Back in early December, the S&P 500 had corrected down to around 4500. At that time, my monthly Bear-o-meter reading was due (I read this indicator once a month and post its results on this blog). Here is my December 2nd blog for the Bear-o-meter, taken near the bottom of the very minor November-December correction of about 100 points (a bit over 2%). The meter read a very rare “7” out of a potential 8 points for bullishness. I noted that the meter was suggesting that investors buy stocks, now that the meter was bullish and prices had fallen. As I write today’s blog, which will provide you with the newest reading of the Bear-o-meter, the SPX is trading near 4760- which is well over 3% from the bullish December reading.
So – where does the meter stand today? Answer: Its pulled back to a dead-center “neutral” reading of “4”. Such a neutral reading suggests that risk and reward potential on the broad markets are more or less evenly divided.
In my last post on January 3rd, you will note that I suggested a potential for a minor 5% correction on the SPX. Almost immediately after I had posted that blog, the SPX corrected about 2%, and the NASDAQ pulled back more than 3%.I still feel that there is a bit more room for a pullback. The Fed’s announcement of potential rate hikes in March and the intention to invoke a “runoff” policy (where maturing bonds are not renewed) spooked the markets. This is typical – the market shows technical signs of being overbought, but needs a trigger to nudge the reaction. We got the trigger this week.
Briefly – here are a couple of the factors that have driven the Bear-o-meter into a “neutral” rating for risk/reward potential, vs. a “bullish” rating last month. Both of these indicators are signs of diverging breadth. Market breadth (participation) is balanced according to most of the Bear-o-meter factors. But we are seeing early signs of weakness in the divergences below. Of note, both of these indicators are discussed in my online course, which I will post a special announcement on this weekend or early next week.
Dow Theory INDU/TRAN divergence
The chart below shows us that the Dow Industrials Index (INDU- red line) has been putting in new highs. Meanwhile, the Dow Transportation index (TRAN- black line) is diverging negatively and has not confirmed the INDU. This is often a leading indicator of a correction. Note the same divergence between June and August of last summer resulted in an October correction for both the INDU and the S&P 500.
NYSE A/D line divergence
You can see how the SPX (red line) has been putting in new highs, while the cumulative Advance Decline line for the NYSE (black line) is diverging lower. This means that the market has been less diversified in its strength of late. The A/D line diverged in the spring of 2021 – providing a heads up for the October correction. You can see that same divergence during the same June-August period of last year noted in the INDU chart above.
The evidence continues to mount for a bit more corrective activity on the markets this month. As noted in my last blog, use this correction to your advantage. The trend is still strong. The Bear-o-meter is not screaming bearish. We are likely in for a minor bull market pullback within a larger bullish trend.
For those interested in constructing the Bear-o-meter for themselves, please refer to my newest book Smart Money, Dumb Money, available on Amazon.