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Still Waiting for Clarity

141219markethealth

Over the past week our market health indicators bounced around a bit, but none of them changed enough to modify our core portfolio allocations. During the week our core measures of risk went negative, but recovered and closed slightly higher than last week. This tells us how close we are to a tipping point. Nevertheless, I follow the indicators so there will be no portfolio changes until I see more clarity.

 
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Risk Rising

141212markethealth

Over the past week all of our core market health indicators fell. Most notable is our measures of risk. Our core measures of risk fell from moderate levels to almost warning. It will take a large sell off in the last hour to take this category below zero and have us increase our hedges and/or raise cash. Our market risk indicator has three of its four components warning. This is very unusual given the fact that the market is only down about 3% from all time highs. This tells me that market participants are skittish…which increases the risk of a sharp sell off. If this indicator signals we’ll be changing the hedge to an instrument that benefits from higher volatility. I don’t expect it to signal today, but if it does I’ll update this post before the market closes. Another sign of rising risk is the performance of Junk Bonds (JNK) compared to High Quality Bonds (LQD). LQD is rising while JNK is falling. This tells us that bond holders

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Consolidation Warning from Trade Followers

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The Trade Followers momentum indicators for many of the major indexes (DJIA, SPX, and Nasdaq 100) are warning of a short term correction in the market. This increases the odds that we’ve finally got the short term top I’ve been expecting for the last month. I still think that the most important index at the moment is the Russell 2000 so I’d like to see it confirm before getting too bearish. If we’re getting the expected dip then it will be important to watch how internal indicators react.

 
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Market Health Improves

141206markethealth

Over the past week most of our market health indicators improved. None of them moved enough to change our portfolio allocation, however our measures of market quality and strength are getting very close to going positive. I expect at least one of them to go positive by the end of next week if the market continues upward. If we get a dip then we may have to wait as long as the first of the year before making any allocation changes. We’re experiencing a market that is trying to sort itself out after a huge decline and retracement. The retracement still hasn’t repaired the damage done to market internals during the decline. Below are some examples. As I mentioned recently, the NYSE Advance / Decline line (NYAD) finally broke above its previous peak. This is an encouraging sign, but the breakout is weak and NYAD turned down last week even though the S&P 500 Index (SPX) posted a small gain. In an strong bullish market I would expect to see

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No Portfolio Changes This Week

Just a quick note. No portfolio changes this week. If I get time over the weekend I’ll do a full update with our core indicators and things I’m watching.

 
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Maybe A Dip

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I’ve been waiting for a short term top for almost three weeks now. Maybe we’ve finally got one. If this is the case it’s time to watch market internals to see if they hold up or fail in the face of lower prices. One of the things I’m watching most carefully is the percent of stocks above their 200 day moving average. Long time readers know I like to see them stay above the 60% level. My reason for concern is that many previously loved stocks are flirting with their 200 dma. The market is at a point where these stocks need to see higher prices that keep them (or get them) above their 200 dma or they’ll likely drag the market lower.

 
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No Portfolio Changes This Week

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Our core market health indicators are mostly improving this week, but at a very slow pace. None of them have improved enough to change any of our portfolio allocations. It isn’t likely that conditions will change by Friday, but I’ll make a post if they do. One positive sign is the NYSE cumulative Advance / Decline line (NYAD) has finally cleared its negative divergence with price. It’s still lagging a bit so I’d like to see more strength from this indicator. Especially on the next dip…if we get one.

 
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Risk Falling

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Over the past week most of our core market health indicators improved a bit. Our core measures of risk made it into positive territory. As a result, long/cash allocations will now be 20% long and 80% cash. The hedged portfolio will be 60% long stocks we believe will out perform in an uptrend and 40% short the S&P 500 Index (SH). The volatility hedge is 100% long (since 10/24/14). Below is a chart that shows changes to our portfolio allocations. Green lines represent adding exposure and reducing the hedge. Yellow lines represent reducing exposure and adding a hedge. Red lines represent an aggressive hedge using a security that benefits from increasing volatility. This week marks the first week since July that all four components of our market risk indicator are positive. Our market risk indicator is completely independent of our core measures of risk mentioned above so we now have two sets of indicators confirming that market participants are comfortable. It feels more like complacency (and top ticking) to me, but my

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Waiting

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Just a heads up about our core indicators and portfolio allocations. At the moment our core measures of risk are positive. It appears that they’ll stay that way into the close tomorrow. It would take an extremely sharp down day tomorrow to push them back to negative. As a result, the core portfolio allocations will most likely change tomorrow. The long / cash portfolios will both be 20% long and 80% cash. The hedged portfolio will be 60% long stocks we believe will outperform in an up trend and 40% short the S&P 500 Index (SPX). The volatility hedge will remain 100% long. The market is drifting higher as the Trade Followers momentum indicators suggested last week. Meanwhile, the things I’ve been watching lately have drifted sideways. That leaves us in a position where we are waiting for a dip to see how market internals react. One thing of note is the percent of stocks above their 200 day moving average. It is sitting at 76% which is a healthy

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Market Health Still Negative

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Almost all of our core market health indicators improved over the past week, however none of them could get back above the zero line. If the market can continue to climb it looks like our measures of risk and quality could clear by next Friday. The problem I see is that we’re due for a bit of consolidation so the nature of the next dip will be extremely important. A very healthy sign would be for our indicators to continue to rise in the face of falling prices. Here is a chart of our health indicator categories. Since they’re all below zero our core portfolios are either fully hedged or in cash. The volatility hedge portfolio is 100% long due to the fact that our market risk indicator isn’t warning. One thing I’ve been watching closely for the last several weeks is the performance of small caps (IWM). They should either break upward to new highs or consolidate fairly soon. I want to see any dip muted as a sign

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