Over the past week we got more of the same. The market is bouncing around and so are my core health indicators. None of them have deteriorated enough to change any of our core portfolio allocations. All of them are 100% long. At the moment there just isn’t anything significant happening in the market or underlying indicators. As a result, I’ve got nothing more to say. Enjoy the weekend everyone!
There has been an increase in news stories about Dow Theory lately. Most of the discussion has been focused on the divergence between the transports (DJTA) and the industrials (DJIA). As you know I’ve added to the news flow by highlighting the break in opposite directions of Dow Theory lines by the averages. What almost everyone is talking about is the non-confirmation and its implication for the market. The opinions range from “the sky is falling” to “non-confirmations don’t mean anything” or even “Dow Theory is useless so this non-confirmation is nothing more than fodder for idiots”. I’ve been asked by one of the readers of Downside Hedge to share my thoughts on a recent blog post by a popular market commentator. His article was of the “useless fodder for idiots” variety. I’m happy to respond, but rather than call someone out I’ll focus on the general arguments I usually see against Dow Theory (which the “fodder for idiots” article touched on). The arguments against Dow Theory generally fall into
Over the past week my core market health indicators bounced around a bit, but none of them moved enough to change the core portfolio allocations. Have a good holiday everyone!
Over the past week the non-confirmation in Dow Theory between the industrials (DJIA) and the transports (DJTA) widened. Both indexes have been painting a line for over two months. Now both indexes have broken out of their lines. The problem is DJIA broke upward and DJTA broke down. This creates a non-confirmation that warns of a possible long term trend change in the near future (next several months…remember Dow Theory is about the very long term trend). Until this non-confirmation clears with the transports moving to new highs (and of course the industrials too) investors should be cautious about adding new long positions. On the other hand, if DJIA breaks the lower boundary of its range along with the transports then it will add a larger warning that the long term trend might be changing. Any low created after a break lower from the range in both indexes will create a new secondary low that will be the trigger point of a change from a bullish trend to a bearish
Last week I mentioned that my intermediate term indicators strengthened while some short term indicators that I follow were showing weakness. This week I’m seeing the short term indicators right themselves and the intermediate term indicators continue to strengthen. This increases the odds that the market will finally break out of the current range to the upside. Of course, price is truth so 2120 on the S&P 500 index must be decisively broken to the upside (along with the current Dow Theory line breakouts) for confirmation that the next intermediate term trend is underway. One positive indicator comes from support and resistance levels generated from the Twitter stream. Traders are now tweeting higher price targets which indicates they’re putting on bullish trades. Another positive sign this week is NYSE new highs are rising and new lows are falling as the market gets close to new all time highs. We still want to see new highs break its recent down trend for confirmation that investors are willing to buy shares that
Here are a couple more things showing up that are small warning signs. First is the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX). It is close to breaking below its 20 week moving average. The S&P 500 index is weighted by market capitalization so the larger stocks have more influence on its movement. SPXEW is weighted equally so a ratio between SPXEW and SPX will show money moving between large cap and mega cap stocks (because SPX is made up of large and mega caps). When the ratio moves down it indicates money moving into mega caps. Possibly from a flight to safety, but is most likely market participants buying companies with global exposure in reaction to recent dollar weakness. A move below the 20 week moving average often results in a choppy market for a few weeks due to the rotation. Another thing that is a bit concerning is the NYSE Advance / Decline line (NYAD). Since the lows in October NYAD
At the end of April monthly MACD for the S&P 500 Index (SPX) created a bearish crossover. However, momentum is still fairly strong. As a result, I take the monthly MACD signal as notice to start paying closer attention to the market because it is starting to stall (but not a signal that a long term top is in). If momentum crosses below 100 it will increase the odds that a long term trend change has occurred. Of course I’ll want to see confirmation from all the other indicators I follow before making a call. Here’s a close up view of the MACD crossover.
Over the past week all of my core market health indicators have strengthened except for market risk. My measures of the economy strengthened enough to move slightly above zero. This means we’ll be adding exposure to the core portfolios. The new allocations will be as follows: Volatility Hedged portfolio: 100% long (since 10/24/14) Long / Cash portfolios: 100% long Long / Short portfolio: 100 long Here’s a chart with changes to the core portfolios over the past 18 months. Green is adding long exposure, yellow raising cash or adding hedges, red represents an aggressive hedge using an instrument that benefits from rising volatility. One thing of note is that my core indicators (which are intermediate term in nature) are currently at odds with some of the short term indicators I watch. For example, Trade Followers momentum from Twitter is currently issuing a consolidation warning. This indicates that even though we’re adding exposure the market may chop around or dip before it can move higher. Another thing of concern is that
Market Risk Warning
Volatility Hedged Portfolio
Long / Cash Portfolio