As of this moment, my market risk indicator is signalling. It requires a Friday close with all four components signalling to create a market risk warning. So we’ll have to wait till Friday before we panic with the rest of the market. Here are a couple of things I’m seeing. Two of the four components of my market risk indicator are very oversold. My core market health indicators are still all positive My core market health indicators are falling from overbought levels to more reasonable levels My conclusion is that the selling is due merely to fear and not concern over core market health. It looks to me like everyone knew that the market was overbought and now they’re all taking profit at the same time. As noted above, don’t panic until we see what the market looks like on Friday.
Over the last week, I saw broad based strength in my core market health indicator categories. My measures of market quality moved back into positive territory. This means that all of the portfolio allocations are now 100% long.
Over the past couple of weeks, my core market health indicator categories have started diverging. The market risk, economy, and strength categories are soaring higher, while the market quality and trend categories are lagging substantially. This is another sign that the market is due for some consolidation. Nevertheless, the market continues to move higher so we continue to watch and wait.
Last week, I mentioned that it might be time for some consolidation. This week, it appears more likely. My measures of market quality have dipped below zero and my measures of market trend are dropping pretty fast. This indicates that we should get some sideways to down movement over the next several weeks. I suspect that the market has at least one more good rally in it, but we’ll need a pause before it happens. The consolidation will most likely be due to rotation out of mega cap stocks into smaller stocks as a “sell the news” event when/if the tax plan passes. With market quality falling below zero the core portfolio allocations change as follows: Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short the S&P 500 index Volatility Hedged portfolio: 100% long (since 11/11/2016)
Several of my core market health indicators are sitting on the edge of going negative. One notable exception are my core measures of risk. That category has moved into overbought territory. Normally, this means several weeks of continued rally, however, I’m in a bit of doubt due to the weakness in all the other categories. This time it might mean it’s time for some consolidation. I expect we’ll get more clarity over the next few weeks.
Over the past week, my core indicators bounced around again. The only significant thing I’m seeing is some weakness in my measures of the economy, but I suspect this category won’t have much impact on the market in the near term. Instead, focus on the tax plan will continue to drive investor’s purchases and sentiment.
Last week, I mentioned that some of my core indicator categories are getting over bought and when that happens it often fuels several more weeks of upward movement. It looks like we’re starting the next wave up. My core indicators continue to show strength, but there is one concerning thing. My core measures of risk fell slightly this week. That isn’t normal when the market is making new highs. This is the indicator category I’m watching most closely at the moment to indicate the rally is coming to an end.
My core market health indicators continue to show strength. Most notably, are the core measures of risk which are getting into over bought territory. This is often a good sign that results in a melt up that lasts several weeks. The last time this happened was the first week of October which resulted in a nice run followed by a bit of consolidation that should fuel the next run higher.