Headline stock indexes can easily mask underlying market weakness, and that's exactly what I think is happening right now.
When I look under the hood at sector-level momentum, I see risk increasing. This is not a new development. But if the trend is our friend, it's telling us that "winter's coming."
More News from Barchart
Check out this snapshot as of Wednesday's market close of ROAR Scores – my proprietary technical analysis system – for all 11 S&P 500 Index ($SPX) sectors. ROAR is designed to identify the risks associated with investing in any ETF or stock.
I then built my "ROAR Score" into a full-fledged DIY security analysis, portfolio construction, and investment research platform, with the help of my friends at PiTrade.com.
Using this toolset, I can take a close look at the 11 sectors, where I see a budding breakdown. That is a strong hint to me that market breadth is quietly deteriorating, with sector after sector rolling over into technical weakness.
Understanding the ROAR Score and How to Use It to Manage Risk
The ROAR Score is a quantitative risk-management metric engineered to evaluate "Return Opportunity And Risk (ROAR)." I do not mean risk of a minor pullback. We all know how much short-term noise exists in this algorithmically driven, S&P 500 Index fund-obsessed market. I'm talking about the risk of "major" loss.
Depending on how volatile a stock or ETF typically is, that could be a 10%-20% move in most cases. One simple way to think of ROAR is that it seeks to answer the question "what are the odds that the next 10% move is UP and not DOWN?" The score can be loosely interpreted that way.
However, as I emphasize regularly to subscribers, the TREND in the score is more important than the actual "spot" score today.
The most powerful use of ROAR analysis is to combine securities and use the platform to automate the allocation among that set of tickers and backtest before investing. That essentially creates a programmatic approach to buying, selling, and position-sizing.
Yes, there are many systems that sound like that. But as my regular readers here know, I'm not the "how do I double my money in a year?" guy. I'm a RISK MANAGEMENT pro. Everything else is secondary. So ROAR is more like a 21st century version of combining securities with the goal of not losing big along the way. To me, that's the way to create successful long-term outcomes.
Story Continues