Over the past week our core health indicators bounced around a bit. Some were up and some were down, but nothing too significant emerged. The category that the fell the most was our measures of trend. Our measures of risk backed off a bit and appears to be in a holding pattern. Overall, I’m seeing slowly deteriorating indicators in our core categories, but larger moves in ancillary indicators and measures of risk. This puts us in a situation where it’s all about risk and how it affects market participants. Our market risk indicator still has two components warning and two close enough to warning if the market suffers a sharp drop next week…or before the close today. However, three of the four components turned up (lower risk) this week even with the volatility in the market. What I’m seeing is the longer term indicators of risk fighting the shorter term. None of our indicators moved enough to change or core portfolio allocations. We’re still 100% long and will stay that
It’s probably too early to break out this chart, but I thought I’d show it anyway. Usually when the market falls steeply over a few days then consolidates for several days it is only the half way point of the move. Today it looks like we fell out of the consolidation range. As a result, my back of the napkin math targets roughly 1860 on the S&P 500 Index (SPX) as the next stop for this move. You’ll note that during 2013 the pattern failed a couple of times. The failures are similar to many other indicators in 2013. Nothing that predicted lower prices worked. If the market is starting to turn over then I expect to see indicators like this pattern start working again.
I’m starting to see more things that suggest the worst isn’t behind us. The churn during March and April didn’t show big signs of fear or mass selling. Some of the measures of breadth I highlighted this week like NYAD didn’t turn down with the market for example…and has now turned down. Another way to look at the strength of the market, fear, and amount of selling is by comparing various “short” ETFs. During March the only ETF that was affected by the churn was the actively managed bear fund (HDGE). It moved slightly up, as the market moved sideways to up and mid term volatility fell. The falling volatility showed that market participants weren’t afraid of a longer term market top, but saw the market action as rotation. Fast forward to today and we see a different picture. The market is falling (SH rising), shorts are working (Active Bear – HDGE) is rising, and people are pushing mid term volatility up (VXZ). This shows broader based selling and more
Over the course of this year I’ve been consistent in repeating that I didn’t think the market could suffer a correction unless breadth broke down. Even though many other indicators have warned on and off this year, breadth has held strong. This week the picture changed a bit. First let’s look at the breadth indicator that warned first. The ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX) warned in early July when it broke below its 20 week moving average. It turned back up this week but as a result of large caps selling faster than small caps. When a ratio turns up I like it to result from upturns in the numerator and denominator so this upturn isn’t exactly positive. The NYSE Advance/Decline line (NYAD) is currently experiencing its largest decline in a year. This indicator shows that since the first of July there has been broad based selling as more stocks are declining than advancing. Other declines in the market this year
Over the last week most of our market health indicators fell slightly, but didn’t suffer enough damage to make any changes to our core portfolios. Our measures of risk showed a large amount of concern from market participants, but didn’t fall below the zero line. Our Market Risk Indicator has two of the four components warning. The other two components moved rapidly toward signaling yesterday, but have backed off a bit today. As a result, our risk indicator shouldn’t warn today unless the market falls sharply in the last hour. One interesting thing of note is that our risk indicator almost never signals without at least one of our core indicators warning as well. The only instance since 2000 was on 9/19/2008. With modest strength in our core indicators and no risk signal our portfolios will remain 100% long for at least another week. Any changes next will will almost certainly be a result of a continued decline that triggers our risk indicators. Below is a chart with our current health