As long time readers know, I usually focus on intermediate term indicators because our core portfolios attempt to catch intermediate term up trends (and avoid large draw downs). I don’t often focus on long term indicators so I thought it would be good to step back a bit and see what the very long term indicators are telling us. For the most part they are still showing healthy readings that indicate a long term bull market, but they’re starting to stall. Over the past month the monthly MACD for the S&P 500 Index (SPX) has be crossing back and forth between a bullish and bearish cross. Momentum for SPX is diverging from price as well. As you can see from the chart below, these two indicators have been losing strength for well over a year. For that reason, they aren’t very timely so instead of using them to indicate portfolio allocation changes I use them as warning to watch intermediate term indicators more closely. Looking at SPX on a weekly
Over the past week our core market health indicators bounced around a bit, but mostly improved. Our core measures of risk improved after a few weeks of falling closer to the zero line. One thing that is concerning in this category is a few of the indicators have been painting lower highs since July 2014. Our measures of the economy turned back down this week after trying to complete bottom formations. Our measures of market quality and strength fell as well. The good news came from our measures of trend. They finally went positive. As a result, our core portfolio allocations will change to reduce cash and/or short positions and increase long positions. The new allocations are as follows. Long / Cash: 80% long and 20% cash Long / Short: 90% long stocks we believe will outperform in an up trend and 10% short the S&P 500 Index (using SH). Volatility Hedge: Remains 100% long (since 10/24/14). This is a result of our market risk indicator’s strong readings. None of
Our measures of trend finally made it to positive territory yesterday. If they can hold into the close on Friday we’ll be changing our core portfolio allocations by reducing cash or short positions and adding longs. The change won’t have an effect on the volatility hedged portfolio since it’s still 100% long (since 10/24/14). I’ll do an update Friday before the close with the new allocations. One thing to keep an eye on if the market continues to push higher is the NYSE Advance / Decline line (NYAD). It continues to show healthy readings even though other measures of breadth like the percent of stocks below their 200 day moving average are starting to print tepid readings (65% area). This tells us that even though many stocks are below their 200 day moving average they’re being bought (advancing issues). As I have stated over and over again, I don’t think the long term trend will change until we see a serious decline in all of our measures of breadth. At
Over the past week all of our core market health indicators fell slightly. The volatility and large range days in the market didn’t do a lot of damage. The one exception is our core measures of risk. They fell quite a bit and will likely go negative if the market continues to fall next week. On the other hand our measures of trend want to go positive, but just can’t get any upward momentum. If the market can rally next week then they will likely go positive. That puts us at a pivot point between increasing risk or a continued up trend. Another sign that the market is at a critical point comes from Trade Followers. Their algorithm that captures support and resistance levels for the S&P 500 Index (SPX) puts 2040 as a must hold level. If that level breaks then 2020 is the next level of support, but minor in nature. There is very little support below that level which sets up the potential for a cascade lower
Over the last week our measures of market quality, trend, and strength all improved even though the S&P 500 Index (SPX) declined. Measures of the economy fell a bit and our core measures of risk started suggesting a little caution. Our market risk indicator is still a long way away from any warning signal with only one of four components currently negative. Overall, the indicators were fairly stable and suggest that the current decline is healthy consolidation. Of course this could change, but I take the evidence as it comes. What I’ll be watching most closely is our core measures of risk. None of the indicators moved enough to change any of our current portfolio allocations. One thing of note this week is that Elder Impulse for the S&P 500 index on a weekly chart has turned blue. It appears that it will close with a mild warning today. A blue bar often precedes at least a few weeks of sideways movement and occasionally is the start of a more
There really isn’t anything significant happening in market internals lately. From all appearances the market wants to go higher, but probably needs to consolidate a bit before another rally. If the market dips keep an eye on breadth to see if anything changes from bullish to bearish for early warning of a significant decline. Here’s an update of some of the breadth measures I follow. They all have healthy readings, but with a few nuances. The NYSE Advance / Decline line (NYAD) is confirming the recent move to new highs. This is the most healthy sign of breadth I’m watching. Breadth between the most bullish stocks on Twitter and StockTwits and the most bearish stocks is also showing readings that are consistent with a bullish trend. However, it is now at levels that have often preceded a short term decline. The bullish percent index (BPSPX) has historically strong readings above 60%, but is down from the giddy readings during the rally in 2013. The highs over the past six months
Over the past week our market health indicators bounced around a bit, but there were no significant changes. As a result, our portfolio allocations will remain the same. The only thing of note is that even though the S&P 500 index (SPX) has moved higher this week our measures of trend fell. This isn’t too concerning, but I would have expected them to move into positive territory with the current market action. This will be something to watch over the next few weeks.
Last week the Dow Jones Industrial Average (DJIA) moved above its previous peak, however the Dow Jones Transportation Average (DJTA) remained below its own. This divergence between the two indexes has created a Dow Theory non confirmation…but it doesn’t matter…yet. A lot of Dow Theory proponents make a big deal out of non confirmations, but all non confirmations are not equal. The type that just happened where one average makes a new high and the other trails is what should happen. It would be extremely odd if both averages always moved above their previous peaks on the same day. When you see others suggesting that danger looms because the transports haven’t broken out yet don’t panic because this non confirmation gives us next to no useful information. A divergence that would make me sit up and notice would be if the transports started lower and broke below their January low. A condition where the industrials have made a new high and the transports are moving lower would be a warning
Over the past week all of our core market health indicator categories rose. This rise came as the S&P 500 Index (SPX) consolidated just below the 2100 level. Our measures of market risk and quality moved from negative to positive. Our measures of market trend couldn’t quit make it. If the market can hold at current levels I suspect our measures of trend will move back above zero next week. Our measures of the economy are still posting sluggish numbers, but slowly improving. Overall I’m seeing good behavior from almost all the market internal indicators I follow. This suggests the market should rally. As a result, our new portfolio allocations will be as follows: Long / Cash portfolio: 60% long and 40% cash. Long / Short portfolio: 80% long stocks we believe will out perform in up trends and 20% short (using SH). Volatility Hedged portfolio: 100% long (since 10/24/14). Below is a chart with our portfolio changes over the past year. Green represents adding exposure and reducing hedges. Yellow
I’ve done another update to the gold trade from Trade Followers we posted in early January. Here is the current situation for gold stocks (GDX). Below is the chart associated with the new post. It’ll soon be time to add more to the position or close the trade. It’s make or break time.