Over the past six weeks emerging market stocks (EEM) and financial stocks (XLF) have shown surprising relative strength against the S&P 500 Index (SPX). Both of these indexes have been able to hold their 50 day moving averages even as SPX has clearly broken below its own. In addition, while SPX has broken several levels of support including its recent uptrend line, both EEM and XLF have held theirs. EEM in particular looks to be consolidating just above a breakout of a down trend line. This should be a very positive sign. EEM and XLF are generally leading sectors. We often see them create positive divergences with SPX at the tail end of major corrections. The problem we have now is that these two sectors are showing strength near the end of a rally (rather than the first of one). When leading sectors lag it tends to cause confusion…and confusion leads to consolidation or a down trend. These two sectors are trying to tell us something about the market. One
I got this as change today. I did a double take to see if the clerk was my grandma…and if it was my birthday.
We had fairly serious down movement in the market last week, with Friday showing signs of a near term bottom. Although we’re due for a bounce, we’re still aggressively hedged because of the weakness in our Market Risk Indicator. Our core market health indicators are also deteriorating with many of them barely holding above the trigger line. Market Positives Our Twitter Sentiment indicator is currently painting a positive divergence with price. The break of support in the S&P 500 Index (SPX) at the 1420 level printed a large down day in price, but Twitter sentiment didn’t confirm that break. On Tuesday, while price was falling there were still a large number of tweets suggesting that SPX 1400 would hold. Many people talked about their confidence of the market’s ability to recover. Surprisingly, there were enough positive tweets on Tuesday that daily sentiment did not reach oversold levels (which would have indicated an initiation thrust and project much lower prices). The next three days of sideways to down movement in price
From the middle of September to the middle of October the S&P 500 Index (SPX) traded largely in a range. During this time we hoped that market internals would hold up signalling a healthy consolidation. The first trip down from 1375 on SPX didn’t do much internal damage. However, the rally back up and the subsequent sell off brought with them diverging internal indicators. These divergences served as a warning that the support range of 1420 to 1430 might not hold. As an example, take a look at the percent of S&P 500 stocks above their 200 day moving average in the chart below. The first decline from 1475 to 1430 in SPX brought the percent of stocks above their 200 DMA lower, but not to an extent that caused concern. On the following rally it was evident that many stocks could not regain their 200 DMA. This served as our first warning that traders were now selling many of those stocks as they bounced back toward their moving average. However,
Over the past several months gold (GLD) and gold stocks (GDX, GDXJ) have given a few low risk opportunities for you to accumulate precious metals. We posted in late July that although there was still risk to the down side in precious metals we would be buyers if we held absolutely no gold in our portfolio. Then in early September we mentioned that GLD and GDX had broken their respective down trend lines. Once the trend lines held we felt there was a low risk entry being offered by precious metals. Today we’re back to the low risk entry points with gold stocks acting well. After the breakout GDX ran strongly until GLD hit resistance in the 174 area. This point marked the last two previous peaks in GLD. These peaks were made while GDX was diverging and continuing on its downward slope. GLD has given up 40% of the rally out of the May lows, while GDX has only given up 25% of it’s rally. It wouldn’t be unreasonable
Last Friday our Market Risk Indicator went negative. Although this puts us officially in warning mode it doesn’t mean that prices will necessarily fall. For this reason, you should never use our Market Risk Indicator as a signal to go either long or short. If you do, you’ll lose money. Remember, hedging is not the same as going short. Over the last four months the market has rallied and is now consolidating. This consolidation comes above very important support levels. If we were to look at nothing but price we’d have to conclude that the market is simply pausing before moving higher. Unfortunately, what looks healthy on the outside isn’t always healthy on the inside. Our risk indicator is telling us that even though price is acting reasonably, risk is rising. The red lines on the chart below represent our market risk indicator signalling a warning. The blue line are when the warning condition was cleared. When market risk rises investors have several options available to reduce risk. In our
It’s starting to get overcast, windy, and ready to rain in Northern California. Chili season has officially begun. My wife absolutely loves chili. She even orders it as a meal at restaurants on occasion. It was something I could never understand. In fact, I used to mock her about it…until she forced me to go to a Chili Cook-off. After trying several styles of Chili I realized that there is a chili for everyone’s taste. My favorite style consists of beef, anaheim peppers, onions, a few beans, hot peppers, and of course the secret spices. My thanks goes out to a guy named Gene who runs a transmission shop and added one more thing to my life that I enjoy…even if my wife now has one more thing with which to mock me with “I was right and you were wrong”. My mother (who was a fantastic cook…and I’m not just say it because she’s my mom), taught me that cooking is not about recipes. Cooking is actually about ratios.
What a week. We’re in the same place as we were last week, but it doesn’t feel like it. After making a trip to the top of the range and back down again we saw deterioration in many of our indicators. Most importantly our Market Risk Indicator went negative. This indicator overrides all of our other indicators as it often signals an acceleration to the down side. We’re not predicting a break of support in the 1420 to 1430 range on the S&P 500 Index (SPX). Rather we’ve been warned of a the chance of substantial risk so we’re buying insurance by aggressively hedging our portfolio. We’re effectively 50% long stocks we want to own and 50% short, however, we’re using aggressive hedging instruments like puts that match our portfolio or mid term volatility (like VIXM or VXZ). Market Positives Our measures of the economy and trend strengthening slightly, however they are slowing in momentum. Financial stocks are showing better relative strength which would bode well for the market if
Our Long / Cash hedging strategy is now 100% cash. Please see our Long / Short Hedging Strategy Update for an explanation. In the chart below the green lines represent buying stocks for the portfolio (reducing cash). The yellow lines represent raising cash by selling stock.