Over the past week several of the indicators I watch deteriorated. Our market health indicators that govern our core portfolio allocations compressed toward the zero line. They continue to paint a picture of cautious optimism, but with some jitters. The most concerning thing I saw was that a small move down in price brought with it a quick increase in the perception of risk. Investors are dancing close to the door. It appears that they don’t want to risk the gains from a very good year. Adding weight to the argument our Investor Contentment index has been negative and declining over the past three weeks while our Market Stability index, although positive, has been declining as well. Our Twitter sentiment index for volatility (VIX) has issued a buy signal indicating that traders on Twitter believe that volatility is likely to rise in the near future. This signal comes after four touches on the smoothed sentiment down trend line that was confirming lower volatility. Previous signals this year have been early,
Over the past week our core market health indicators compressed a bit. Some shuffling occurred with our measures of market quality moving from barely negative to barely positive while our measures of the economy fell from positive to negative. Our measures of trend and strength fell slightly. Perceptions of risk rose. The flip flop in the economy and market quality keeps our core portfolio allocations the same with the long/cash portfolios 80% long and 20% cash. Our hedged portfolio is 90% long stocks we believe will outperform the market and 10% short the S&P 500 index (using SH). The overall picture suggests that portfolio managers are holding, but could change their mind very quickly. Small moves in price are causing many of our core indicators to jump quickly both up and down. This is a sign of investors dancing close to the door and that they aren’t willing to sit through a consolidation at the moment. Much of the movement could simply be people protecting gains going into the end
I shared this chart on StockTwits and Twitter last week. It is one of the charts I like to watch and it is providing some early warning that we’re getting closer to a top. In the past when the ratio between the S&P 500 index equal weighted (SPXEW) and the S&P 500 index (SPX) has fallen below its 20 week moving average it has signaled a top. This measure is often early and sometimes wrong, but still something to keep in mind. At the minimum it is providing early warning that money is moving into the the stocks with the largest market capitalization which often happens when money managers are moving to what they consider safer stocks. If more signs of a flight to safety show up in the coming weeks we’ll most likely see a correction of a larger magnitude than we’ve seen in the past year.
Our Twitter sentiment indicator for the S&P 500 Index (SPX) is exhibiting whiplash size moves on the daily indicator. Small moves in price in either direction are causing daily prints in both the +20 and -20 range. These are extreme readings for SPX and indicate that many traders on Twitter are simply responding to moves in price rather than making projections and trading accordingly. The volatile readings are also accompanied by intensity spikes which shows large segments of the herd shifting direction at the same time. The underlying intensity scores show a base of committed bulls and another base of skeptical bears, then a third group representing an additional 25% of intensity that is jumping back and forth between bullishness and bearishness. Smoothed sentiment is responding by moving up and down in short vertical pops and drops. This indicates there is volatility in the actions of market participants that is not accompanied by large moves in price. This creates an unstable foundation for the market and brings with it
Our core market health indicators bounced around a bit this month. Perceptions of risk rose a little, measures of the economy fell, and the other categories strengthened. Overall it was an improvement, but our measures of market quality didn’t rise enough to change our core portfolio allocations. We’re still 80% long in the long/cash portfolios and 90% long 10% short in the hedged portfolio. Below is a chart of the current condition of each health category.
Today the Federal Reserve minutes suggested that they may start to taper bond purchases sometime in the future. The market sold off on the news. I’m ignoring the news and the market’s move until Friday. Over my 30 years of investing and trading I’ve observed that the real direction of the market after Fed announcement doesn’t usually appear until the Friday after the minutes are released. The algos take over the first day, then it takes a day or two for money managers to decide how they want to be positioned in light of the news. If the market rebounds by Friday then there is a good chance the uptrend will continue. While a continued sell off will most likely mean more selling ahead. One thing to note about general market sentiment is that small moves lower in price are once again causing large shifts in sentiment. The chart of the Nasdaq 100 (QQQ) below illustrates the point. The underlying numbers show the bulls getting quiet while the bears are
The market continues to press higher without fear. There is virtually no perception of near term risk by investors. However, as I mentioned yesterday I’m seeing weakness in some of our internal measures that suggest all is not well in the market. The strong rally out of the October lows hasn’t been met with strengthening of our core health indicators. Instead, they’re starting to compress near the zero line. It appears that those who have participated in the rally this year and have large gains are taking profit and rotating to defensive stocks. While investors who missed the big gains are chasing higher prices. As a result, our indicators aren’t moving much above or below zero and indicate an unhealthy rally is in progress. It won’t take much weakness in our indicators to raise more cash and add a larger hedge to core portfolios even if the market continues to rise. On the flip side it won’t take much underlying strength to move us to a 100% long position. As
Over the past week our market health indicators bounced around a bit, but didn’t move substantially. As a result, there are no changes to our core portfolios this week. One thing to note is the compression of the major categories. All of them except for perceptions of risk are fairly close to zero. This is an interesting situation where a continuation of the current rally with confirming internals will most likely have us adding longs and removing hedges. In contrast, it won’t take much weakness in price and internals to have us raising cash and adding hedges. There’s very little perception of risk by market participants, but enough is happening under the covers to keep our health indicators fairly cautious as the market makes new highs. Bottom line, I’m comfortable being mostly long because we’ll move to safety fairly quickly if the market turns down.
The consolidation warning issued on 11/7/13 for the S&P 500 Index (SPX) from quantified tweets has been closed. This raises the odds that the prevailing trend will continue in the near to mid term. Just like the signal from the StockTwits stream it appears that the Twitter stream has created a whip saw. There aren’t a lot of upside targets above 1800 for SPX on Twitter so the next few days will give us a better picture of potential risk/reward. A dearth of tweets at higher levels will suggest an unfavorable risk/reward scenario.
Today the S&P 500 Index (SPX) finally cleared the 1775 resistance area created from gleaning price targets from the Twitter stream. We first identified the 1775 level as strong resistance on 10/19/13. Then reiterated that level as a point that would be shorted by traders on 10/26/13. 1775 was hit at the last of October, then price traded sideways for the next two weeks as the bears tried to push the market lower. This is a pattern that I’ve seen repeated several times over the last year and a half. When a large number of traders target the same level, price almost always reacts when it gets there. This is one of the benefits of following the whole market instead of just a few traders. Nimble traders can use Twitter support and resistance levels for quick scalps. I usually wait for the market to make a few daily closes above an important resistance level before removing it. In addition, smoothed sentiment from Twitter for SPX, RUT, and QQQ haven’t cleared