Bear-o-meter moves back to High Risk

February 14, 20226 Comments

The next few days will be critical to determine if the stock market is to move into a bear market. The Bear-o-meter has moved into a more risky reading, and its warning should be heeded. Despite the fact that some of the sentiment indicators were coming off of a bullish level of pessimism from last month, the Bear-o-meter has moved from a neutral risk/reward reading in January – to a more bearish reading now. Today’s blog will take a look at a few of the indicators in the Bear-o-meter compilation that invoked this bearish change.

Recall that sentiment indicators are largely contrarian indicators – see my book Smart Money/ Dumb Money. 

On the one hand…

Despite the move into higher risk territory, the Bear-o-meter displayed a number of positive indicators within the compilation. For example, the Advance/Decline line, which was diverging negatively in January, is no longer in negative divergence. It went from a negative reading (-1 on the indicator) in January to a neutral (0) reading today. Only a positive divergence (aka A/D line rising against a flat or negative SPX) creates a positive point to the Bear-o-meter.  The meter also gained a positive point after the Transportation vs Industrial index moved from a negative divergence last month to a neutral “correlated” reading this month. As an aside, if any of these terms or indicators confuse you – I encourage you to take my online Technical Analysis Course and/or read my book Smart Money Dumb Money.

We are also seeing a bullish move in some of the sentiment indicators – such as the VIX. It has not reached a “bullish” reading, but the VIX (which is an excellent neartermed investor fear reading) is starting to move up aggressively enough to suggest there will be a fear-peak coming. Russia’s antics are clearly part of the reason for a rising VIX. As a 32 year veteran of the market, I would like to remind readers that scary events like this are typically front-loaded by the markets, followed by a relief rally after the fact. Its like getting a needle. You sweat before getting it, you feel the prick and a bit of discomfort during it, but the experience is never as traumatic as envisioned. Here’s a 30+ year chart of the VIX. Note that my “bullish (high fear) levels start at 35 and get into “back up the truck and buy everything in sight” mode above 35. We are at 29.8 as I write. The VIX moves quickly. We could get a washout buy signal any day now if the markets continue to panic.

Another sentiment indicator flashing bullishly is the Smart Money/Dumb Money compilation by Sentimentrader. I view this indicator as one of the key investor sentiment indicators which is why I named my newest book after it. Note on the chart below how it has been hovering above the “smart money bullish, dumb money bearish” ratio for more than a month. You’ll also note that we have not seen this type of divergence in opinions (blue line is smart money, red line dumb money) since the COVID crash. This implies that any pullbacks in the nearterm are not likely to last – smart money is buying the selloffs:


On the other hand…

OK, now for the bad news…

A prime indicator within the Bear-o-meter is the 200 day SMA trend indication. The SPX is below its 200 day (40 week) SMA. This subtracted 2 full points from the meter. If you see a break below the 200 day SMA followed by a sustained (absolute minimum of 3 days) break below support (4300 in this case), you have the potential for a bear market or severe correction. So the next week or so will be crucial. The sentiment indicators noted above would argue that a washout with a bullish reversal is likely if it does break 4300, but a sustained break (3 + days) trumps all other indicators. Trend trumps all. Don’t forget that.


  • Hi Keith,
    Hopefully it doesn’t happen, but what are the markets likely to do if Russia does indeed invade the Ukraine?

    • Wendy – you cant predict anything. But…You can prepare by following your rules. My trend following rule in this case, is sell if it breaks the last significant low on weekly charts: Break of the 4300 on SPX by more than 3 days = sell, not all at once, but leg out in steps. If market revisits and breaks 4300, leg back in.
      It is impossible to read the minds of control-focused governments like Putin (and JT, for that matter!) – nor can you predict the markets reactions to their moves. So you don’t try to predict. Just follow your rules.

  • I was reading a report tonight from equity clock and they indicate the oil trade is looking like it has topped out for now. What is your take?

    • It is overbought but not over. I recall I got the same kind of question in the fall – oil was overbought, and I said yes it will have a normal pullback, then rally back and go on to new highs. It did precisely that.
      My view is the same now–I anticipate a pullback, but not a trend break – and an eventual new high. So you have to decide (if you agree with me) – will YOU lighten positions now and have the timing ability to go back in if as when it declines?
      Ultimately, inflation is real, COVID version 2.0 is ending meaning more travel etc, NA supply is limited – exploration was capped precisely at the wrong time for the wrong reasons by Dumb & Dumber (Biden & Trudeau), Saudi is not opening the taps, and Russia is a wildcard.

    • Joyce- an excellent question! You don’t need 3 continuous up-days (recall that is my bare minimum)- you need support held (or resistance cracked) for 3 + days – one of those days could be a negative.

      But having said that, if I see 2 up days then a super strong down day on day 3, I will question the strength and hold on for another few days. As noted–it is a MINIMUM of 3 days, and you learn to use your judgement in cases like I just described.
      Technical Analysis is part quantitative and part qualitative – ie – the rules, and experience.


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