Today didn’t do much damage to our core indicators, however, two of the four components of our Market Risk Indicator are warning. A third component is very close to warning and it won’t take much to trigger it. The fourth component is further away and will take a sharp down day like today to make it warn. I just wanted to give you warning that there may be changes to the core portfolios tomorrow (Friday). I’ll update the site and post to Twitter and StockTwits by 3 PM Eastern what our allocations will be going into the close. IF the risk indicator signals the hedged portfolio will go 50% long and use the other 50% to hedge with a mid term or dynamic volatility instrument like (VXZ, XVZ, or VIXM). If you don’t like volatility ETFs then a managed short fund like HDGE is an alternative. For those of you who use put options the strategy would be to stay 100% long, but cover your complete portfolio with intermediate term
If you’re interested in Twitter and StockTwits momentum (previously sentiment) I posted some charts at Trade Followers.
The Elder Impulse indicator now has four blue bars. In the past this condition has usually preceded a down turn. This is one more ancillary indicator that is stalling. Remember, tops are a process and we usually see indicators fall one at a time until they reach critical mass and cause the market to fall. We’re still a long way away from any warning from the totality of indicators I watch, but every day it seems one more caution sign appears. It’s time to make a list of stocks you wouldn’t want to hold during a down trend…and think about other methods to hedge your portfolio. The NYSE Advance/Decline (NYAD) line is painting the largest divergence in nearly a year, but still isn’t at a critical level. As I’ve stated many times before, I don’t think the market can suffer a substantial decline unless breadth breaks down. Keep an eye on NYAD, stocks above their 200 dma, and the bullish index.
I’ve done an update to gold with its social media momentum indicators at Trade Followers. Long story short is that gold needs to move higher soon or the downtrend could accelerate.
The trend that started two or three weeks ago where our core indicators moved up and ancillary indicators fell continues again this week. Below are updates to some of the things I’m watching without much commentary. You can view this post for an explanation. I use the ratio between VIX and VXV to signal “all clear” when it falls back below .9 after a choppy of falling market. It couldn’t quite get there this week. Large caps are still outperforming small caps…rotation to safety starting? Junk bonds (JNK) are still under performing high quality bonds (LQD)…risk off. The individual stocks I’ve been watching for clues to a direction are starting to diverge. Market participants are becoming more selective in the momentum names which caused a decline early in the year. Here are some examples. Twitter (TWTR) is still in a holding pattern and hasn’t decided which way it wants to go. Baidu (BIDU) is breaking higher. 3D Systems (DDD) looks like it’s breaking down.
Over the past week our indicators are showing more risk entering the market while most of our core health indicators are improving. This is a change from the past 18 months where risk entering the market has been associated with deterioration in our core indicators. This signals a change in the character in the market that we should watch closely. Market participants are now starting to show concern about world events and earnings misses. In the past, earnings misses were considered company specific and didn’t have much impact on the market. This is something to keep an eye on. Since our core indicators are all positive we’re still 100% long in all portfolios. Any changes over the next several weeks will almost certainly come on the back of an “event” or a severe down turn. In the absence of a sharp market decline I doubt we’ll have any changes. Below is a chart of our core health categories.
FYI, The Twitter and StockTwits Top 10 Portfolios have moved to the TradeFollowers Blog. There are two new updates posted at Trade Followers.
The consolidation warning issued on 7/11/14 for the S&P 500 Index (SPX) from quantified StockTwits messages has ended. This suggests that the worst is probably behind us and the path of least resistance is up. Please note the consolidation warning for SPX from Twitter is still open, but will most likely close in the next few days.
This week we saw more of the same. Our core indicators strengthened while ancillary indicators weakened. The only core indicator that got worse was our measures of risk. Early in the week they were showing more concern from market participants even as the market moved higher. Thursday did some serious damage to them and Friday only saw a partial recovery. So far they’re providing early warning, but no signals. It will most likely take another few weeks to shake out. One thing I follow that suffered a lot of damage this week is the relationship between high quality bonds (LQD) and junk bonds (JNK). While LQD appears to be painting a bullish flag, JNK is falling sharply. This suggests that bond owners are shifting money from risk (JNK) to safety (LQD). The events in Ukraine and Gaza on Thursday had LQD rising while JNK fell. Watch this relationship going forward because a shift in bonds often occurs before a flight to safety in stocks. Speaking of stocks, the symbols I