A few weeks ago one of my kids met up with several of his friends from college to catch a San Francisco Giants game. They’ve graduated from college and their first “real” jobs have scattered them across Northern California. They landed in San Francisco, Napa Valley, Sacramento, Chico, and beyond. Fortunately for them, they’re not too far apart so they can still get together. As a parent, it’s fun to realize that these are the teenage boys that used to litter my family room gaming, watching TV, and arguing about everything from games to sports to girls. Ok, I have to be honest, sports, gaming, and girls are the only things they talked about…arguing or not. Eight of them applied to the same colleges and then picked the one that accepted them all. Probably not the best idea for someone who has aggressive career goals, but a great choice for a group of friends that understand what’s really important in life. Watching them start real life is very rewarding for
During the last week all of our market health and risk indicators showed weakness, however, this is a normal condition during market consolidations. As long as the indicators continue to paint chart patterns similar to price we won’t be concerned. We get nervous when our indicators turn down faster than price. When that happens it is signalling underlying weakness in the market. So far we’re of the opinion that we are currently in a normal, healthy consolidation. None of our measures of the economy, risk, quality, trend, or strength deteriorated enough to cause any changes in the portfolio. We’re still 100% long. We’re aware of the fact that consolidations can turn into larger corrections so we’ll continue to monitor our indicators closely for signs of weakness. Market Positives Our Twitter Sentiment Indicator for the S&P 500 Index (SPX) continued to show relatively good strength again last week. Two weeks of downward price movement has only brought smoothed sentiment back to the trend line we drew near the beginning of September.
The correction that began on 9/14/2012 has brought with it some surprisingly similar readings on our market health and risk indicators as the correction that occurred during November of 2010. What makes it eerie is that the November 2010 correction coincided with the QE2 official announcement. Now we’re seeing a sell the news event coincide with the QEternity announcement. Just for fun I’ve posted a chart of the S&P 500 Bullish Percent Index (BPSPX) with illustrations of the similarities. Notice first the divergence from the peak of April 2010 to the peak in November 2010. It looks very similar to the current divergence in that; it sprang from an oversold condition, followed by a strong rally, which culminated in a final burst upward, caused by a Federal Reserve Quantitative Easing announcement. Even the levels in which the BPSPX reached each time are similar. This is somewhat encouraging since the current BPSPX level gives the market room for one more leg higher before becoming overbought. In addition, we’re now seeing momentum
Over the past few weeks we’ve observed the Active Bear ETF (HDGE) outperform a short of the S&P 500 Index (SH). The last time we saw this same behavior starting was in late February and early March of this year. That time period ended up being the last leg in a market rally before an 11% correction. Money flowing out of weak stocks is something we often see as a rally nears a top. This isn’t something that is concerning in itself as the natural progression of most rallies see breadth indicators diverging from price as the rally moves higher. The problem we have now is volatility rising with weak stocks getting weaker. The combination of a thinning market and rising volatility often signals the start of a larger correction. When volatility stays low and actively managed bear funds like HDGE (or weak stocks) begin to fall rapidly we’re not generally concerned as it usually simply shows money flowing out of weak holdings and into stocks that have performed well
The S&P 500 Index (SPX) broke below our primary support level of 1450 today. Along with that break we’ve seen two days of fairly negative sentiment. Today’s sharp move lower with a substantial move down in our daily Twitter Sentiment Indicator could prove to be an initiation thrust to the down side. This isn’t a good short term sign. As we mentioned in our weekly update, a break of 1450 could take us down to the 1422 level or even our major support level of 1400. We don’t consider 1440 to be anything more than minor support (see the weekly update for an explanation), so the market must catch and rebound at 1440 in the next few days or we’ll be headed for at least a 3% to 5% correction. On the positive side, even though support has been broken and we’re seeing a substantial move lower in daily sentiment, our smoothed sentiment indicator is still above a rising trend line. We don’t like to see it go below zero
We’re starting to see some rotation out of small caps, technology, and the general market into big cap stocks. At this point we’re not sure if it is merely profit taking and re-balancing of portfolios or if it represents distribution and a flight to safety. It is one of the things we’ll be watching closely over the next few weeks. If the trend continues it will be one more sign that the current rally is loosing steam. Add that to the Dow Jones Transports trying to break critical support and we should start seeing the market rounding out a top. Of course, if the transports hold, as they did today, and the short term rotation to big caps turns out to be re-balancing then the market is simply setting up for the next run higher. Keep an eye on RUT, NDX, and DJIA over the next few weeks as they will provide clues to the next market move.
The high school near my house does a fireworks show every year for Homecoming. It’s close enough that all I have to do is get a lawn chair, a beer, and sit in the driveway. Technically, I’ve left the house, but my wife doesn’t count it that way.
Over the course of last week most of our market health indicators showed consolidation in line with the S&P 500 Index (SPX). Some of the indicators were up slightly and others were slightly down. All in all, a normal response to consolidation. Our Market Strength indicator rose into overbought territory during the week. Our measures of risk and quality showed continued strength. Our measures of trend stalled as would be expected during a consolidation of market gains. Our measures of the economy showed the most weakness of all our indicators, but is still clearly positive. The continued strength in the health of the market is keeping our current allocation in our hedging strategies at 100% long. Market Positives The S&P 500 Index showed surprising strength last week considering the quick move from 1440 to 1475 in the prior week. Generally a move of that nature needs a fairly significant consolidation (often back down to the break out point). Instead, we saw buying on every small move lower. Even the intra-day
The Dow Jones Transportation average (DJTA) has fallen once again to a critical support level. This is in contrast to the Dow Jones Industrial average (DJIA) hovering near its 52 week highs. This is not something we generally see in a healthy market. It is one of the few negative indicators we are watching for signs of the next major move in the market. When market rallies get tired and begin to form a top they usually do so from a position where almost every indicator we follow is positive. When an intermediate term high is forming, divergences between major market indexes, momentum indicators, and breadth indicators start to show up. The transports are getting close to painting a major divergence from the other market indexes. This often signals weakness in the general economy as fewer raw materials, supplies, and finished goods are moving. Keep an eye on the transports over the next week or two. If it breaks below the 4850 to 4900 level it will be one
McDonald’s (MCD) has been in a down trend since the first of this year. During that time it has substantially under performed the broad market. Most significantly, MCD has had trouble keeping up with the market during the rally starting at the first of June. This weakness may persist if the stock can’t move above its 200 day moving average and the down sloping trend line. Both of these measures of price are currently converging with price itself, marking a critical point for the stock. Our Twitter Sentiment Indicator for MCD is showing some positive developments that may be signalling that MCD’s correction is over. The last time MCD reached the 93 level and the 200 day moving average our indicator pushed above zero, but without much enthusiasm. The subsequent correction took the indicator quickly back below zero. Not a condition we see in healthy stocks. Now the stock is back at the 93 level and the 200 day moving average with sentiment substantially higher. This is an encouraging sign