Over the past few days various measures of breadth have show quite a bit of weakness. As I noted in this post, large market declines come when breadth is already weak. With such weak readings the odds have increased that this decline will be 10% or more. Below are some breadth examples. First is NYSE Advance/Declines. They led the current decline in the S&P 500 Index (SPX). Small caps are especially sensitive to this condition. Next is the Bullish Percent Index (BPSPX). It currently has less than 60% of the stocks in SPX with bullish point and figure charts. This indicates a significant number of stocks in down trends. Last is the percent of stocks in SPX that are below their 200 day moving average. Nearly 50% of SPX stocks are below their 200 dma. With all three measures of breadth showing significant weakness, a signal from my market risk indicator should be taken seriously.
Here are a couple of things that haven’t happened since late 2012. First is a downtrend in the Dow Jones Industrial Average (DJIA) that is more than a month long. Since the last secondary low for DJIA the down trends have lasted roughly a month. If DJIA closes at the current level today it will be in a down trend that is now six weeks old. The transports (DJTA) are now in a down trend that is six months long. One of the tenets of Dow Theory is that bull markets will have long up trends and short down trends. In context of the two and a half year rally out of the 2012 lows neither of these declines are significant, but they do point to a changing character in the market. As a reminder, Dow Theory is still in a long term bullish trend. The current declines haven’t changed that trend. I’ll keep you updated to any significant or interesting things that happen with Dow Theory. Another thing that
Over the past week the market has dipped a bit, but for the most part my core market health indicators have held steady. The one exception is my measures of risk. They have risen a bit and once again two of the four components of my market risk indicator are warning. The other two are a long way away so at the moment this appears to be just another short term dip in a long term uptrend. All of our portfolios are still 100% long. There’s been a lot of talk about the transports (DJTA) this week and the implications of their downtrend. If you look at the decline in a longer term context you can see that DJTA’s downtrend has only retraced about 20% of the rally out of its last secondary low. A “normal” decline in a bull market can decline more than 50% or even 67% of a move from a secondary low and still be healthy. With the industrials (DJIA) only a few percent away from
Since the low in October 2014 the market has largely been reacting to the strength or weakness in the dollar. This isn’t a common condition. Usually the market reacts to other macro factors or events, but the quick moves in currencies over the past several months has investors worried about the impact of a strong dollar on earnings of multinational (or mega cap) companies. But, as the dollar has fallen over the past three months investors have started a rotation back to the mega caps. You can see this rotation by comparing the S&P 500 Index (SPX) to SPX equal weighted. When the ratio is rising it shows money moving into the smaller stocks in SPX. When the ratio is falling it shows money moving into the largest companies in SPX (mega caps). I consider a rising ratio a sign of broad participation in the market. A falling ratio can often mean a flight to safety, but currently I suspect it is simply relief from the falling dollar rather than
Over the past week my core market health indicators bounced around a bit, but none of them moved to enough change any of the core portfolio allocations. They’re all still 100% long. One thing of note is that Thursday’s strong rally cleared the components of my market risk indicator that were negative. Today only one component is bouncing around near the zero line. Since all four must be below zero to create a signal the Volatility Hedge continues to be 100% long. Have a good weekend everyone.
A few weeks ago Urban Carmel at The Fat Pitch wrote a post that concluded that the NYSE Advance / Decline line (NYAD) was a poor timing indicator. I generally agree with his assessment. I think that most measures of breadth by themselves are poor timing indicators. Markets can fall when breadth is healthy and breadth often diverges at market tops for a very long time before the market actually falls. For example, the Bullish Percent Index (BPSPX) and the percent of stocks below their 200 day moving average have been diverging with the S&P 500 index (SPX) for over a year (or two depending on how you count). The fact that breadth isn’t timely is why I don’t use it as a part of my “core” indicators. Instead, you’ll hear me refer to various forms of breadth as ancillary or secondary indicators that give good background information. So what information does it give? Answer: When breadth is poor the odds increase that a decline will be large. If breadth
Over the past week my core measures of risk held steady while all of the components of my market risk indicator moved closer to warning. This is a crosscurrent where we’ve got positive core strength, but increasing skittishness by market participants. When this condition occurs we usually see higher volatility until both indicators start moving the same direction again (either up or down). Currently one of the four components of market risk is warning and a second is on the edge. The other two are still a safe distance away so it will likely take a sharp decline in the market to generate a warning signal. Another sign of crosscurrents comes from my core market health indicators vs. ancillary indicators. All of the core categories rose or held steady (even though the market fell). While, measures of breadth and other ancillary indicators are deteriorating. I suspect this likely result in more volatility before the market can move higher. Here are some things I’m seeing that provide background information that increases
Last week the Dow Jones Industrial Average (DJIA) made a new all time closing high, breaking above its recent range (Dow Theory line). At the same time the Dow Jones Transportation Average (DJTA) broke decisively below the bottom of its line. When this occurred it invalidated the line patterns in both indexes. Remember, a major tenet of Dow Theory states that both indexes must confirm a move to provide any useful information…so the fact that the indexes broke different directions invalidates the lines…period. So what do we do now? We go back to waiting for the current secondary low to be broken (which would signal a new bear trend) or the formation of new secondary lows. To break below the current secondary low (without creating a new secondary low) it will take a decline of over 30% in DJIA and 45% in DJTA. A highly unlikely scenario. So what we should be watching for is a new secondary low to be created. There are several criteria that should be met
Over the past week we got more of the same. The market is bouncing around and so are my core health indicators. None of them have deteriorated enough to change any of our core portfolio allocations. All of them are 100% long. At the moment there just isn’t anything significant happening in the market or underlying indicators. As a result, I’ve got nothing more to say. Enjoy the weekend everyone!
There has been an increase in news stories about Dow Theory lately. Most of the discussion has been focused on the divergence between the transports (DJTA) and the industrials (DJIA). As you know I’ve added to the news flow by highlighting the break in opposite directions of Dow Theory lines by the averages. What almost everyone is talking about is the non-confirmation and its implication for the market. The opinions range from “the sky is falling” to “non-confirmations don’t mean anything” or even “Dow Theory is useless so this non-confirmation is nothing more than fodder for idiots”. I’ve been asked by one of the readers of Downside Hedge to share my thoughts on a recent blog post by a popular market commentator. His article was of the “useless fodder for idiots” variety. I’m happy to respond, but rather than call someone out I’ll focus on the general arguments I usually see against Dow Theory (which the “fodder for idiots” article touched on). The arguments against Dow Theory generally fall into