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Precious Metals Update

Published on February 28, 2013 by in Gold, Gold Stocks
Twitter Sentiment for Gold GLD

In the first week of February did an update on precious metals and stated that we were “getting concerned that gold stocks are going to renew their down trend”. Then two weeks ago we reiterated our pessimism due to the lack of tweets talking about being buyers of gold stocks. As we look at the charts again today we’re even less hopeful than before. Gold (GLD) had a small bounce above the $150 level and now appears to be ready to break it. Since the first of the year our Twitter sentiment indicator for GLD has mirrored the movement in price.  This tells us that traders and investors alike are confused and are simply chasing price.  When traders are making “rational” judgements about the future prospect of a security sentiment plots its own path.  Short term traders often take profits on bounces and buy on dips, which shows up in our sentiment indicator as divergences from price near turning points.  When market participants are confident in the direction of a

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Twitter Intensity Building

Over the past week as the market has been experiencing larger range days the volume and intensity of tweets has been building.  In the past we’ve seen volume pick up at turning points as traders and investors get more intense in their opinions.  Some of the intensity is fear and some is indignation, however, the emotion we see most often lately is resignation.  There are a lot of tweets where even bulls are tweeting that the market needs a rest.  This is showing up in the daily indicator where today the S&P 500 Index (SPX) rose 19 points and daily sentiment gave a negative print of -2. The Twitter stream today was filled with traders looking to short the market or add hedges to their portfolios.  This isn’t the type of action we’d like to see if the market is going to make an attempt at the recent highs in SPX near the 1530 area. We’d rather see confirmation of the current move with traders chasing the rally or getting

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Shorts are Working

HDGE vs. SH

Last week we highlighted some indicators that were giving early warning that money managers were preparing for a choppy or volatile market. One of the charts we showed was of an actively managed short ETF (HDGE).  We pointed out that it was rising with the S&P 500 Index (SPX).  It indicated that traders were putting on short positions in preparation for a market sell off.  Now a week later we’re seeing HDGE continue to rise as traders press their shorts.  Just what you’d expect when the market starts to sell off. For clues about the depth and duration of a sell off we like to compare a short of the general market (SH) to an actively managed short fund like HDGE.  When the general market is being sold, but shorts are not working it tells us that traders aren’t expecting an extended draw down.  It shows that traders are mildly concerned about the market so they want some shorts, but also want liquidity due to their greater fear of the

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San Diego

Published on February 25, 2013 by in Photos, Random

The wife and I spent some time in San Diego last week. We’re home now so I’ll get back to my regular posting schedule tomorrow…unless I have too much catch up work to do.  Here’s a picture near Pacific Beach that I hope makes up for the light posts.  

 
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Market Overview 2/23/13 – Caution Warrented

Over the past week our core market health indicators continued to fall.  Our measures of quality and trend fell far enough to join the economy in negative territory.  Our measures of market strength fell substantially as did our measures of risk (meaning the market is more risky).  Our indicators are telling us that there is a high likelihood of a pause in the market and that risk to long stock positions is rising.  It could play out as a very choppy slow uptrend, an extended sideways move, or a pullback in price.  As you know we don’t try to predict the future, rather we try to align our portfolio with the health of the underlying market. We changed our portfolio allocations as follows.  Both of our Long / Cash portfolios are now 40% long and 60% cash.  Our Long / Short (or hedged) portfolio is now 70% long and 30% hedged.  Our longs still consist of stocks that we believe will outperform the general market during sustained up trends. However,

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Raising Cash and Adding Hedges

Just a quick note about our current portfolio positions.  Our core market health indicators have deteriorated further throughout the week.  They’ve fallen enough that we’re raising cash in our Long / Cash portfolios and adding hedges to our Hedged portfolio.         Our Long/Cash portfolios are both now 40% long and 60% cash.   Our Hedged portfolio is now 70% long and 30% hedged with a simple short of the S&P 500 Index.  The ETF SH is an easy way to short SPX if you don’t want to short SPY.  The long portion of our portfolio still remains the stocks we believe will outperform the market over the long term. However, we’ve trimmed some positions based on their future prospects and used that cash to purchase the hedge. Note: charts added on 2/24/13

 
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Random Observations

Our core market health indicators deteriorated enough today to warn that some consolidation is ahead of us in the market.  We’re not making any changes to our portfolios yet, but will by the close on Friday if the indicators don’t turn back up.  We require a weekly close just to avoid whipsaws.  This isn’t a prediction…remember, I can’t see the future.  Instead, we try to align our portfolios to hedge out perceived risk. Bottom line, it looks like the odds of the market moving substantially higher over the next several weeks are very low.  While the odds of the market moving sideways or falling is getting more likely.  Now is a good time to look at your portfolio and think about trimming your losers, high beta positions, or anything you’re not comfortable with.  Have a list ready in case you decide to raise cash. Our Twitter Sentiment indicator for the S&P 500 Index (SPX) got turned back at the zero line again today (smoothed sentiment).  Over the past several weeks

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Canaries in the Coal Mine

The market broke above the important 1525 level today, but did so with a few warning signs.  We’re still seeing negative divergences as the market moves higher.  This doesn’t mean that the market is going to fall in the immediate future. However, it does warn that we’re seeing a slow move away from bullishness towards caution by portfolio managers.  Below I’ll highlight a few things we’re seeing and explain what we think it means. The first chart is new 52 week highs on NYSE.  The S&P 500 Index (SPX) has moved higher since the beginning of the year.  At the resolution of the Fiscal Cliff issue the market ran sharply higher for two days.  At that time new highs on NYSE spiked to nearly the same level they had achieved last September (when price was trading at about the same level…so far, so good).  Today price is almost 5% higher, but new highs are lower, causing a negative divergence that has lasted for over six weeks.  This is one of

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It’s Officially Spring

Published on February 17, 2013 by in Photos, Random

In our continuing series on Northern California seasons, it’s officially spring in Sacramento.  Fall started in the middle of November. Winter began on Christmas Eve. And now the first blooms in my yard signal spring.

 
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Market Overview 2/16/12 – More Divergences

New week, same story.  The market spent time grinding higher last week while the majority of our core market health indicators ground lower.  None of them deteriorated enough to change our portfolio allocations, but raising cash or adding hedges sometime in the next few weeks looks inevitable.  A very sharp move higher that brings with it wide spread participation is about the only thing that could change the indicators.  We’re not predicting a down turn, rather we believe it is best to protect gains when the market is uncertain. We’ll wait for our indicators to turn before taking any action. We’ll note any warnings throughout the week on Twitter @DownsideHedge.  If we make any changes to the portfolio we’ll post an update before the close on Friday. Market Positives Our core market health indicators that measure risk, quality, trend, and strength continue to be positive (although as mentioned above, showing negative divergences). We have to leave them as a market positive even if we’re not optimistic.  Our market stability index

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