Crypto Talk with Terence A Comment -- General Comments From an Expert A Commentary COMMENT Jan 27, 2022

It's really a risk/reward assessment, not a market-timing tool to buy "now" or sell "now". It tells you your relative tradeoff. He looks at 11 factors, some are trend and some are value, such as sentiment and breadth. Each factor gets a score and the Bear-o-meter registers from 0-8. 

0 means run for the hills, very risky on a relative basis. And 8 means back up the truck. We're at about 3 right now, which is OK but not wonderful. It's been pretty much there all year so far.

Note that this tool looks at the S&P 500, not at the TSX. All 11 factors are based on US markets.

S&P is up ~7% so far this year, rather a mediocre year. Really good for the TSX.

The Bear-o-meter hasn't been saying run for the hills, but it has been choppy. There's certainly the potential for continued volatility. We'll have to keep an eye on it.

August, September, and October typically show higher VIX levels (higher volatility) than at any other time of the year. So you want stocks with lower beta.

Among ETFs, equity ones remain the most popular with 1,800 in Canada. The newest ones are on the 0 day to expiry; we'll see how they do over time. The latter hold indices and sell puts to make short-term profits; are not for everybody, but this is the cutting edge in ETFs. Options volumes continue to grow. If you buy USD ETFs, make sure they are hedged. The market has been complacent. No matter the headline, the market rallies or dips have been very shallow. He expects a dip in the near future, but remains constructive long term.

The TSX has quietly been delivering an impressive run, passing 27,000 and outpacing the S&P 500 so far in 2025. It's seen strength in energy, materials, and financials. Combined with expectations for lower interest rates, it's really given the index a fresh tailwind.

With the all-time highs, she is a little cautious. Big question is whether upcoming earnings can justify these levels, especially with treasury yields creeping higher again. Nearly half of the S&P 500 is set to report earnings in the next 10 days, and it includes some big tech names. Even if you don't own those names directly, their concentration risk means their results will dictate the path of the market headed into the fall. 

Both the S&P 500 and the QQQ have closed above their 20-day MA for 60 days in a row, which is the longest streak going back to the late 1990s. So those remain in overbought territory if looking from a technical or RSI point of view. Going back to 1975, this has happened only 4 times; the average return 1 year later is in double digits around 22%.

Though she is still bullish on the next 9-12 months, investors should be cautious and selective, taking some profits off the table. Markets at these levels tend to go sideways or perhaps even sell off. August and September are typically weak months, so she wouldn't be surprised to see a 7-8% selloff from stretched valuations.

Absolutely. He's getting more cautious, especially lately. There's just been too much bullishness, and he's looking at sentiment, valuation, and other things. 

People are underestimating economic risks from the tariff regime. Suddenly 15% is the new level instead of 10%. Trump is feeling somewhat empowered after the Iran-Israel thing, the big budget bill, and some of these trade deals (even though it wasn't 90 deals in 90 days). Trump's going to stick to the tariff story. He likes the revenue coming in from tariffs, and they need it from a deficit basis. 

The market hasn't adjusted to what the impact of tariffs is going to be. Starting to see it in some corporate earnings reports, such as GM, CNR and TXN. More importantly, we're moving from an average tariff rate of 1.5-2% to 14-15% (not sure what the number is, as it's constantly changing). This will change corporate behaviour. Companies need some type of surety going forward, some consistency as to what the environment's going to be like. Until they have that, they're not going to do capital spending or hire people to the same degree.

He has economic concerns and valuation concerns. The market's now 26x trailing earnings (pretty high historically), right back to the high. And that's for earnings that are only growing at a 5% rate.

Sentiment got really beat up into the April lows, which was a  great buying opportunity. All the surveys, such as AAII and Bank of America's, are right back to lowest cash and highest bullish indicators. Valuation and sentiment alone do not create market tops, but they can accelerate the downside once you do get a move in that direction. That's what we saw in April.

We're starting to see weakness in consumer spending, housing, and employment numbers. He's increased his bond weighting. Between inflation and growth, what's the bigger risk from tariffs? He thinks it's to growth. Ultimately, Trump will get his way and rates will go lower but for the wrong reason (economic data will be slowing significantly).

So in that environment, you have to get defensive. He's taking the beta out of the portfolio. The only thing he's sticking with is tech. That sector's proven itself. AI spend will continue, as you saw with GOOG's numbers last night. 

He'd play the commodity directly in this case. Somewhat undervalued relative to gold. Has more of a commercial use than gold. Still likes precious metals.

Sometimes it's better to play the commodity, but sometimes stocks are the cheaper play.

A lot of the macro uncertainty has been melting away, in fits and starts over the last couple of months, and more quickly over the last 2 weeks. Various countries are coming to the table and coming to terms with the US on trade and tariff matters -- whether substantively or performatively, let viewers be the judge. The market's taking it as a good sign, or at least (probably a correct assumption) that the worst-case scenarios priced in during April are off the table.

As a result, stock markets in Canada and US are hitting all-time highs.

Broadly, he's below weight on the Mag 7. Just for context, their market weight is massive. His firm runs a NA mandate, but if you were to run just a US mandate this would mean that about 33% of your portfolio would be in just 7 stocks. That's an imprudent amount of concentration.

So they've picked their spots and own a couple. The ones they don't like, they don't own.

Increasingly, there are signs of that. A couple of things point to complacency and greed. 

One is the resurgence in the meme stock trade, as it did in 2021. The other one is leverage. NYSE members extend margin credit to clients of member firms. Data suggests that margin debt outstanding has surpasses $1T, and that's quite a lot. Shows that people are getting increasingly comfortable with the durability of the economic cycle and the stock market rally.

He is too, but there's a lot of ground between comfort with durability of an economic expansion and piling headlong into things like meme stocks, zero-date expiry options, and triple-levered ETFs.