Over the past week, my core market health indicators mostly moved higher. With the exception of market risk, they’re compressing around the zero line. This usually happens near inflection points where the market breaks hard one way or the other. Market risk isn’t showing up so that gives the edge to the bulls. The current dip looks much more like a rotation before a rally than a long term top being made. My measures of market trend moved into positive territory this week. As a result, the portfolio allocations have changed as noted below. As always, use your own risk tolerance to structure your portfolio. Long / Cash portfolio: 40% long and 60% cash Long / Short portfolio: 70% long high beta stocks and 30% short the S&P 500 Index (or use the ETF with symbol SH) Volatility Hedged portfolio: 100% long (since 11/11/2016)
Over the past week, most of my core market health indicators rose. Most significantly, are the market quality and trend categories. Both of them could go positive next week if the market doesn’t suffer much damage. One fly in the ointment is that money is still being moved disproportionately into mega cap stocks. This will provide a headwind for the broad market until the ratio between the S&P 500 Index (SPX) and SPX Equal Weighted (SPXEW) can move higher (preferably above its 20 week moving average). Conclusion Market health is improving, but investors are still favoring the “safe” stocks. This indicates continued marginal gains followed by choppiness.
We’ve got an interesting situation in the markets where perceptions of risk are extremely low, but my core indicators show an unhealthy market profile. This suggests that the unhealthy internals are most likely a result of rotation, and not the start of a longer term top. Of course, that’s not to say that mere rotation can’t turn into mass selling. But, for now, I’m not too concerned. One of the reasons I’m not to concerned is that even with the Nasdaq 100 (NDX) weakness over the past week, the percent of stocks in the S&P 500 Index (SPX) above their 200 day moving average is rising. This tells me that investors are rotating into beaten down stocks. This isn’t the way tops are usually made. Tops are made when leaders and beaten down stocks are being sold at the same time. As I mentioned above, my core indicators are showing weakness in underlying technical support. Most notably, is the market quality category which fell below zero this week. That changes our
Over the past week, all of my core market health indicators rose. They are finally starting to look like they want to confirm price, but I suspect it will take a very good week for the market next week or a couple of weeks of sideways to up movement to get any of the negative categories in positive territory. At the moment, I’m looking up rather than down.
I’m starting to see a few rays of hope from various measures of breadth that could provide the fuel for a broad based rally. The first comes from the Russell 2000 Index (RUT). It finally looks like it wants to play catch up with the other major indexes. Another indicator that is showing some strength is the NYSE Cumulative Advance / Decline line (NYAD). It has broken higher with the market this week. One last small ray of hope comes from the ratio between SPX and SPX Equal Weight. It turned up this week. If it can continue to rise it will help the market rise as money moves into large caps (and away from mega caps). Unfortunately, there is a looming cloud over the ray of hope. My only category of core indicators that rose this week was measures of risk. All of the others fell. This is discouraging because it could indicate that the long term trend is getting much closer to ending. Conclusion Things
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.
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
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
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
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