Earlier in the month I highlighted some technical analysis indicators that showed a battle between accumulation and distribution. As of Friday we have more evidence of a battle between people accumulating stock and distributing it. This evidence comes from Dow Theory. Friday’s decline in the Dow Jones Industrial Average (DJIA) created a Dow Theory line. Both averages are now showing a pattern that indicates either accumulation or distribution is underway, but we’ll have to wait and see how these patterns resolve to know which will win. William Peter Hamilton stated: When a ‘line’ is in process it is the hardest thing in the world to tell either the nature of the selling or that of the buying. Both accumulation and distribution are at work, and no one can say which will ultimately exercise the greatest pressure. When the pattern is broken we’ll have an answer that will have a significant impact on the market. Hamilton said that the break of a line will indicate a change in general market direction
The sharp drop in the market today is creating a lot of buzz from the financial press, but isn’t really showing up as fear or panic in the measures I follow. None of the four components of my Market Risk Indicator have gone negative. This is unusual given the fact that the drop is a result of the fear of a global macro event (speculation that Greece may leave the Euro) which could cause a large disruption in currency valuations. The day isn’t done yet, so there is the possibility that my measures of risk escalates into the close, but at the moment my they are treating this as a “normal” profit taking event. Our core measures of risk fell a bit this week, but like our Market Risk Indicator they aren’t showing panic. Our other market health indicators dipped slightly but haven’t been damaged enough to change any of our core portfolio allocations. I suspect that we’ll have enough evidence by next Friday to determine if the current dip
Over the past week our core market health indicators continued to churn along with the market. Most of them rose, but none significantly. We still have every category with the exception of the economy with positive readings. As a result, none of our portfolio allocations will change this week. For a longer term view I’m currently watching Dow Theory for a warning or confirmation of a renewed uptrend. Dow Theory should give us some clues over the next few weeks if there is cause for concern, but it will take longer to confirm the uptrend. Until we have more evidence I’ll wait and watch with a small hedge.
Over the past six months there has been distribution occurring in the market. However, the market has been able to move higher due to bottom fishing and value buying. So far the choppy market we’ve seen since the first of the year has been a result of profit taking (distribution) in stocks that had been making new highs with the money raised being put to work (accumulation) in stocks that have been beaten down enough that they were making new lows at the end of last year. When the S&P 500 index (SPX) broke higher in March the number of new highs jumped to healthy levels. Currently, SPX is within 2% of those highs, but NYSE new highs aren’t rising rapidly. This is a bit of a concern and suggests that distribution is still occurring, but nothing to worry about yet. Another sign of the battle between the accumulators and distributors comes from Trade Followers breadth. It is holding up at healthy levels with the same condition as NYSE new
At the end of February I noted that Dow Theory had created a non confirmation. In that post I mentioned that I wouldn’t care about it unless the transports (DJTA) fell below their January lows. On Thursday of last week the January lows were broken. This is our first caution sign from Dow Theory. What makes the warning more significant is that the transportation average has been trading in a tight range since the first of the year. This tight range is called a Dow Theory line. The break below the bottom of the range creates a warning, but a major tenet of Dow Theory states that both averages must move together. The industrial average (DJIA) still hasn’t created a low that is three weeks away from its early March high. In addition, it isn’t painting a line. When both averages paint a line then break out (either higher or lower) the event is considered significant in Dow Theory. Since that hasn’t happened it leaves us with a small warning
Just a quick note today. No changes to any of the portfolio allocations this week. Enjoy the holiday!
FYI, the Trade Followers breadth indicator now shows the bullish and bearish stock counts. You can see the interactive breadth chart here. If you hover over any of the lines in the interactive chart you can see how the numbers change over time.
As long time readers know, I usually focus on intermediate term indicators because our core portfolios attempt to catch intermediate term up trends (and avoid large draw downs). I don’t often focus on long term indicators so I thought it would be good to step back a bit and see what the very long term indicators are telling us. For the most part they are still showing healthy readings that indicate a long term bull market, but they’re starting to stall. Over the past month the monthly MACD for the S&P 500 Index (SPX) has be crossing back and forth between a bullish and bearish cross. Momentum for SPX is diverging from price as well. As you can see from the chart below, these two indicators have been losing strength for well over a year. For that reason, they aren’t very timely so instead of using them to indicate portfolio allocation changes I use them as warning to watch intermediate term indicators more closely. Looking at SPX on a weekly
Over the past week our core market health indicators bounced around a bit, but mostly improved. Our core measures of risk improved after a few weeks of falling closer to the zero line. One thing that is concerning in this category is a few of the indicators have been painting lower highs since July 2014. Our measures of the economy turned back down this week after trying to complete bottom formations. Our measures of market quality and strength fell as well. The good news came from our measures of trend. They finally went positive. As a result, our core portfolio allocations will change to reduce cash and/or short positions and increase long positions. The new allocations are as follows. Long / Cash: 80% long and 20% cash Long / Short: 90% long stocks we believe will outperform in an up trend and 10% short the S&P 500 Index (using SH). Volatility Hedge: Remains 100% long (since 10/24/14). This is a result of our market risk indicator’s strong readings. None of
Our measures of trend finally made it to positive territory yesterday. If they can hold into the close on Friday we’ll be changing our core portfolio allocations by reducing cash or short positions and adding longs. The change won’t have an effect on the volatility hedged portfolio since it’s still 100% long (since 10/24/14). I’ll do an update Friday before the close with the new allocations. One thing to keep an eye on if the market continues to push higher is the NYSE Advance / Decline line (NYAD). It continues to show healthy readings even though other measures of breadth like the percent of stocks below their 200 day moving average are starting to print tepid readings (65% area). This tells us that even though many stocks are below their 200 day moving average they’re being bought (advancing issues). As I have stated over and over again, I don’t think the long term trend will change until we see a serious decline in all of our measures of breadth. At