All of my core market health indicator categories, with the exception of market quality, bounced back this week. With the upward momentum, the fears I had last week have been alleviated. Now, we’ve rallied to the 2300 level on the S&P 500 Index (SPX) that I mentioned last week as reistance. We want to see the indicators hold up as the market shows some weakness at resistance.
Over the past week, most of my core market health indicators fell, with the rest holding mostly flat. One thing of serious note is that the measures of trend fell sharply and the measures of strength are flagging. They are both falling fast enough that they could be negative by next week. One other thing that signals caution is Twitter sentiment for the S&P 500 Index (SPX). It is close to breaking a confirming uptrend line. If it happens, we should expect some consolidation. If the uptrend in sentiment holds, the upside will likely be limited to 2300 on SPX in the short term. The market will probably pause there for at least a day or two. Conclusion The market needs rally soon or we’re likely headed for a larger consolidation. It’s time to start paying attention.
Over the past week, all of my core market health indicators rose. Most notably, are my measures of market quality. This category of indicators went negative just two weeks ago, then flipped back to positive this week. Normally, the core indicators don’t whipsaw because they are attempting to catch intermediate term trends. In fact, there were only a handful of times in the last 16 years where a category went negative for only two weeks. This is the first occurrence of a category whipsawing without any of the other categories already in negative territory. With measures of market quality now positive the core portfolio allocations are as follows: Long / Cash portfolio: 100% long Long / Short Hedged portfolio: 100% long high beta stocks Volatility Hedged Portfolio: 100% long (since 11/11/2016)
Since the US election in November, the market has had broad participation as evidenced by a strong relationship between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). During the month of December, however, SPXEW didn’t keep up with SPX. The ratio between the two fell sharply as both small and large cap stocks stalled, while at the same time mega cap stocks gained support. Now, the ratio is turning back up in an apparent resumption of the widespread buying. We can dig a little deeper into what stocks are getting the most attention by looking at the most bullish stocks on Twitter over the last two months, one month, and one week. Since the US election the most bullish stocks are across several industries. During December, the list gravitated toward more technology and health care. Over the past week, the list is once again widening in the number of industries listed. This is a condition we want to see going forward as evidence of widespread
2015 was a year of intermediate term whipsaws. 2016 saw longer term indicators whipsawing. The longest term indicator I follow is Dow Theory. It looks for trends that last from one to three years (or longer). As a result, Dow Theory gives a lot of leeway to counter trend moves. It’s common to have a 10% or 15% correction during a long term bull market that doesn’t change Dow Theory’s long term trend. You can see some examples during the long term uptrend from mid 2009 to early 2016 in the chart below. Zooming in to the last few years, you can see what appeared to be a long term trend change according to Dow Theory. In August of 2015, both the industrials (DJIA) and the transports (DJTA) had large enough corrections to mark Dow Theory secondary lows. In December of that year, DJTA broke below its secondary low point and created a bearish non-confirmation in the indexes. In February 2016, DJTA broke its secondary low point. This created a