Time for the monthly Bear-o-meter report. The meter, as many of you know, measures the relative risk/reward tradeoff on the markets. Please refer to my past blogs for descriptions of its components. Refer to my book Smart Money Dumb Money to learn how to construct it. On with the show.
This month is a repeat of the level seen on the Bear-o-meter since December. That is, a low-neutral reading of 3. The diagram below shows you the scale. As you can see, one could argue that a score of 3 is either low-neutral, or just moving out of the high risk zone. Recall that the lower the score, the more market risk.
This month, we had a change by two breadth indicators within the compilation that makes up the Bear-o-meter. One was up a point, one down a point. Also one repeat. Hence the repeat score of 3.
- The AD line for the NYSE showed a short termed divergence (last week) against the SPX.
- The % of stocks > than their 50 day MA’s moved lower from an overbought signal.
- Also, the Dow Transports continue to plummet against the Industrials. Divergence like this is almost always a leading indicator for some type of correction. However, the lead it gives us can be a month or more, so don’t get too bearish!
My conclusion: Same old same old. The market remains a one-trick pony, as I have discussed in past blogs. Until market players get bored of that trick, it will continue to move higher. Until it doesn’t.
My musing mind:
At this point, there are no signs of a top, so a challenge of 5,000 or a bit higher is reasonable. That said, this rally needs a rest – as I noted here. My sense is that a “rest” will result in a correction to the 4,800-ish breakout point. All of this, plus the fact that, seasonally, February has the second-worst monthly return over the past five years, suggests that caution is warranted in the weeks immediately ahead.
From a BearTraps report:
We are seeing highly unusual activity in the markets for the last 24 – 48 hrs. We saw similar ingredients before the SVB blow-up in March 2023 and before the COVID-19 shock.
1. Long bonds are bid with the transports breaking down (see below). Significant deterioration in some spots, trucking, logistics, etc. The 2-10s curve is flattening as the long bond buyers are bringing yields lower.
2. The last 30 days the banks have been strong, On Wednesday we had isolated weakness in NYCB and on Thursday we witnessed broad contagion up the channel to large market cap financials.
3. Consumer staples continue to outperform equal-weight discretionary, and recession risk is rising.
4. Commercial real estate names continue to underperform.
5. The RRP dropped by $111B on Thursday, now $503B. Powell – Yellen are depleting liquidity and a ton of bonds come for sale in March.
6. The high yield JNK is unchanged since December, and CCCs are a lot lower, and credit is NOT confirming equity love festival.
The probability of a hard landing is surging.
Long equity vol — VIXY high conviction with a $13.70 stop. On the heels of META and AMZN, call buyers have been supporting vol.
*There are times to be fully long stocks and there are times when the risk – reward is extremely poor.” Larry McDonald