Risk-Reward and Reddit

February 5, 2021No Comments

Risk-Reward and Reddit

We are going to cover the ValueTrend Bear-o-meter reading. I blogged on that a couple of days ago. The Bear-o-meter is a reading of the market’s risk-reward basis on a relative basis. So it takes a look at how much risk compared to a normal situation on the stock market there is versus potential reward. Surprisingly, the bear-o-meter measured very low risk right now it was measuring six out of a potential eight or eight is the lowest risk possible, not a bad reading. This, despite the fact that it’s pretty inarguable, that the price-earnings ratio and even technical momentum indicators are pretty overbought and are overvalued right now.

So we’ll take a look at that. We’ll also be looking at the latest Reddit stock. Boom, we’re all aware of the GameStop spike and fall. And I got a question recently as to whether that kind of event is possibly predictable using old school analysis. In fact, this individual is asking me if old school analysis dead? So let’s cover that. So I’m going to share the screen right now and I’m going to bring you right over to the bear-o-meter. So, the first thing I want to talk about is why the stock market is still actually in a fairly bullish position, despite the fact it’s overbought and we’ll look at a few charts here. One of the things we want to look at to determine that the market has got good, internal strength is this line, which is called the advanced decline line. It takes all advances versus all declining stocks.

And it measures if there is net greater advances than greater declining stocks, and you can see the line is rising with the market. That’s actually a good sign. So that’s one of the things that the bear-o-meter suggested or the bear-o-meter indicated as a positive factor. The other factor we look at is whether the stock market is ahead of its 200 day moving average. Now this red line here is the 200 day moving average, and this is the recent level. Now it’s currently sitting at around 11 or 12% over its 200 day moving average. And I tend to say anywhere over 10% is starting to get overbought. So absolutely this market is a little vulnerable. In fact, if we looked at traditional indicators, which I’ll put up here, you can see that this is a stochastic indicator. It’s starting to roll over our side, peaked at an overbought level and it started to trend down.

So even MACD is starting to show possible signs of rolling over. So I am not discounting the probability of near-term volatility based on these overbought indicators. But when you have a stock market that is trending up with higher highs and higher lows and above the 200 days moving average, it’s still considered bullish. According to the bear-o-meter, this is another breadth indicator. We can see that the black line, which is the transports are right now, not diverging and direction from the industrials. And we can also see that many of the Sentimen indicators that I use such as Put/Call ratio are right kind of in the middle. There we are right there. They’re not complacent and they’re not overly fearful. This is another one new highs versus new lows. It’s a breadth indicator that I use more of an indicator for the momentum of breadth.

And you can see it’s right in the middle. So again market breadth is not overdone. This is a 200-day moving average number of stocks that are over the 200 days. It is overdone, but that’s actually not a component in my indicator because you can see it tends to stay at that level for long periods of time. Now, this is the 50 days number of stocks, 50-day moving average and this right in the middle. So again, not a bad situation, fairly neutral. This is the VIX and I’m going to take a closer look at the VIX and you can see that a week ago, we actually had a signal and anytime it gets over 35. I get a signal that it is actually oversold and that’s on that recent selloff we had last week. Well, we’re right down.

If anything, the VIX is starting to get a little complacent again, to get closer. It gets to 20, there’s a, there’s a minor danger signal and we are at around 22, but it’s still off that 20 lines. So I gave it a zero as far as it’s not a negative. So overall we have a pretty bullish looking market. One of the indicators that I don’t like to look of is the smart money, dumb money indicator. This is by Sentimen trader. The dumb money is the red line. You can see it’s very high confidence and the smart money is the blue line. You can see very low confidence when they diverge much as they did here. You can see that often dumb money here was very fearful right at the bottom. And you can also see periods where dumb money was very optimistic.

They’re fearful there again, and very optimistic near a market peak there. So we’re in that zone where it is a little kind of skewed towards dumb money being bullish. And of course, market evaluations, the good old S&P ratio on the S&P is around 39, which is the third-highest of all time. So there’s no doubt about it that the stock market is a bit overvalued, but we can’t argue that the trend, the trend is your friend, as is said, so we’re going to carry on being bullish. Now, the next thing I’d like to cover is the blog I wrote recently on “Can you Predict the Next Reddit ” that inspired the stock move. Now, this is the most newsworthy chart that we’ve been looking at. This is the GameStop chart. Now, what’s interesting. There’s GameStop.

Now it’s pulled back since I wrote the blog, but someone was asking, as I said, can you predict this stuff ahead of time? Well, my argument is that we can’t predict a Reddit group, pilfering of the shorts, but we can most certainly predict that the stock is setting up for something because way before the Reddit group got in and you saw it was in a declining trend, but it began to base no more lower highs and lower lows. In fact, it was basing, it broke both the trend line and the neckline of the base quite a few months ago. So it was setting up for something. Nobody could predict this credit move. Nobody could predict it, but there was something going on with the stock that had the potential for some upside. Now there’s another one. AMC was also a Reddit mover.

Now this one was in a downtrend, did base, but it moves so quickly. As you can see here on the chart that you couldn’t have possibly profited off of that.

However, good old Blackberry. Most definitely. That was a perfect setup. In fact for disclosure, we don’t own Blackberry, but we did buy Fairfax because we liked the insurance industry and whatnot that Fairfax Financial has in it but we also kind of looked at it as a backdoor way, getting into Blackberry. We didn’t predict the Reddit group’s short squeeze, but we did like this. So it broke out from a basic, it was in a downtrend based, broken, tested the neckline, boom, there’s the Reddit group, pushing the stock. Doesn’t matter what the reason is, the setup was there for something to happen. The only one that I would say wasn’t a good setup was Nokia.

That was another one that was targeted by the group. And you can see it kind of spike. This is actually a long tail on a candle, one for all the way up here, but it didn’t last. And it ended up still in the downtrend. So Nokia really wasn’t much of a mover.

Silver was briefly targeted earlier this week, it had a bit of a spike. You can see on the far right-hand side of the sharpest, it virtually disappeared right away. Now somebody was as I said, asking, could you actually find a way of identifying these stocks? So there are different websites. This is one service, say they did charge seven bucks a week or something for this information. You can find shorting information all over the internet. I’m not promoting these guys. I just happen to find it, but they do seem to have a list of most shorted stocks.

So you can see this GameStop, the percent shorted and on, and on we go, you could maybe use this as a hunting ground to look for those technical platforms base breakouts that we were talking about, and then who knows you can’t predictive Reddit, the Reddit groups are going to move on a stock and try to squeeze those shorts, but Hey, it gives you a hunting list. So there’s always a way is what I’m emphasizing.  I’d just like to finish by noting that last week’s comments that I made on oil seem to be so far moving. I wasn’t expecting oil to move super quickly, but Hey, I’ll take what I can get. Oil has been in the news in the past week traders and starting to bid it up.

It’s moved even since I began talking about it a couple of weeks ago at around $52 bucks, I think it’s around $55, $56 a barrel right now. And I do still see $60 to $65 on oil. So I think there’s lots of potential input to producers. And a while itself, you can read my argument behind that on the blog at www.valuetrend.ca.

Finally, I’m speaking of the oil trade and all these other factors we’re looking at there’s a lot of rotation going on in the market these days. And I know I harp on this a little bit, but if you feel that you are not rotating your portfolio to stay with these transitions, that the market is clearly making these days, then maybe it’s time to talk to us at ValueTrend. We’re happy to talk to you about how we do things. Take a look at our performance numbers. We tend to do very well when markets are volatile, that’s our strength. And actually our performance recently in the massive volatility we’ve had has been pretty darn good. Take a look online. You’ll be able to see that we show our performance to the world. We don’t hide anything at ValueTrend.

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