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Broad Participation

160819NYAD

It’s been a while since I highlighted some breadth indicators so here we go. First is the NYSE Advance / Decline line (NYAD). All I can say is Wow! NYAD is telling us that small cap stocks were the place to be coming out of the February low. Comparing the S&P 500 Equal Weight Index (SPXEW) against the S&P 500 (SPX) shows us how big cap stocks have performed against mega cap stocks. The move out of the February low showed widespread buying of big cap stocks, while mega caps lagged. This was a rotation out of the safety trade. Then we got a bit of consolidation in SPX as investors took some profit in big caps and re-allocated it to mega caps. Now it looks like the market is getting ready to run again, fueled by big caps. The percent of SPX stocks above their 200 day moving average (SPX200) shows the same picture as SPXEW. Widespread buying of big caps, followed by some consolidation, then renewed widespread buying.

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Core Risk Very Positive

160812MarketHealth

Over the past week my core market health indicators bounced around a bit. One thing of note is my core measures of risk. They are getting close to a very bullish condition. The current pattern of this category of indicators is similar to late 2012 just as the market was starting a strong rally. I’ll be watching this indicator closely over the next few weeks to see if the bullish conditions persist (or turn back over which will signal a decent sized consolidation ahead).

 
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Adding Exposure

160805MarketHealth

Over the past week the majority of my core market health indicators improved. Most notably is the market strength category. It has finally pushed above zero, resulting in a change to the core portfolios. The new allocations are as follows. Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short Volatility Hedged portfolio: 100% long (since 7/1/2016) In early July, I highlighted some problems with leadership in the market. Most of those problems have been resolved. As you know, I’ve been watching the ratio between the Nasdaq 100 (NDX) and the S&P 500 (SPX). It made a good break higher two weeks ago and is currently fueling the rally as NDX plays catch up to SPX. One thing that hasn’t fully resolved itself is the ratio between the S&P 500 Equal Weight index (SPXEW) and SPX. The current rally has this ratio moving sideways, which shows lackluster participation from the “smaller” big cap stocks in SPX. If the ratio

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Improvement Across the Board

160729MarketHealth

Just a quick note this week. All of my core market health indicators improved this week, but we’re still waiting on measures of market quality and strength to move above zero before adding more exposure to the core portfolios. Have a good weekend everyone!

 
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More Improvement

160722MarketHealth

Over the past week my core market health indicators bounced around, but didn’t see significant improvement. However, I’m seeing other signs that the market can burst higher. First a weekly chart of the S&P 500 Index (SPX) has a clear break out of a bull flag with a successful retest (after a fake out). MACD confirmed the retest by not showing a bearish crossover. RSI on the weekly chart is also well above bear market levels. Next we have the Nasdaq 100 (NDX) compared against SPX. This ratio is breaking above its 20 week moving average. This condition usually results in a market that moves higher. Technology has been lagging since December 2015, but it appears that it is starting to lead again. If this condition persists it should fuel a good sized move higher in the general market. The only fly in the ointment is Dow Theory. The transports (DJTA) still haven’t broken above their last secondary high. If DJTA can get above 8110 it will signal that we’re

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Slow Improvement

160715MarketHealth

Over the past week all of my core market health indicators improved. None of them improved enough to change any portfolio allocations. One thing that is still concerning is that technology isn’t participating strongly in this rally. I’d like to see the ratio between NDX and SPX break above its 20 week moving average as a sign the rally has legs. Some consolidation here then a resumption of the rally that is led by financials and technology would be a very healthy sign of a big run ahead.

 
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Leadership Waning

160708BPSPX

Over the past couple of months, I’ve highlighted some encouraging signs that had accompanied price strength in the market. Unfortunately, most of those signs of strength haven’t persisted as the market is moving close to all time highs. First lets look at the Bullish Percent Index (BPSPX). It finally got above the 2015 highs in March and April of this year, but the subsequent consolidation in the market did serious damage to this indicator. It is still below 60% which is a big drag on the market (and adds the risk of a big decline). Basically, a lot of point and figure charts turned bearish during the last consolidation and haven’t righted themselves. Next is small caps stocks compared to big caps. They have lagged during the last rally. I like to see them lead as a sign of investors taking risk in their portfolios. Money flowed into mega cap stocks faster than big cap stocks during the last rally too. Another poor sign for a sustained rally. It looks

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That Was Quick

160701MarketHealth

Last week we got a market risk warning due to the surprise of the Brexit vote. This week, that warning has been cleared as market participants realize it will take a couple of years to sort out… so they can wait until then to panic. My core market health indicators, with the exception of trend, improved last week. The overall numbers are still soft, but positive enough to change the portfolio allocations to the following. Volatility Hedged portfolio: 100% long Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or the ETF SH) Long / Cash portfolio: 60% long and 40% cash One thing of note that happened over the past few weeks is the Dow Jones Transportation Average (DJTA) created a new secondary high near 8110. The Dow Jones Industrial Average (DJIA) also created a new secondary high near 18100. DJIA is above November 2015 secondary high, but DJTA is below all of its recent secondary highs. As a result, Dow

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Market Risk Warning

160624MarketHealth

Just a quick note, my Market Risk Indicator is warning today. As a result, the portfolio allocations are now as follows: Volatility Hedged portfolio: 50% long and 50% hedged with mid term volatility (and ETF/ETN similar to VXZ) Long / Short Hedged portfolio: 50% long high beta stocks and 50% hedged with mid term volatility Long / Cash portfolio: 100% cash I suspect it will take a couple of weeks to see what the fallout of Brexit will be. Until the market has less risk the portfolios will remain hedged or in cash. FYI, the market risk warning takes precedence over my core market health indicators.

 
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Market Risk Rising

160617MarketHealth

This past week has seen a significant increase in my stock market risk indicator components. Currently, two of the four components are warning, however, three components warned at times during the week. The fourth component still has a bit of room before creating a market risk signal. With the market so close to all time highs it is odd behavior to see market participants so skittish. The behavior I’m seeing in the indicator components is similar to the action during the dip in mid June 2011. This isn’t a prediction of any decline to come, merely a heads up to let you know that a warning could come quickly if the market continues to fall. Risk is rising, but we don’t have a warning yet so there is no change to the Volatility Hedged portfolio. It remains 100% long. My core market health indicators are still suffering damage as the market dips. Most significantly, my measures of trend could go negative over the next few weeks if the market can’t

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