The market is exhibiting behavior that we often see during times of indecision. Price is swinging in a large range and at the same time intermediate and long term indicators are giving mixed messages. Take a look at how compressed the the Y axis is on a point and figure chart for the S&P 500 Index (SPX). This clearly shows the sideways range of the past two years along with with multiple changes in the short to intermediate term trend (over the past year). The current trend is up and will stay that way as long as SPX stays above 2020… which coincidentally is about where the 200 day moving average is. The next set of mixed messages comes from a weekly chart of SPX. Weekly RSI is trying to turn down near normal bear market peak levels, while at the same time MACD is moving above levels associated with bear markets. Monthly momentum and MACD are mostly exhibiting bear market behavior. MACD is a little stronger than we normally
It’s been almost eleven months since the Dow Jones Industrial Average (DJIA) has made a new high. It’s been over fifteen months since the Dow Jones Transportation Average (DJTA) has made a new high. But, DJIA is only about 5% away from its highs. This makes it difficult for many people to determine if we’re in a bull or a bear market. According to Dow Theory, we’re in a bear, but getting close to levels that would turn the bear to a bull. When that occurs it’s time to watch the dip. All we have to do is watch to see if the downtrend resumes in force or if we get a small consolidation that rallies and breaks above the last secondary highs in DJIA and DJTA. A break higher will turn the bear to a bull. While we wait for a resolution, the core portfolios are moderately hedged or have a small exposure to the market. The volatility hedged portfolio, that is much more aggressive than the core portfolios,
Several weekly and monthly indicators for the S&P 500 Index (SPX) are getting to levels that generally mark the top of bear market rallies. We’re sitting right at the point where the market will likely roll over or start an extremely sharp rally. First look at the weekly chart for SPX. RSI is just below 60. This level if broken to the upside will be a good sign that we’re headed for a rally. If it turns down from here the bear market should resume. MACD is also right below zero, the level that usually constrains price during bear markets. On the monthly chart for SPX momentum is back to the 100 level. If it can break through it will be another sign that the market is going to move higher. MACD on the monthly chart is trying to turn up. If it can turn up it will add weight to the rally argument. Another chart that indicates we’re at an inflection point comes from Trade Followers Twitter sentiment. It
Another week with not a lot of change in my core indicators. The core portfolios remain modestly long. The volatility hedged portfolio is 100% long (since 3/14/16). My recent posts have been short because I’ve been on the coast vacationing. One observation from the trip. The beach just isn’t what it used to be.
Over the past week my core market health indicators bounced around, but were mostly down. None of them moved enough to change any portfolio allocations. Enjoy the holiday weekend everyone!
As most of you know, I believe the market is currently in a long term down trend. However, I’m starting to see things that put the bear market in doubt… which should be a really good sign that we’re still in a down trend — because bear market rallies create enough doubt to suck people in. Back to the point, take a look at the chart below. It is a point and figure chart of the S&P 500 Index (SPX). This chart shows an intermediate or short term up trend within the confines of a longer term downtrend. But a closer look at the short scale indicates a long term sideways range. It will take a break of the range to add clarity to the pattern. A daily chart of SPX has a fairly clear downtrend channel. This indicates a new bear market is underway. We have to consider the current rally as a bear market rally until the upper bound of the trend channel is broken. If that channel
FYI, I did a post at Trade Followers over the weekend that highlights some traditional technical analysis indicators that are still saying we’re in a bear market. However, the Trade Followers market breadth indicator has just gone positive. The breath indicator is probably flashing a whipsaw signal because I suspect it has an inherent bullish bias. You can read more here.
Over the past week all of my core market health indicators improved. However, as you can see, they are all still deep in negative territory. They are clearly showing weakness in underlying market internals. There is a slight chance that a continued rally next week might bring my measures of core market risk and/or measures of the economy positive. In order to accomplish the feat it will require a continuation of the strong rally currently underway. My market risk indicator has been trying to clear this week, but hasn’t been able to right itself. Next week will be key for this indicator. I suspect it will clear unless the market turns back down with some momentum behind it. Even a consolidation at current levels would likely clear the warning. Conclusion All of my indicators are still negative, but the recent rally has removed some of the underlying damage. Next week will likely be a make or break moment for the market.
Over the past week all of my core market health indicators showed a slight improvement. It is somewhat disappointing that the indicators aren’t responding much to the strong rally and consolidation this week. My market risk indicator isn’t showing signs that it wants to clear either. That leaves us in the same position, aggressively hedged or 100% in cash.
This week didn’t help any of my core market health indicator categories. They’re still looking ugly. To make matters worse, Dow Theory signaled yesterday that we’re in the midst of a long term bear market that could last from one to three years. Bear markets are a time where it’s hard to make money. Take a look at the charts in this post and you’ll see that all of the hedging strategies except for the Volatility Hedged portfolio lost money during bear markets. The Volatility Hedged portfolio benefited from the extremely steep declines in 2008 and 2009 (and subsequent historically high levels of volatility). I don’t think it’s reasonable to expect the current bear market to unfold in the same fashion so if you’re following the Volatility Hedged portfolio expect it to lose some (more) money during this bear. My point is that you need to have reasonable expectations during bear markets. You’ll most likely lose money, but the important thing is that we don’t take catastrophic or unrecoverable losses.