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Breadth from Twitter Stream Diverging from Traditional Indicators

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FYI, I did a post at Trade Followers over the weekend that highlights some traditional technical analysis indicators that are still saying we’re in a bear market. However, the Trade Followers market breadth indicator has just gone positive. The breath indicator is probably flashing a whipsaw signal because I suspect it has an inherent bullish bias. You can read more here.

 
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More Improvement

160226MarketHealth

Over the past week all of my core market health indicators improved. However, as you can see, they are all still deep in negative territory. They are clearly showing weakness in underlying market internals. There is a slight chance that a continued rally next week might bring my measures of core market risk and/or measures of the economy positive. In order to accomplish the feat it will require a continuation of the strong rally currently underway. My market risk indicator has been trying to clear this week, but hasn’t been able to right itself. Next week will be key for this indicator. I suspect it will clear unless the market turns back down with some momentum behind it. Even a consolidation at current levels would likely clear the warning. Conclusion All of my indicators are still negative, but the recent rally has removed some of the underlying damage. Next week will likely be a make or break moment for the market.

 
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Slight Improvement

160219MarketHealth

Over the past week all of my core market health indicators showed a slight improvement. It is somewhat disappointing that the indicators aren’t responding much to the strong rally and consolidation this week. My market risk indicator isn’t showing signs that it wants to clear either. That leaves us in the same position, aggressively hedged or 100% in cash.

 
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No End In Sight

160212markethealth

This week didn’t help any of my core market health indicator categories. They’re still looking ugly. To make matters worse, Dow Theory signaled yesterday that we’re in the midst of a long term bear market that could last from one to three years. Bear markets are a time where it’s hard to make money. Take a look at the charts in this post and you’ll see that all of the hedging strategies except for the Volatility Hedged portfolio lost money during bear markets. The Volatility Hedged portfolio benefited from the extremely steep declines in 2008 and 2009 (and subsequent historically high levels of volatility). I don’t think it’s reasonable to expect the current bear market to unfold in the same fashion so if you’re following the Volatility Hedged portfolio expect it to lose some (more) money during this bear. My point is that you need to have reasonable expectations during bear markets. You’ll most likely lose money, but the important thing is that we don’t take catastrophic or unrecoverable losses.

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Dow Theory Bear Market

Dow Theory Bear Market

The Dow Jones Industrial Average (DJIA) closed at 15,660 today (six points below the last secondary low). DJIA is now confirming the long term down trend with the Dow Jones Transportation Average (DJTA). With both indexes below their previous secondary lows we’re officially in a Dow Theory bear market. The expectation is that both indexes will continue to make lower lows for the next one to three years. There will be strong rallies during the process, but when the primary trend is down, rallies generally fail. In order to change the primary trend back to bullish, DJIA will need to surpass about 17,920 with DJTA confirming the trend by surpassing about 8302. Those targets will stay in place until they are surpassed or new secondary highs are created. A new secondary high would require a rally that lasts more than three weeks and retraces 33% to 66% of the decline from the November highs for the indexes. Conclusion Dow Theory has signaled that we’re in a bear market. It’s time

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Getting Ugly

160205MarketHealth

It’s getting ugly for my core market health indicators. My measures of market quality, trend, and strength are all in oversold territory. During bull markets, oversold conditions generally result in a resumption of an uptrend. Unfortunately, I suspect we’re at the beginning of a long term bear market so oversold conditions should now result in more price destruction before a rally can ensue. Here are a few charts that suggest we’re likely resuming the down trend. First is a point and figure chart of the S&P 500 Index (SPX). It now has a bearish reversal during an intermediate term down trend. Next is a weekly chart of SPX Elder Impulse. It has turned red after a short term rally that couldn’t produce a green bar. Conclusion It’s ugly out there. We’re likely in a bear market. Dow Theory hasn’t signaled yet, but many other indicators are toppling one by one. As a result, bear market rules apply as I interpret charts and indicators… which are currently suggesting a resumption of

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Bear Market Signs

160201spxWeekly

Although Dow Theory hasn’t confirmed a bear market yet, a lot of other S&P 500 Index (SPX) indicators are starting to show bear market behavior. I’ve mentioned before that monthly MACD and Momentum are starting to look like we’re in a bear market. In addition, the long term timing indicator at Trade Followers (breadth between bullish and bearish stocks) is signalling that we’re in a long term down trend. Now it appears that weekly MACD and RSI for SPX are starting to show strong signs that we’re in a bear market. Notice on the chart below that during bear markets RSI spends most if its time below 50 with peaks in the 55 to 60 area. That has been the case for RSI since the May peak. MACD is also showing the same type of weak behavior. During short term rallies in long term down trends MACD is usually constrained by the zero line. The last rally barely moved MACD above zero and it is now well below that level.

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