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Market Health Holds Steady

Over the past week most of our market health indicators held steady. As a result, there are no changes to our core portfolios. The most concerning thing I see at the moment is the perception of risk is rising.  Most of the components of our Market Risk Indicator are negative and I suspect a break below 1600 on SPX will create a market risk warning.  That would result in us adding an aggressive hedge to our hedged portfolio and going to 100% cash in our long/cash portfolio that recognizes risk.  My take on the current situation is that the core underpinnings of the market are strong, but there is nervousness ahead of a long weekend that may see the United States engage in military action against Syria.  Once that situation is resolved the market should move higher.  The nature of that bounce will give clues for the longer term direction. Below is a chart with the current health indicator category levels.

 
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Facebook and 3D Systems Hold up Twitter Top 10 Portfolio

The Twitter Top 10 Portfolio held steady this week as the market fell. The out performance was a result of rallies from Facebook (FB), 3D Systems (DDD), and Chipotle Mexican Grill (CMG).  The bank stocks under performed, while the rest of the portfolio held fairly steady.  The weakness in the bank stocks is a bit concerning for the overall market, but the fact that the high beta and momentum stocks are holding up or rising lends weight to the argument that this recent down turn isn’t the start of a longer term bearish trend.  I’d expect to see the momentum stocks failing rather than breaking out to new 52 week highs if this down trend is likely to continue. By looking at a few charts it is likely that the banks could have a bit more weakness before rebounding.  Citigroup (C) is on a Twitter sentiment consolidation warning, while Bank of America (BAC) appears to experiencing a soft consolidation that brings price and sentiment back to levels where it can

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Where Will the Down Trend Stop?

Here’s another look at a simple method of calculating a probable bounce or ending point for a short term down trend. I’ve found it fairly accurate over my investing career.  During the past year it has been a good indicator of when the market is likely to bounce.  The chart is annotated with horizontal red lines showing the consolidation and target where the pattern has been in play before. Here’s how I calculate it. After a fairly sharp sell off the market often consolidates the initial move with a bear flag (as we mentioned over the weekend).  When the bear flag is broken to the downside it often signals the half way point of the current move.  By taking the middle of the consolidation and subtracting it from the recent high we can project how much farther the market is likely to fall. Using this back of the napkin technique I get roughly 56 points from the high to the middle of the consolidation on the S&P 500 Index (SPX). 

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Seeing Some Bottom Fishing on Most Bullish List

There are quite a few stocks in down trends that made the most bullish list this week which suggests that some bottom fishing is going on under the covers of the market. A few examples are Amarin (AMRN), Walter Energy (WLT), and Alpha Natural Resources (ANR). Below are charts with the bullish intensity scores for the most bullish stocks on Twitter for the week and month ending 8/27/13.

 
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Berkshire Hathaway One of the Most Bearish Stocks on Twitter

Berkshire Hathaway (BRKB) made its debut on the most bearish list this week. It has been lagging the market since this rally began so it’s something to watch if it continues to under perform during the current dip. Below are charts with the bearish intensity scores of the most bearish stocks on Twitter for the week and month ending 8/27/13.

 
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Most Active Stocks on Twitter

Below are charts with the intensity scores of the most active stocks on Twitter for the week and month ending 8/27/13. Below that is the status of the 50 most active stocks on Twitter.

 
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Character of the Market

Long and Short Signals from Twitter

I’ve talked in the past about judging the character of the market by looking at the action of the stocks you own in your portfolios. This is especially useful when the market is showing weakness after making new highs or when it is showing a bit of strength after a sell off.  When the stocks I own and/or have in my watch list confirm the move I suspect that the market will continue in that direction.  If a majority of the stocks I track are diverging from the market my bias moves in the direction of the portfolio. As a variation on the same theme, I’ve charted all the long and short signals generated from Twitter sentiment over the last several months.  By watching the action of the most active stocks on Twitter we can get a picture that shows the changes in the character of the market. On the chart below you can see several buy and sell signals during the consolidation from late March through April.  This highlights

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Waiting for Labor Day

Over the past week all of our core market health indicators improved except for perceptions of risk, resulting in adding longs and removing some hedges from our core portfolios.  Almost all of the indicators that we watch stayed positive even as the market fell for a few weeks.  I am seeing a few things that are of concern, but nothing serious yet. Over the 30 years that I’ve been active in the market I’ve observed that Labor Day is often an inflection point where the market either strongly confirms the current direction of the market or starts a turn.  When I look at the condition of our indicators and price action in the S&P 500 Index (SPX) it appears to me that market participants are waiting for summer vacations to be over and everyone to get back to work before committing to a direction.  Traders are getting cautious as evidenced by the consolidation warning from Twitter sentiment.  Measures of breadth that we follow show investors  becoming much more selective in

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Market Health Improves – Adding Exposure

All of our market health indicators except for perception of risk improved over the past week. Our measures of market trend and strength continue to show high readings. Our measures of market quality are almost positive and I suspect that baring a large sell off we’ll see them move to positive territory by next week.  Our measures of the economy finally moved into positive territory. As a result, we’re adding exposure to our portfolios.  Both of our long / cash portfolios are now 80% long and 20% cash. Our hedged portfolio is 90% long stocks we believe will outperform the market and 10% the S&P 500 Index (or the ETF SH). Below are charts of our portfolio changes over the past year.  The green lines represent adding exposure. The yellow lines represent raising cash or adding hedges. The red lines represent the hedged portfolio in an aggressively hedged position with instruments that benefit from increasing volatility. Current market health indicator status.

 
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Twitter Top 10 Portfolio Widens Gap with Market

The stocks in the Twitter Top 10 portfolio are starting to show some momentum again.  Over the last week as the market has made a short term bottom and risen just over 1%.  At the same time the Twitter portfolio jumped almost 2%.  Ford (F) and the bank stocks (WFC, BAC, C) are having the largest drag, while Facebook (FB) is showing the majority of the strength in the portfolio. Below is a performance chart and details for the stocks held this month. Note: Prices are from about 9:30 AM Pacific on 8/23/13. Start Date Symbol Shares Start Price Start Total End Price End Total % Gain / Loss 8/2/2013 $FB 313 38.05 11909.65 40.02 12526.26 5.18% $BAC 803 14.84 11916.52 14.52 11659.56 -2.16% $F 903 17.5 15802.50 16.42 14827.26 -6.17% $SBUX 172 74.23 12767.56 71.84 12356.48 -3.22% $DDD 251 47.42 11902.42 48.04 12058.04 1.31% $LNKD 50 235.58 11779.00 238.18 11909.00 1.10% $C 224 53 11872.00 49.82 11159.68 -6.00% $BIDU 85 139.7 11874.50 138.81 11798.85 -0.64% $WFC 267 44.49 11878.83

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