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Trying to Break Higher

Over the past week, my core market health indicators mostly moved higher. With the exception of market risk, they’re compressing around the zero line. This usually happens near inflection points where the market breaks hard one way or the other. Market risk isn’t showing up so that gives the edge to the bulls. The current dip looks much more like a rotation before a rally than a long term top being made.   My measures of market trend moved into positive territory this week. As a result, the portfolio allocations have changed as noted below. As always, use your own risk tolerance to structure your portfolio. Long / Cash portfolio: 40% long and 60% cash Long / Short portfolio: 70% long high beta stocks and 30% short the S&P 500 Index (or use the ETF with symbol SH) Volatility Hedged portfolio: 100% long (since 11/11/2016)  

 
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Almost Ready

Over the past week, most of my core market health indicators rose. Most significantly, are the market quality and trend categories. Both of them could go positive next week if the market doesn’t suffer much damage.   One fly in the ointment is that money is still being moved disproportionately into mega cap stocks. This will provide a headwind for the broad market until the ratio between the S&P 500 Index (SPX) and SPX Equal Weighted (SPXEW) can move higher (preferably above its 20 week moving average).   Conclusion Market health is improving, but investors are still favoring the “safe” stocks. This indicates continued marginal gains followed by choppiness.

 
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Risk vs. Health

We’ve got an interesting situation in the markets where perceptions of risk are extremely low, but my core indicators show an unhealthy market profile. This suggests that the unhealthy internals are most likely a result of rotation, and not the start of a longer term top. Of course, that’s not to say that mere rotation can’t turn into mass selling. But, for now, I’m not too concerned. One of the reasons I’m not to concerned is that even with the Nasdaq 100 (NDX) weakness over the past week, the percent of stocks in the S&P 500 Index (SPX) above their 200 day moving average is rising. This tells me that investors are rotating into beaten down stocks. This isn’t the way tops are usually made. Tops are made when leaders and beaten down stocks are being sold at the same time.   As I mentioned above, my core indicators are showing weakness in underlying technical support. Most notably, is the market quality category which fell below zero this week. That changes our

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Looking Up

Over the past week, all of my core market health indicators rose. They are finally starting to look like they want to confirm price, but I suspect it will take a very good week for the market next week or a couple of weeks of sideways to up movement to get any of the negative categories in positive territory. At the moment, I’m looking up rather than down.  

 
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Ray of Hope

I’m starting to see a few rays of hope from various measures of breadth that could provide the fuel for a broad based rally. The first comes from the Russell 2000 Index (RUT). It finally looks like it wants to play catch up with the other major indexes.   Another indicator that is showing some strength is the NYSE Cumulative Advance / Decline line (NYAD). It has broken higher with the market this week.   One last small ray of hope comes from the ratio between SPX and SPX Equal Weight. It turned up this week. If it can continue to rise it will help the market rise as money moves into large caps (and away from mega caps).     Unfortunately, there is a looming cloud over the ray of hope. My only category of core indicators that rose this week was measures of risk. All of the others fell. This is discouraging because it could indicate that the long term trend is getting much closer to ending.   Conclusion Things

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