Although the intermediate term indicators we follow are mostly positive, I’m seeing some short term caution signs from the Trade Followers Twitter and StockTwits indicators. An example is the chart for volatility below. You can see the full article here.
This past week as the market drifted our health indicators have been slipping. The majority are a long way away from a signal, but our measures of the economy are a whisper away from going negative. This increases the likelihood that we’ll be raising some cash next week and/or adding a small hedge to the portfolios…but as always we’ll wait for a signal before making any changes. Our measures of risk abated this week with our core risk indicator sitting right on the edge of being over bought. It is painting a negative divergence with the peak it made in June. This is something I’m watching carefully, because this type of action often precedes a 10% decline in the market. Our market risk indicator is showing signs of market participants dancing close to the door. This is at odds with our core risk indicator and adds some instability. It appears that it won’t take a lot of downside in price to create a risk signal. Nevertheless, the current conditions are
As I mentioned last Friday the S&P 500 Index should see some sideways action near the 2000 level. We’re now three days into sideways motion on relatively low volume. It’s the last week of the summer so we could continue to drift for the rest of the week. Once everyone gets back to work next week we should see some movement as people evaluate their portfolio performance and start to position themselves for the end of the year. Our indicators only have a few kinks that suggest we may be putting in a longer term top. The Russell 2000 (RUT) is still lagging the other indexes, but has been playing catch up this week. Junk bonds (JNK) have had a huge run, but haven’t recovered from the July damage. They’re telling us that investors are still positioning themselves away from risk. The ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX) is still below its 20 week moving average. This is a sign of rotation
As we suspected last week the market was poised to rally to new highs in the absence of bad news. The early August dip had our risk indicator showing concern, but or core indicators held steady. The recent events provide a good example of maintaining discipline when fear enters the market. Even though we saw a lot of ancillary indicators and our risk indicator getting close to warning we held our portfolio allocations steady. The reason for this is that our core indicators weren’t substantially affected by the dip in the market. This past week all of our core indicators with the exception of the economy rose. This keeps us 100% long in all portfolios. I only see a few concerning things at the moment. Small cap stocks (Russell 2000 – RUT) continue to under perform and indicates that investors are reducing risk. This in conjunction with the sharp declines in momentum stocks during the first four months of the year warns that a longer term top may be in the
As I suspected last weekend, the market was poised to move to new highs. The S&P 500 Index (SPX) is there this morning. One of the charts we’ve been following is VIX vs. VXV. It has been below .9 most of the week and looks like it’ll give an official all clear signal tomorrow. I’ll do a full update of our core indicators tomorrow and highlight other general market indicators over the weekend.
Last week I mentioned that the nature of the bounce would tell us if we’re headed to new highs or seeing a failed rally. As of this week we’re on track to see new highs…if Russia and Ukraine will just cooperate. The underlying indicators I watch are improving enough to support a move to new highs, but the fear of a larger war in Ukraine is putting a drag on the bounce. As a result, risk is the most important indicator to watch at the moment. Even with world tension our market risk indicator backed away from a warning last week. Now only one of its four components is warning (and it has turned back up). Our core measures of risk continue to signal all clear. Fear of risk is moving the right direction and should support the market in the absence of bad news. The ratio between VIX and VXV improved last week, but still couldn’t get back below .9 to signal the rally should continue. It was below
Over the past week our core market health indicators bounced around a bit, but had no significant changes. Our risk indicators abated even with the events in Ukraine. Overall the situation is the same as the last several weeks where our core indicators show a stable underpinning for the market, but risk is fluctuating with news events. It appears that the market wants to go higher if world leaders would cooperate. Since all of our core indicator categories are above zero and our risk indicator isn’t signalling we continue to be 100% long in all portfolios.
I’m starting to see some positive signs that the dip is behind us. First is Elder Impulse for the S&P 500 Index (SPX). It has a tiny blue bar for the week. If it can hold or move to green by Friday it will be a very good sign. Next is the ratio between VIX and VXV. If fell below .9 today. It needs to hold below that level for the rest of the week to signal the worst is behind us. The next two hurdles to cross are from price on SPX. The 50 day exponential moving average is where the market closed today and the 50 day simple moving average is near 1955. In addition, the most tweeted levels for the market are near the 1955 area. If those two levels are surpassed then the odds will favor an advance to the all time highs.
It’s looking like the market is ready for a bounce. The nature of any bounce will tell us whether we should expect new highs or if the rally will fail. Here are some of the critical charts I’ll be watching over the next week or two. A chart I show often when the market is starting a move lower is the ratio between near term volatility (VIX) and mid term volatility (VXV). Spikes in this ratio show immediate fear is greater than longer term fear. They are usually associated with an event or a sudden recognition of danger by many market participants. When the market bounces out of a short term low this ratio can help us determine if near term fear is subsiding or lingering. Over the next few weeks we want to see it fall below .9 to give the all clear signal. If it can’t move below that level the odds favor more downside ahead. This indicator couldn’t clear the warning two weeks ago and signaled that
If you’re interested in the Twitter and StockTwits indicators, I’ve posted this week’s charts at Trade Followers. Here’s an example of the Gold Miner’s ETF (GDX) creating a long setup.