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Market Risk Warning

160624MarketHealth

Just a quick note, my Market Risk Indicator is warning today. As a result, the portfolio allocations are now as follows: Volatility Hedged portfolio: 50% long and 50% hedged with mid term volatility (and ETF/ETN similar to VXZ) Long / Short Hedged portfolio: 50% long high beta stocks and 50% hedged with mid term volatility Long / Cash portfolio: 100% cash I suspect it will take a couple of weeks to see what the fallout of Brexit will be. Until the market has less risk the portfolios will remain hedged or in cash. FYI, the market risk warning takes precedence over my core market health indicators.

 
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Market Risk Rising

160617MarketHealth

This past week has seen a significant increase in my stock market risk indicator components. Currently, two of the four components are warning, however, three components warned at times during the week. The fourth component still has a bit of room before creating a market risk signal. With the market so close to all time highs it is odd behavior to see market participants so skittish. The behavior I’m seeing in the indicator components is similar to the action during the dip in mid June 2011. This isn’t a prediction of any decline to come, merely a heads up to let you know that a warning could come quickly if the market continues to fall. Risk is rising, but we don’t have a warning yet so there is no change to the Volatility Hedged portfolio. It remains 100% long. My core market health indicators are still suffering damage as the market dips. Most significantly, my measures of trend could go negative over the next few weeks if the market can’t

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Still Lacking Leadership

160610NDXvSPX

Here’s an updated (and cleaner) chart of the Nasdaq 100 index (NDX) / S&P 500 index (SPX) ratio. It has turned down from below its 20 week moving average. This is discouraging because I believe we won’t get a sustained rally above the all time highs in SPX unless we get some leadership from NDX. Over the past week, all of my market health indicator categories fell a bit, but not enough to make any portfolio allocation changes. The core portfolios have roughly 60% long exposure to the market. The Volatility Hedged portfolio is still 100% long.

 
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Leadership

160603spxew

One thing I like to see during market rallies is strong leadership from three areas of the market at the same time; big cap stocks, small cap stocks (RUT), and the Nasdaq 100 (NDX). For big cap leadership, I like to see broad participation from a majority of stocks in the S&P 500 index (SPX). One way to measure large cap breadth is from indicators like the Bullish Percent Index or percent of stocks above their 200 day moving average. A few weeks ago, I highlighted their recent strength. Another way to measures large cap breadth is by comparing mega cap stocks to large cap stocks. I do this by comparing the S&P 500 Equal Weight index (SPXEW) against SPX. Long time readers know that I use a dip below the 20 week moving average in the SPXEW v. SPX ratio as a warning sign that some chop is ahead (and possibly danger). When this occurs it signals that money is rotating out of big cap stocks and into mega

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What People Are Watching

Published on May 30, 2016 by in Market Comments
160530DailyBullFlag

Over the past couple of weeks I’ve seen a lot of blog posts and Twitter charts highlighting the bull flag on a S&P 500 Index (SPX) daily chart. This week the bull flag was broken to the upside. The flag itself is important, but is made more important by the notice of a lot of market participants. Remember, what makes technical analysis a powerful tool isn’t just the patterns themselves… it’s the number of people and the amount of money that act on the pattern. The chart I’ve been watching and believe is more significant is the weekly bull flag on SPX. Of course, no one is talking about it so it’s probably irrelevant. Anyway, what I’m seeing on this chart is a nice clean break above the weekly bull flag and then a successful retest of the upper trend line. This last chart is probably the most important. It represents price targets tweeted by traders for SPX. Most people are tweeting 2100 and 2110-2115. That doesn’t represent a lot

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Little Change

160527MarketHealth

There was little change in my core market health indicators over the past week. They bounced around a bit, but no big moves. My measures of market strength are very close to going positive, but couldn’t make it this week. As a result, no changes to the core portfolio allocations.

 
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Chart Repair

160520spxbp

The rally out of the February lows has repaired a lot of charts. If you look at the bullish percent index (BPSPX) the last rally brought the percent of bullish point and figure charts in the S&P 500 Index (SPX) to nearly 80%. That level is higher than BPSPX achieved during all of 2015. This is an encouraging sign for the market as a whole because it gives BPSPX plenty of room to consolidate before getting below the 60% level. Long time readers know that I use readings below the 60% level to indicate increased risk (big market declines occur when breadth is already weak). So as long as BPSPX stays above 60% this indicator will remain bullish. Another indication of chart repair comes from the percent of stocks in SPX that are above their 200 day moving average. This indicator is back to the 2015 level again. It has also improved substantially from the levels of the August 2015 to November 2015 rally (which had price peaking above the

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Not Much Change

160513MarketHealth

This week had little effect on my core market health indicators. They mostly deteriorated, but in a small way. One significant change this week came from my measures of market quality. They are approaching oversold territory. The last time this happened was in early February just before the market began the current rally. Don’t take that as a prediction, just an observation. The short story is we wait another week to see if the dip continues or ends.

 
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Still Waiting for Resolution of Long Term Trend

160506MarketHealth

Another week passes and we’re still waiting for a resolution of the long term trend. Is it up or is it down? I don’t know. Dow Theory is still calling the long term trend down. My core market health indicators are mildly positive. That leaves us modestly long in the core portfolios. My market risk indicator isn’t even close to warning so the volatility hedged portfolio remains 100% long. Quite a difference from three reliable methods that use disparate inputs. This is just one more example of the market giving mixed messages. The conclusion is, we’re left waiting for more information in hopes that the different strategies pick the same direction and we get a good trend to ride… either up or down.

 
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Mixed Messages

160429spxPnF

The market is exhibiting behavior that we often see during times of indecision. Price is swinging in a large range and at the same time intermediate and long term indicators are giving mixed messages. Take a look at how compressed the the Y axis is on a point and figure chart for the S&P 500 Index (SPX). This clearly shows the sideways range of the past two years along with with multiple changes in the short to intermediate term trend (over the past year). The current trend is up and will stay that way as long as SPX stays above 2020… which coincidentally is about where the 200 day moving average is. The next set of mixed messages comes from a weekly chart of SPX. Weekly RSI is trying to turn down near normal bear market peak levels, while at the same time MACD is moving above levels associated with bear markets. Monthly momentum and MACD are mostly exhibiting bear market behavior. MACD is a little stronger than we normally

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