Today we’ll take the monthly reading of the risk/reward compilation known as the “Bear-o-meter”. Most of you know how this compilation works. It ranks a series of indicators under the categories of Trend, Breadth, Breadth-Momentum, Sentiment, Value, & Seasonality. A score of 0-8 is assigned, where 0 is a very poor return potential vs high potential risk, and 8 is a very high return potential vs low potential risk. The higher the score, the better.
The current reading on the Bear-o-meter is “3”. That’s the dividing line between the high risk zone, and the neutral zone (Star Trek nerd alert!). While a score of 3 isn’t a bad score – do keep in mind that the meter gets a 2 full points just because we are in a seasonally favorable time of the year. Plus, the meter got 3 points for the S&P 500 holding above the 200 day, and 50 day Simple Moving Average. So that’s 5 points – yet we total only 3 in the overall score.
Clearly, there were enough negatives and neutrals scores to keep our overall score low. In fact, two factors in the compilation were super close to ringing up negative points – which would have thrown the meter fully into the danger zone. I’d like to start off by looking at these indicators, which are the % of stocks above their 50 day SMA’s on the SPX. And the VIX.
We have a situation where the S&P 500 is up +18% for the year, and yet the average stock is only up +5%, while more than 40% of the index is still down for the year. That’s a bull market for passive index investors, but less so for everyone else. Breadth matters, and the last time that
concentration and bifurcation were this extreme was back in the 1999 tech mania. We all know what happened next. David Rosenberg
% stocks > 50 day SMA’s on the SPX
You’ll note on the % of stocks on the SPX ahead of their 50 day moving averages that the indicator was recently at my overbought level of 85. But todays reading shows its come down to 83 – which is still a lofty reading, but not at me official “negative score” level.
The VIX is assigned an official bearish (too complacent) reading if it breaks below 12. It closed at 12.35 on Friday. Again, not an official bearish reading according to the Bear-o-meter – which keeps things quantitative and binary to avoid opinions. But boy, its close to a sign of complacency.
Smart / Dumb Money confidence
Boy, the smart money is REALLY not in love with this market right now. Retail (dumb) money is, on the other hand, fully on board. The spread – shown below, sits at -0.5 (aka a ratio of twice as many dummies liking the market than smarties liking it right now). Generally this means trouble.
NYSE AD vs SPX
Its best to see the NYSE broad market Advance Decline line (black line) trail along in relative performance with the SPX (red line). If they start to diverge too much, like now, its a sign of the more concentrated SPX outperforming the better diversified index of the NYSE. Generally that isn’t great – see Rosenberg’s quote per above.
This indicator, which pits the Dow industrials (INDU) against the Dow Transports (TRAN), is a timeless breadth indicator that is actually pretty good at spotting turning points on the market. The TRAN’s have been diverging negatively (underperforming) the INDU for 2 months straight now. Something’s gotta change to keep this market healthy
Hey, a system doesn’t work if you change the rules as you wish, so I stick with today’s low-neutral reading of “3”. We’re holding a bit of cash back, but we are forced to continue legging in so long as the trend stays intact. But there’s a reason why the Bear-o-meter reads only a 3, even though we are in a seasonably good time of the year AND the trend is up. Underlying all of that good news of late are some warnings. I think what this means is that we’d better be prepared to sell if the trend starts to reverse. The underlying structure isn’t there to support anything but a perfect environment.