Today at the close a consolidation warning for 3D Systems (DDD) was issued. Sentiment has been diverging from price for over six weeks and has now broken a fairly long term confirmation of the uptrend. The last move in price to new highs didn’t generate a lot of positive sentiment. This indicates that traders weren’t cheering the new highs. I suspect that DDD might need a bit more time to consolidate above its breakout point ($50) and the 50 day moving average before it can move higher.
The sell signal issued 8/26/13 for Randgold Resources (GOLD) was closed today when smoothed sentiment broke back above its downtrend line. This is not a signal that GOLD will move higher, simply a close of the sell signal.
I’ve often talked about looking at your own portfolio to get a feel for the underlying market. Over the weekend I noticed a pattern repeating in a wide variety of the stocks I actively track that can provide an indication of where the market is likely to go next. There are several stocks across almost every sector that are currently painting multi-month consolidation patterns. Many of these patterns consist of fairly wide and loose sideways or down patterns where the difference between peaks and valleys are in the 10% or more range. These wide consolidations show the growing uncertainty among investors as they have been reluctant to push a broad cross section of stocks to higher prices. At the same time many of the stocks aren’t being pushed substantially lower. At this point the stocks are still mostly consolidating, but their performance over the next month or so will likely show the market’s hand. If they start to break higher the market will go with them. If they break down
Over the past week the breadth of the 50 most active stocks on Twitter fell. This was mostly a result of weak stocks that were bouncing over the past few weeks turning back down with corresponding sentiment readings. Many stocks moved from counter trend bounces, positive divergences, and unclear back to a confirmed down trend. At the same time a few stocks moved from unclear back to a confirmed uptrend. We have a situation where the weak stocks are resuming down trends and the strong stocks are holding up. This separation is causing a continued negative divergence between the breadth of the most active stocks and the S&P 500 index (SPX). Below are charts of the breadth and status of the most active stocks on Twitter.
A few weeks ago I wrote a post ahead of the FOMC meeting where I highlighted the value of technical analysis in determining the condition of the market in the absence of the news. This week that post becomes relevant again as the same conditions are persisting ahead of the budget and debt ceiling deadlines in Washington DC. However, I want to make an additional point that by using technical analysis you can avoid the pitfall of reacting to each and every news event. Instead, by simply following the underlying indicators of the market you can make portfolio changes when it appears that conditions are deteriorating rather than on a guess (or fear) that conditions might get worse. Just as it was two weeks ago, our core market health indicators are still all positive, but perceptions of near term risk are rising. Almost every other indicator I follow is telling the same story. As a result, our core portfolios are 100% long in the face of a looming event. My
Over the past week most of our core market health indicators held steady. As a result, there are no changes to our core portfolios. The most significant changes came from our measures of risk and quality. Market quality fell and looks like it could go negative again over the next couple of weeks if the market doesn’t move to new highs. Our measures of risk are showing signs of concern with several components of our market risk indicator going negative. This isn’t surprising considering all of the sabre rattling going on in Washington so I don’t have big concerns for the market yet. Our sentiment indicators that quantify tweets and StockTwits messages are pretty tame today even with the S&P 500 Index (SPX) down almost 10 points. Twitter is reading -3 and StockTwits +3 going into the last hour of trading. Bottom line, I’m seeing strength in our core indicators and overall sentiment which indicates market participants are still long, but some are hedging and reducing exposure over a weekend
The Twitter Top 10 Portfolio is up 4.12% this month (from the first Friday) and 29.5% from the first Friday of the year. The S&P 500 Index (SPX) is up 2.24% for the month and 15.42% from the first Friday of the year. The out performance this month comes from several stocks being up almost 10% and Yahoo (YHOO) screaming higher and up over 19%. The highest performing stocks are Yelp (YELP) up 8.91%, Groupon (GRPN) up 8.82%, and Salesforce (CRM) up 8.67%. The drags on the portfolio are two stocks that were in down trends (you know by now I hate to buy stocks in a down trend, but this is a mechanical portfolio…flaws and all). Amarin (AMRN) is down 7.09% and Walter Energy (WLT) is down 4.02%. Below is a performance chart for the year and details of the current holdings. Note: Prices are from about 11:00 AM Pacific on 9/27/13. Start Date Symbol Shares Start Price Start Total End Price End Total % Gain / Loss 9/6/2013
The recent dip in the S&P 500 Index (SPX) has caused a quick dip in sentiment generated from the text of tweets on the Twitter stream. This is a fairly negative development. While there has been relatively little price damage, the damage to sentiment has been very negative. The daily indicator has posted a couple of -17 or below days in the last week. This is causing smoothed sentiment fall rapidly. We saw the same type of action in late July and again in early August, which resulted in a consolidation warning and a further drop in price by about 55 points on SPX before it caught. The pattern being painted since the FOMC announcement last week has been one of chasing. It appears that traders on Twitter haven’t made any clear decisions yet and are simply reacting to price. Sentiment from Twitter is nearing a critical point where it’s about to drop below zero and break the uptrend line created out of the August positive divergence. As I mentioned
The sell signal for long term bonds (TLT) has been cleared. I’ve seen a lot of chatter on Twitter lately from people liking US bonds now that the fed isn’t tapering yet. I suspect this theme will continue until fear builds that a taper will occur at the next meeting. The counter trend bounce signal for IBM has been cleared as well. IBM had a small bounce, but the failure of IBM at its 200 day moving average with falling sentiment just above the zero line increases the odds that IBM will continue its downtrend or at the least need more time to form a bottom.
Below are charts with the bullish intensity scores for the most bullish stocks on Twitter for the week and month ending 9/24/13. The broad theme of internet stocks lead the weekly list. Yahoo (YHOO) and Baidu (BIDU) search and content plays. Priceline (PCLN), TripAdvisor (TRIP) , Yelp (YELP), and Groupon (GRPN) form another sub-theme of recreation and entertainment. Then of course Facebook (FB) and Zynga (ZNGA) as social and gaming.
Market Risk Rising
Volatility Hedged Portfolio