I was a teenager in the 1970’s. As a normal teen of that era, I devoted a certain amount of time to worshiping the greatest Rock n’ Roll legends of all time (Beatles, Led Zeppelin, Rush, Guess Who and of course Pink Floyd, Yes, Genesis and other prog rock legends). Ironically, the Rolling Stones were never a big favorite of mine.
Beyond the rock n roll, I was also feverishly devoted to the comic group Monty Python. I mean, I was devoted! I had all of their albums, had seen the entire television series and all of the movies, and had a book called “Just the words”. This book gave the entire transcript for every Python script ever done. And – here’s where you learn what a strange nerd I was – I literally memorized about 2/3rds of the skits. Not sure if I should boast about my useless ability to recall the scripts for many of these shows. Anyhow, one of the scripts that appealed to me was “The tale of Ralph Mellish”. It was a recording on one of the Python records called “Matching Tie and Hankerchief”. Here is a link to the skit – very funny in typical Python style.
The Mellish skit is sometimes referred to as the “Nothing Happened” skit. Basically, it entails a day in the life of a rather boring, ordinary man. The skit uses dramatic music and narrative to highlight the otherwise dull events of his day. Tongue in cheek humor.
So….Why do I bring up the Mellish skit today? Well, I tend to report on this blog a monthly reading of my risk/reward ranking compilation called the “Bear-o-meter”. That compilation provides us with a score from 0-8, where a low score is considered higher risk vs. reward (all things being equal) on the US equity markets. A high score indicates lower risk/reward. The drawing below illustrates the 3 sectors of risk – bearish, neutral, bullish. In last months reading, the score dropped from the neutral zone in July (where it typically resides) into the higher risk zone by August. The score was 4 in July, then 2 in August.
The Bear-o-meter now reads “3”, as of Sept. 1, 2020. Now its back to a neutral score, albeit at the very low end of that neutral zone (pardon the Star Trek reference). The “nothing happened” part of this reading comes out of the total lack of movement by most of the indicators in my compilation. Every indicator of the 11 factors in the score remain now where they stood in August. Nothing much happened!
Typically, I see one or two of them move around in scores, often cancelling each other out to end up in a similar reading month over month. But this time, there was no shuffling. Only the put/call ratio moved from a bearish score in August, to a neutral score this month. And just barely. The put to call ratio went from 0.67 to 0.78 month over month. My cut-off for a “complacency” reading on that indicator is 0.75 or less for the put/call ratio. That 0.75 means that total put volume is about 75% of call volume. The indicator swings around a lot, but you can see that most of the time it remains between 0.75 on the low side to 1.25 on the high side. Anything outside of those levels is considered overly bullish/ complacent traders or bearish/ fearful investors (which is a good thing).
Conclusion
It would appear that the market continues to exhibit slightly more risk (given its “3” ranking) than a normal neutral rating, yet not so risky to cause undo concern. For this reason, its probably not wise to raise further cash beyond any you may be holding right now.
We’re at around 21% cash in the ValueTrend Equity Platform. We’re heavily weighted in defensive stocks – some of which have done very well (Walmart and CP rail among others). Some have done absolutely nothing beyond their relatively higher dividends (pipeline, utility, infrastructure stocks). We hold technology, but at 10% of total portfolio, we are at about half the weighting in that sector as is the SPX.
In other words, we are cautiously neutral. Just like the Bear-o-meter suggests. We’re not running for the hills, but we hold some cash for buying opportunities and risk control, and hold an above market weighting in lower beta positions. Given the relatively neutral indications of the Bear-o-meter, I’d think that any pullback might be contained to 10% or less. Such pullbacks might represent excellent buy-in opportunities.
