Over the past week we saw a bit of divergence between our core market health indicators. Our measures of quality and risk got better, while our measures of trend and the economy weakened. None of them moved enough to change our core portfolio allocations. Our core measure of risk is still diverging with the last several peaks in the market. Since the extremely overbought condition on this indicator in late 2013 it has mostly painted lower highs as the market moves higher. This indicates that investors are getting less confident with each rally. As I’ve noted before, it takes time to build a top so this indicator provides information and something to watch carefully, but nothing to act on…yet. The most important thing to watch for a sign of a long term top continues to be breadth. So far we’re seeing small chinks in the armor, but nothing serious. The NYSE Advance / Decline Line (NYAD) is an example. It isn’t confirming the new highs in the S&P 500 Index
On Tuesday we mentioned that our measures of trend were negative. That condition has resolved itself so it looks like we won’t be making any portfolio changes tomorrow. This is a good example of avoiding a whip saw by waiting for Friday’s data to make decisions. Our portfolios are designed to be long term in nature and have infrequent allocation changes. Since we use weekly data for all of the signals they tend to track the intermediate term trends. The sensitivity in our measures of trend show how long in the tooth the current long term trend is. Even with new highs our trend measures are barely positive so it won’t take much weakness to raise more cash. I’ll do an update of all of our core market health measures tomorrow.
It’s still early in the week, but I wanted to give you a heads up that our measures of trend are currently negative. We require a weekly close below zero before changing any portfolio allocations so this is simply early warning that we might be raising some cash and adding a larger hedge come Friday…but I’ll wait till Friday to make any changes in order to avoid whip saws. Our market risk indicator has two of its four components signalling, but the two positive components are a long way from a warning. What is interesting about their current condition is that the least sensitive components are warning while the most sensitive are a long way from a signal. This means there is some instability in the underlying market and that we’d quickly get a market risk signal if prices drop substantially. Our core measure of risk fell out of over bought readings in early July, moved back up to kiss overbought in August, and is now falling again. This is
Just a quick note today. Our core indicators bounced around this week, but none of them moved enough to change our core portfolio allocations. Here’s the post where from our last allocation change. Have a good weekend.
Although almost every indicator I follow is still positive I’m starting to see some chinks in the armor that suggest that a longer term top is in the making. Tops are a process and take a long time to form so there’s nothing to worry about yet, but here are some things to watch over the next several weeks. First is the ratio between the S&P 500 Index (SPX) and S&P 500 Equal Weight Index (SPXEW). We use the 20 week moving average as a bullish/bearish line. When the ratio is below the 20 week ma the market is often choppy as a result of reallocation rotation or the ratio falls as investors are rotating to safety. Recently it fell below the 20wma then retraced back to it and has turned down again. Investors are continuing to rotate to larger cap stocks which often precedes longer term tops. Next, the NYSE Advance Decline Line (NYAD) is reacting much more quickly to small price declines. This tells us that fewer stocks are
This past week our measures of the economy dipped into negative territory. As a result, we’ll be changing our core portfolio allocations (details below). All of the rest of our core market health indicators dropped as well. They had held up fairly well earlier in the week, but Thursday’s market action did some damage to them. As a side note, it is extremely unusual for one indicator to warn without others warning within a month so it is likely we’ll be raising more cash over the coming weeks. But as always, we’ll wait for a signal before making further moves. Our core measure of risk turned down after touching over bought readings the last few weeks. It is painting lower peaks which suggests investors are getting more concerned as the market moves higher. Our market risk indicator still has one component that is negative even though the market has moved to all time highs. All the other risk components peaked recently and have turned back down. Right now it is
Just a heads up. Our measures of the economy have been negative all week long and it appears they’ll end that way on Friday. If they stay negative into Friday afternoon we’ll be raising 20% cash in the long/cash portfolios (will be 80% long and 20% cash) and going 90% long and 10% short in the hedged portfolio. I give the warning so you can evaluate your positions and determine which stocks would fair worst or you’d be uncomfortable holding if the market turns down over the next several weeks. As always, I can’t see the future and as a result make allocations based on the odds. I’ll do a post on Friday before the close to let you know if the measures of the economy are still negative. As a side note, all of our other indicators are still positive and mostly moving up. The only dark cloud would be our market risk indicator hasn’t cleared one of its components and the others have turned down this week. It
I did an update on gold (GLD) and gold stocks (GDX) at Trade Followers today. Things aren’t looking good. Here’s the chart that went with the post.
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