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Getting Ugly

160205MarketHealth

It’s getting ugly for my core market health indicators. My measures of market quality, trend, and strength are all in oversold territory. During bull markets, oversold conditions generally result in a resumption of an uptrend. Unfortunately, I suspect we’re at the beginning of a long term bear market so oversold conditions should now result in more price destruction before a rally can ensue. Here are a few charts that suggest we’re likely resuming the down trend. First is a point and figure chart of the S&P 500 Index (SPX). It now has a bearish reversal during an intermediate term down trend. Next is a weekly chart of SPX Elder Impulse. It has turned red after a short term rally that couldn’t produce a green bar. Conclusion It’s ugly out there. We’re likely in a bear market. Dow Theory hasn’t signaled yet, but many other indicators are toppling one by one. As a result, bear market rules apply as I interpret charts and indicators… which are currently suggesting a resumption of

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Bear Market Signs

160201spxWeekly

Although Dow Theory hasn’t confirmed a bear market yet, a lot of other S&P 500 Index (SPX) indicators are starting to show bear market behavior. I’ve mentioned before that monthly MACD and Momentum are starting to look like we’re in a bear market. In addition, the long term timing indicator at Trade Followers (breadth between bullish and bearish stocks) is signalling that we’re in a long term down trend. Now it appears that weekly MACD and RSI for SPX are starting to show strong signs that we’re in a bear market. Notice on the chart below that during bear markets RSI spends most if its time below 50 with peaks in the 55 to 60 area. That has been the case for RSI since the May peak. MACD is also showing the same type of weak behavior. During short term rallies in long term down trends MACD is usually constrained by the zero line. The last rally barely moved MACD above zero and it is now well below that level.

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More Damage

160129MarketHealth

This week wasn’t a good week for my core market health indicators. My measures of market quality, trend, and strength all fell even as the market rallied on Thursday and Friday. This isn’t what the bulls want to see for a sustained rally. So far, this is looking like a bear market rally rather than the start of a new intermediate or long term uptrend. If we have entered a bear market (Dow Theory hasn’t confirmed a bear market yet) then bear market rules will apply to how I read various indicators. Elder Impulse for the S&P 500 Index on a weekly chart is a good example. Notice that during a bull market a blue bar that follows a red bar is usually a good time to buy the dip. However, since the top in May a blue bar that follows a red bar gives us little useful information. Even though Dow Theory hasn’t confirmed a bear market yet, I believe that the odds are very high that we’ll likely

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Mired in Red

160122MarketHealth

This week didn’t do much to help my core market health indicators or my market risk indicator. Everything is mired in red. We’ve finally got a decent bounce underway, now we watch to see if the core indicators get better or risk abates. Until then, we’ll stay aggressively hedged.

 
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Missed it by That Much

Published on January 21, 2016 by in Dow Theory
160121DowTheory

During the day yesterday, the Dow Jones Industrial Average (DJIA) traded as low as 15,450. This was well below the last secondary low for DJIA at 15,666. Fortunately for the bulls, the market rebounded and closed a hundred points above the last secondary low. Remember, Dow Theory uses closing prices (not intra-day) so yesterday’s action didn’t break the long term bull trend. The bull market is still intact, but it’s on life support. The market is bouncing today so now we wait until the market turns down again… to see if 15,666 can hold again or is broken.

 
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Make or Break for the Long Term Trend

160116MarketRisk

I’m seeing several signs that we’re at an inflection point for the long term trend of the market (meaning years). It has been uptrending since 2009 and it looks like it’s make or break time for the bull. Here are some of the things I’m seeing that indicate the market must rally very soon or the long term trend will be down and a new bear market has begun. First is my market risk indicator, which is an intermediate term indicator, has just signaled. Take a look at the chart below and you’ll see that it signals at inflection points. It generally warns very near the low or just as the market is generating downside momentum. This indicator suggests that more excitement (either up or down) is close. Next we have Dow Theory. It is only a few percentage points away from signaling a long term bear market. This indicator marks very long term trends in the market. When both indexes break their secondary lows it tells us that the

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It’s Ugly Out There

160115MarketHealth

Wow. What a week. Like the market all of my core health indicators got hammered. They are now all deep in negative territory. I’ll let the chart speak for itself. One thing of note is that my market risk indicator is now signalling. This changes the volatility hedged portfolio to 50% long and 50% hedged with mid term volatility (an ETF/ETN like VXZ) or dynamic volatility (XVZ). For official tracking purposes I use XVZ, but the instrument is thinly traded so it introduces problems in actual portfolio management. First is that thin trading means it is difficult to fill large trades at a good “market” price. Second is that in a swiftly declining market the bid may as much as 20% below the market so you’ll have difficulty getting out of the position (or rebalancing) when pure panic has set in. As a result, I personally use mid term volatility like VXZ instead of dynamic volatility. But, since the back test has been done with XVZ I’ll continue to use

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Crunch Time for Dow Theory

Published on January 10, 2016 by in Dow Theory
160110DowTheory

It’s crunch time for Dow Theory. We’re still in a long term bull market, but only about 4% away from a bear market signal. If the August closing low of 15666 on the Dow Jones Industrial Average (DJIA) is broken to the downside we’ll have a confirmed long term down trend underway. Currently, DJIA has retraced about 65% of the rally out of the August low. This is about as far as a “normal” secondary low carries. Any further lows in the market will increase the odds that 15666 will be broken. So what we really want to see (if you’re bullish long term) is a resumption of the long term up trend soon (and without much more price damage). So if Dow Theory signals a bear market what does that mean for portfolio management? For me, it means that I’ll be more willing wait for a 15% dip in the longs before rebalancing the longs and shorts. Conversely, I’ll be quicker to sell profit from the longs and firm

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Core Portfolios Fully Hedged or All Cash

160108MarketHealth

As I mentioned on Monday, the damage done to the core indicators would be hard to overcome and that the intermediate term trend is now likely down. Since Monday things have only gotten worse. All of my core indicators dipped even deeper into the red. As a result, the core portfolio allocations are now fully hedged or 100% in cash. My market risk indicator has three of four components warning at the moment, but the forth is still positive. That leaves the volatility hedged portfolio 100% long. Here’s a complete list of the allocations: Long / Cash portfolio: 100% cash Long / Short Hedged portfolio: 50% long high beta stocks and 50% short the S&P 500 index (or use SH) Volatility Hedged portfolio: 100% long As an example of the broken intermediate term trend here’s a point and figure chart of the S&P 500 index. The damage done this week was pretty significant, but looking longer term there is still the possibility that once the current correction has ended we’ll

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Hedged

I don’t have my primary internet access at the moment so just a quick note about allocations. All of the core indicators are negative so the new allocations are as follows: Long / Cash: 100% cash Long / Short: 50% long high beta stocks and 50% short the S&P 500 index Volitality Hedge: 100% long I’ll do a full post when I get internet access.

 
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