Felder Felder Report

Yeah, this market isn’t a frothy bubble. See my comments in the above noted blog on breadth. Ridiculous concentration in so very few stocks. Seems that NVDA insiders are cashing out. Chart below–note the red bubbles – historically at points when they cash out aggressively (like now) the stock often retreats. Meaning…the stock market retreats…

Speaking of Buffett…

This week: Berkshire Hathaway Buys Additional 2.6 Million Shares of Occidental Petroleum.

Gosh…He must be really dumb for buying oil when its clear that NVDA only sits 80% above its 200 day SMA at a PE of only 71,  Dumb ol’ Warren. NVDA is so cheap, and makes so much sense buying here. He should just buy AI stocks like everyone else. What’s with buying hard assets? Clearly, he’s lost his mind.

3 stocks worth watching when assessing risk

I mentioned in a recent blog that 3 stocks dominate the SPX. That is, 3 stocks represent 21% of the “500 stock” index. MSFT 7.0%, NVDA 7.7%, AAPL 6.3% as of June 5, 2024.

Anyone see something wrong with that 3-stock concentration?

Lets look at these three market influencers and see if they are overbought.

MSFT

Near enough overbought.

NVDA

AAPL

What is driving the tech stocks so high?

ETF success begets success. I encourage you to watch my interview with Larry McDonald who spoke of the very concept I am about to illustrate:

  • Active managers buy a stock for 2 reasons: FOMO (fear of missing out) and/or good Fundamentals.
  • Passive funds, like index ETF’s, buy to stay within the weighting of the index they track. They don’t buy because they want to. They buy because they have to.

The chart below illustrates the effect of ETF circular price performance. In this case the success of AAPL, NVDA, and TSLA, is being driven more by passive ETF buying than by active managers who see a reason to buy/add to their platforms from a fundamental perspective.

Conclusion

Signs continue to suggest that risk is growing for North American Markets. Particularly for those influenced by the tech/AI concentration (NASDAQ, SPX).

Still – and this is important–the trend is up. The SPX remains above its last high near 5200. The NAZ is well above its last peak of 16,540. Higher highs, higher lows = uptrend.

Meanwhile, the less tech-focused DJIA failed to meaningfully break its last high of approx. 40,000. And the TSX, while momentarily breaking its last peak of 22,360 – has now retreated (like the DJIA) below that peak. Lower highs (significant lows not yet taken out) = consolidation.

Note: when the significant lows ALSO get taken out, the trend is down! That is the sell signal. Until then, its a consolidation. I have raised cash, but we are still 80% invested. That will change if the picture changes

Don’t predict…Do prepare!!!

We must watch this development by the less concentrated markets closely. Please take my Online Course if you have not yet. This is not a time to do things wrong. The pittance the course costs will be more than made up for in making the correct trading decisions at this juncture!

The broader markets are telling us something…..pay attention class!

 

 

4 Comments

  • APPL announced a share buy back program. This may or may not happen, depending
    on fine print. That is why people renewed their enthusiasm

    Reply
    • I just recorded a video on short termed enthusiastic moves, and how to interpret them. Should be published soon.

      Reply
  • Interesting that transports IYT are trying to bounce off the fifty day and Industrials IYJ are turning down. Maybe another sign of a sideways market?

    Reply
    • Divergence between the two is normally bearish when the transports fail to confirm a new high or a recent peak. But as a general rule, the two moving together is a healthier sign than just one moving up

      Reply

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