Over the past week, all of my core market health indicator strengthened. Most notably, my measures of the economy and market quality, which had been laggards, rebounded sharply. Their current trajectory will likely see one or both of those categories go positive next week if the market continues to show underlying strength. It’s looking like the consolidation we’ve seen for the past two months is about to end. Another indication that the consolidation is about to end comes from Trade Followers. Their measure of sentiment for the S&P 500 Index (SPX) is calculated from investor and traders live comments on the Twitter stream. When the trend of sentiment changes it often leads the market. Earlier this week this indicator broke a downtrend line that had been in place for almost three months.This indicates investors are getting comfortable with the market moving higher and should provide fuel for a run at new highs. You can see a current chart of Twitter sentiment for the stock market here. The site also has
Last week, I highlighted the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). In that post I mentioned that a move below its 20 week moving average usually means a choppy market as money moves out of large cap stocks and into mega caps. This week, the ratio recovered. That suggests that SPX will make another attempt at a new high. Keep an eye on this indicator because a move back below the line should signal a failure and suggest we’re headed back to a choppy market at the least. My core market health indicators bounced around a bit, but my measures of market strength and quality fell further. This isn’t a good sign during a small consolidation. I prefer to see them strengthen. Conclusion Weakness in my core indicators, but strength in the ratio between SPXEW and SPX. It feels like the market wants to make another attempt at new highs, but doesn’t have the technical underpinnings to succeed.
Over the past few weeks the market has shown some rotation out of big cap stocks and into mega cap stocks. When this occurs it generally causes choppy sideways consolidation, at the least, or a short term top with a modest consolidation (5% to 15%). I like to use a dip below the 20 week moving average in the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 index (SPX) as a warning sign. This week, we’ve got that warning so we should expect a choppy market ahead. Only time will tell if this is normal rotation or a flight to safety so keep an eye on this indicator over the next few weeks. My core market health indicators showed weakness this week too, with the exception of market quality. It managed to improve which is a minor hint that the rotation we’re seeing is more likely profit taking and re-positioning rather than a flight to quality/safety. Conclusion It looks like we should expect some choppy
Yesterday, the Dow Jones Transportation Average (DJTA) closed just 32 points away from its last secondary high. If it had closed above that level it would have signaled, from Dow Theory, that a long term bull market was underway. Currently, Dow Theory sees us in a long term down trend, but with a bullish non-confirmation of the down trend. This is due to the Dow Jones Industrial Average (DJIA) being above its last secondary high, but DJTA failing to surpass its last high. DJIA is about 6% above its last secondary low. A close below that level would re-confirm that we’re in a long term down trend (that can be expected to last from one year to three). When we look at a one year chart of both indexes (above) the thought that we’re in a long term bear market seems silly. But looking at a two year chart (below) one could argue that DJIA is completing a complex topping pattern, while DJTA is still in a down trend. So,
Over the past week, my core market health indicators bounced around a bit. Most notably is that my core measures of the economy fell below zero. This results in a change in the core portfolio allocations as follows: Long / Cash portfolio: 60% long and 40% cash Long / Short portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or an ETF like SH) The Volatility hedged portfolio is not impacted by the core indicators so it is still 100% long (since 7/1/16) One other notable thing this week is my core measures of risk are still close to signaling a very bullish condition for the market. They aren’t being impacted by the small dip that started a couple of weeks ago which is a positive sign, but they haven’t moved into the “very bullish” territory yet either. This is the thing I’m watching most closely for signs of a strong rally into the end of the year.
Just a quick note. My core measures of the economy have fallen below zero and I doubt they’ll recover by the close on Friday. As a result, the core portfolio allocations will raise some cash or add some hedges tomorrow. The volatility hedged portfolio won’t be affected. As always, use your personal risk tolerance to determine your own portfolio allocations.