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.
After six weeks of consolidation I’m starting to see a lot of encouraging signs. It appears that the market finally wants to move higher. Our measures of risk and quality have now joined our measures of market strength in positive territory. If they can hold into Friday’s close we’ll be reducing our hedges and adding longs to the portfolio. Here are a few things I’m seeing from Trade Followers that bolsters the argument for a rally above 2100 on the S&P 500 Index (SPX). First is support and resistance levels. After months of next to no tweets above current prices, traders are now projecting prices as high as 2200. The majority of tweets are near 2040 and 2050 so a break above the strong resistance level of 2100 should carry to a minimum of 2040. Another thing that is improving is breadth. The number of strong stocks is rising and the first few days of this week saw the number of weak stocks fall even though the market is pausing
Over the past week our core market health indicators rose sharply again. Everything with the exception of our measures of the economy are hovering right near a pivot point. Our measures of market strength have gone positive while measures of risk, quality, and trend are barely negative. It appears that those three categories will most likely go positive next week if the S&P 500 Index (SPX) breaks to new highs. Overall I’m seeing healthy behavior after six weeks of consolidation. With the current conditions starting to look positive we’re adding a bit more exposure to the core portfolios. The long / cash portfolio will now be 20% long and 80% cash. The long / short (hedge) portfolio will be 60% long stocks that we believe will outperform SPX in up trends and 40% hedged with a short of SPX (or using SH). The volatility hedged portfolio remains 100% long (since 10/24/14) due to no signs of extreme risk in the market. Below is a chart with the core portfolio changes
Trade Followers has taken down the pay wall for the most bullish and bearish stocks on Twitter and StockTwits for a few days. The other features still require a subscription, but we wanted to reward our long time readers with a few days of fun with the bullish and bearish lists. You can access today’s most bullish list and other menu items here. Below is a sample of today’s bullish stocks.
Just a quick heads up today. Our core indicators that follow market strength are showing positive readings today as of the close. If this can hold into the close on Friday we’ll be adding more exposure and reducing our hedge in the core portfolios. If we get a strong move to the upside in the market there is a slight chance that one of our other categories (trend, quality, or risk) could go positive as well. I’ll do a full update on Friday before the close, but wanted to give you a heads up to be looking at longs that you think will out perform the market as a whole.
Over the past week our core measures of market health rebounded sharply from over sold conditions. This is an encouraging sign that the current rally is being supported by better internals than the previous moves to the top of the current range. None of them have moved enough to change our core portfolio allocations. We’re still 100% cash in the long/cash portfolios. The hedged portfolio 50% long and 50% short. Our volatility hedged portfolio is still 100% long due to the fact that our market risk indicator isn’t registering extreme risk. Below is a chart with current readings for our core indicator categories.
One of the primary tenets of Dow Theory is that secondary movements tend to be more steep than the move they are retracing. For example, the Dow Jones Industrial Average (DJIA) made a secondary low point in June of 2012. The subsequent rally lasted four months. Then the next decline retraced 50% of the rally in only six weeks. This is typical behavior during long term bullish trends. What happened next isn’t typical. The market had a continuous rally lasting more than two years without a secondary reaction. This is because no price declines over that period retraced at least 33% of the move in a period lasting more than three weeks. We’ve now reached a point where both averages have declined for over a month. The fact that this decline has lasted over a month is but is only down roughly 5 to 6% shows a market that is changing character. Instead of quick declines and retracements (V bottoms) we’re now seeing some sideways to slowly down consolidation. If
Over the past week our core market health indicators mostly fell. The notable exception is our measures of trend. They continued to move higher in the face of a falling market. This is an encouraging sign even though almost every indicator we track in the intermediate term is mired in negative territory. Another measure that has been supportive for the market is cumulative NYSE Advance / Declines (NYAD). More stocks continue to rise than fall on a weekly basis. This is creating a positive divergence with price. Meanwhile the percent of stocks above their 200 day moving average continues to weaken. It remains to be seen which breadth indicator will win. Until we get a resolution we’re hedged in the core portfolios. The volatility hedge isn’t seeing enough risk in the market to be hedged. It’s still 100% long.