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Breakout or Not Quite

We finally got a good breakout above the 2400 level on the S&P 500 Index (SPX), but my core market health indicators aren’t believing it. Most of them fell this week, which doesn’t bode well for a sustained rally. That’s not to say the market can’t chop upwards, but without underlying technical strength don’t expect huge gains.   One thing I’ve been highlighting over the past few months is the ratio between SPX and equal weighted SPX. This ratio is telling us that mega cap stocks are where the money continues to flow. When this happens, the best the market can do is marginal new highs that are usually followed by chop. That’s what I expect to see until the ratio can get back above its 20 week moving average.   Conclusion We’ve got a break to new highs, but underlying technical indicators aren’t confirming the rally. Expect hard fought gains followed by choppy market action.

 
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Continued Chop

Last week, I concluded: The market is trying to break out, but breadth isn’t improving. This condition often results in a choppy market. If the market can break out then bulls want to see breadth improve or we risk a good size decline when the rally ends. This week, it’s the same. Longer term indicators are trying to move into positive territory, but short term indicators and measures of breadth aren’t cooperating. My core indicators, which are intermediate term, chopped around a bit, but are still on a trajectory to go positive if the market can break decisively higher.   Another disconcerting breadth indicator is the percent of stocks in the S&P 500 Index that are below their 200 day moving average. This indicator is falling fast without much price damage, all while happening within a few percent of all time highs. If the market turns down from here I suspect the decline will be large. On the other hand, this is a condition that can lead to a buying surge if

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Breadth Not Improving

Over the past week, my core market health indicators bounced around a bit. They are mostly showing short term weakness, but longer term strength. This usually means the market should resolve higher. One thing of particular note is that my core measures of risk are deteriorating rapidly. This isn’t a normal occurrence near all time highs. The last time this occurred was in February of 2015 which was followed by several months of choppy movement, then a decent decline. This isn’t a prediction, just an observation and something to watch.   Another thing I’m watching closely is various measures of breadth. The most significant at the moment is the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). When it is below its 20 week moving average the market usually chops around (at the least). This is exactly what we’ve seen since it fell below the line in early February.   Another measure of breadth comes from the number of bullish stocks on the

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Ready for the Rally

Over the past few weeks, my core market health indicators improved significantly, with the exception of my measures of the economy. The strength seen suggests that the market wants to rally. Although my measures of trend and strength are still negative, they are on a trajectory to turn positive within a week or two.   One thing of note is that the current strength is coming from mega cap stocks. This isn’t a healthy condition. Normally, a healthy rally will have broad participation from the stocks in the S&P 500 Index (SPX). This isn’t happening. Look at the ratio between SPX equal weighted (SPXEW). It is still falling. Bulls want to see this ratio turn up if the market breaks higher.   Another sign of poor participation in the market comes from the percent of SPX stocks above their 200 day moving average. As SPX is approaching new highs, the percent of SPX stocks above their 200 dma is falling. This increases the risk that a breakout rally will be

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Waiting for a Direction

Over the past week, my core market health indicators bounced around, but had no significant changes. With most of the indicators compressing near the zero line, it appears that the market is waiting for a direction. One thing of note, is that my measures of market quality are very close to going negative. I suspect that the market will need to rally next week or this category of indicators will cause us to change the core portfolio allocations (raise some more cash or add more hedges). However, the volatility hedged portfolio is still a long way away from a negative reading. This means it would take substantial perception of risk in the market to hedge. This portfolio is still 100% long. Another sign the decline isn’t causing panic.   Conclusion My core indicators are compressing near zero. This indicates that market participants are waiting for a direction. Measures of risk are still healthy. This also suggests that everyone is waiting before taking any serious actions. So, we wait and see

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Not Much Change

Over the past week, my core market health indicators mostly deteriorated, but not in a significant way. The other indicators I’m following aren’t showing any real weakness. As a result, this still looks like consolidation of the recent rally rather than a change in the intermediate or long term trend. As always, make your own decisions about portfolio allocation based on your personal risk tolerance.

 
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Not Much Change

Over the past week, there wasn’t a lot of movement in my core market health indicators. It looks like we’ll have to wait and see if the current bounce holds or not.   One thing that is showing a lot of improvement is the NYSE cumulative Advance Decline Line (NYAD). It is leading price on the S&P 500 Index (SPX) and moving above its last high. This makes it much less likely that we’re painting a long term or even intermediate term top.   Conclusion My core indicators are showing lackluster response to a small bounce in price, but NYAD is signalling that there’s not much chance of a large decline starting from here. I’m in wait and see mode without much worry.

 
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Measures of Trend Fall Below Zero

Over the past week, most of my core market health indicators deteriorated. The most significant are my measures of market trend. This category fell below zero this week. This changes the portfolio allocations to the following. Long / Cash portfolio: 40% long and 60% cash Long / Short Hedged portfolio: 70% long high beta stocks and 30% short the S&P 500 Index (can use the etf SH) Volatility Hedged portfolio: 100% long (since 11/11/2016) Another few things of note come from breadth and risk. Currently, most of the measures of breadth that I follow are still in the healthy range. My measures of risk are deteriorating quickly, meaning that risk is rising. What this tells me is that people are getting nervous, but they’re selectively selling. So, I’m still not too worried about a longer term top being put in place. Conclusion My core indicators are tumbling one by one, perceptions of risk are rising, but breadth is holding up fairly well. At the moment, this looks like rotation rather

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Wait and See

Over the past week, my core market health indicators didn’t move much. They continue to bounce around with the market.   One thing of concern is that a few measures of breadth are starting to show some weakness. Last month I highlighted the decline in the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). It is still warning of a move to mega caps. The cumulative advance decline line for NYSE (NYAD) is now giving a small warning. The small dip in price for SPX caused a lot of damage to NYAD. The longer this indicator goes without making a new high the more serious the warning will become. I don’t get concerned until it diverges for two or three months so this is something to watch, not something to worry much about.   Another measure of breadth comes from Trade Followers Twitter sentiment. The count of bullish stocks diverged from price just before SPX moved to 2400. As the market tries to move higher

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Market Health Bouncing Around

Over the past week, my core market health indicators bounced around, but didn’t move enough to make any changes to the core portfolios.   I’ve started to see a lot of chatter stating that this is the start of a larger top. So far, I’m not seeing the same evidence. There is a bit of deterioration in some of my measures of breadth, but nothing drastic for a small decline in the general market. The most significant change comes from the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). As I mentioned last month, when this ratio dips below its 20 week moving average we usually see some consolidation. The dip was delayed, but it seems that we’re now experiencing it.   Another measure of breadth is the percent of stocks above their 200 day moving average. Long time readers know that I don’t worry until it falls below 60%. As you can see, there are still a healthy number of stocks above

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