Over the past week, some serious damage has been done to my core stock market health indicators. Most notably, the measures of the economy and market strength have gone negative. The changes the 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 use an inverse etf like SH) Volatility Hedged portfolio: 100% long (since 11/11/2016) As always, use your own risk tolerance and read on the market to guide your investment decisions.
The ratio between S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX) is giving a small warning sign that, at the least, we’ll see some sideways consolidation over the next few weeks. As you can see from the chart below, a dip below the 20 week moving average generally results in consolidation. It often precedes pull backs of 5% to 15%. The reason it occurs is that “smaller” big cap stocks are being sold as money is being moved into mega cap stocks. It takes more money to push a mega cap stock higher than it does to push a “smaller” large cap stock higher. It also takes less selling to drive the smaller stocks lower. Thus, mere rotation from large to mega caps creates a drag on SPX. At this point we don’t know if the rotation is just portfolio managers rebalancing or the start of a flight to safety so stay alert. Over the past week, my core market health indicators mostly strengthened, but a few
The S&P 500 Index (SPX) finally broke out of its recent range and moved above 2300. That move didn’t bring a strong response from my core market health indicators. Instead, they bounced around this week. They’re all still positive, but some of them are showing weakness that could turn them negative without a continued rally. An example of an indicator that is barely holding on is the ratio between the SPX equal weight index (SPXEW) and SPX. When this indicator is below its 20 week moving average it tells us that money is moving into mega cap stocks (which is often a flight to safety). Healthy markets have broad based buying of the stocks in the S&P 500 Index. Right now, we’re seeing a slight increase, but not the strong move higher generally associated with big rallies. Conclusion All the indicators are still positive, but could quickly move lower if the market doesn’t continue to rally. This is a time to keep a close eye on the market.
Over the past week, all of my core market health indicators fell. Of most concern is the measures of market quality, trend, and strength. All of them are on a trajectory that could easily take them into negative territory with any further market weakness. But, for now, all of the categories are still positive so the portfolios are still 100% allocated to stocks.