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More of the Same

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This week we saw more of the same. Our core indicators strengthened while ancillary indicators weakened. The only core indicator that got worse was our measures of risk. Early in the week they were showing more concern from market participants even as the market moved higher. Thursday did some serious damage to them and Friday only saw a partial recovery. So far they’re providing early warning, but no signals. It will most likely take another few weeks to shake out. One thing I follow that suffered a lot of damage this week is the relationship between high quality bonds (LQD) and junk bonds (JNK). While LQD appears to be painting a bullish flag, JNK is falling sharply. This suggests that bond owners are shifting money from risk (JNK) to safety (LQD). The events in Ukraine and Gaza on Thursday had LQD rising while JNK fell. Watch this relationship going forward because a shift in bonds often occurs before a flight to safety in stocks. Speaking of stocks, the symbols I

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Market Health Rises – So Does Risk

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Over the past week market health rose, but every measure of perceptions of risk rose too. It speaks to the current theme in the market where core indicators are rising and ancillary indicators are falling. While the underlying health of the market wasn’t affected by this week’s volatility it did do some damage to market participant confidence in the market. Our core measure of risk along with our Market Risk Indicator have slowly been moving closer to warning. At the moment they have plenty of room above the positive line so they aren’t overly concerning, but something to keep an eye on in the next few weeks. Below is a chart with our core health categories.

 
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Mid Week Update

Published on July 16, 2014 by in Market Comments
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Over the weekend I mentioned that our core indicators were positive but other indicators were falling. As the week progresses and the market climbs I’m seeing more of the same. Our core indicators are showing more strength and the things I saw showing weakness are mostly getting weaker. Our core measure of risk is diverging from price after falling from overbought territory. It isn’t recovering even as the market moves higher. This is a pattern that I’ve seen many times before that often precede corrections of 10%. It is a signal of some underlying weakness in the market structure and change of perception by investors. Next the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index is falling sharply after breaking below its 20 week moving average. More rotation to large caps (which often means safety). Today was a good up day in the market, but the momentum stocks didn’t participate. This is the most concerning thing on my radar at the moment. If these

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Tale of Two Markets

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Last week’s market action didn’t affect our core health indicators too much, but many of the ancillary indicators I watch suffered some damage. While the market looks healthy on the surface there are enough indicators warning to suggest the worst isn’t behind us yet. Currently we have a tale of two markets. Although our core health indicators are positive most of them have weak enough readings that they could turn negative over the next few weeks. However, this would be very unusual given the fact that many of them turned positive just last week. Generally, when all of them move above zero they stay there for at least two months. Weakness in these indicators will provide significant warning. Another indicator that is telling two stories is our core measure of risk. It is still showing low perceptions of risk, but just came out of an overbought condition. This often marks the beginning of corrections larger than 10%. Momentum stocks are also acting indecisive. Many of them have had good runs over

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Market Health Stable

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Over the past week our market health indicators bounced around a bit, but remained positive. As a result, we’re still long in all of the core portfolios. The largest indicator change came from our core measure of risk. This indicator came out of overbought readings this week which has often marked the beginning of declines of 10% or more in the market. When this occurred in 2013 the market had small dips, but nothing significant…so it was an exception to the rule. The message from this indicator is to watch the market carefully over the next several weeks. If it fails to move on to new highs it will provide warning that a larger correction is likely underway. Below is a chart of our core health categories.  

 
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Sentiment Compressing for S&P500 Index

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Sentiment (soon to be renamed momentum) from both Twitter and StockTwits for the S&P 500 index is currently painting a negative divergence from price and at the same time staying above a confirming uptrend line. A break from the resulting triangle should point the next short term direction for the market.

 
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Market Health Positive

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Our core market health indicators strengthened enough during this past week to move all of them into positive territory. As a result all of our portfolios are 100% long. Our core measures of risk have been overbought for almost three weeks. They can stay that way for a few months as the market rallies strongly. The longest occurrence since 1990 was October through December 2013 (three months). As I’ve noted before overbought conditions on this category of indicators have almost always been followed by a 10% correction within a few months. The exceptions to this were in early 1999 and all of the occurrences during 2013…which should tell you something about the strength of the current market. I’m not concerned about this indicator yet, but when it turns down from overbought readings it will provide warning that a decent correction is most likely underway. Below is a chart with our current market health readings. Below that are our portfolio adjustments over the past year (green lines represent adding longs and

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Energy Waning While Technology Rises

Published on July 1, 2014 by in Market Comments
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Over the past few weeks the Energy sector as started to show some weakness in support from traders on Twitter. It has had strong support over the past three months, but the strength scores are falling in the closer time periods. At the same time Technology is gaining support on the Twitter stream after a period of weakness. It appears to be profit taking in Energy and rotation to Technology.

 
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Market Health Indicators Diverge

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Over the past week our core market health indicators diverged from each other. Our measures of the economy and trend rose while our measures of quality and strength fell. None of them moved much, but measures of trend moved back above the zero line.  This changes our portfolio allocations as follows. The long/cash portfolios are now 60% long and 40% cash. The hedged portfolio is 80% long stocks we believe will outperform in an uptrend and 20% short the S&P 500 Index (long SH as an alternative to shorting SPY). Our core measures of risk moved further into overbought territory this week. As I noted over the weekend, when this occurs a dip of more than 10% often follows within a month or two. For now it’s not too concerning, but something to watch closely going forward. Below is a chart of our current market health category readings (normalized).   Here’s a chart of our portfolio allocation changes over the past year. The green lines represent adding long exposure and removing hedges.

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Lack of Belief

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Over the past week the market rallied, but our core market health indicators didn’t participate. In fact, all of them except for our measures of risk turned down. As a result, we’re still 30% short in our hedged portfolio and only 40% long in the Long/Cash portfolios. One thing of note this week is that our market risk indicator is diverging from our core measures of risk. Our core measures of risk have made it into over bought territory while our market risk indicator is well below that level. Historically, over bought readings have usually been followed by a dip of more than 10% within a month or two. Early 1999 and 2013 were exceptions. There were four over bought readings in 2013 and three in 1999 that did not result in a good dip. Between 2000 and 2012 there were three times our core measures of risk were over bought. They were January 2004, April 2010, January through April 2011. I’m not too concerned about this indicator at the

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