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Market Health Bouncing Around

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Over the past week our market health indicators bounced around a bit, but there were no significant changes. As a result, our portfolio allocations will remain the same. The only thing of note is that even though the S&P 500 index (SPX) has moved higher this week our measures of trend fell. This isn’t too concerning, but I would have expected them to move into positive territory with the current market action. This will be something to watch over the next few weeks.

 
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Encouraging Signs

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After six weeks of consolidation I’m starting to see a lot of encouraging signs. It appears that the market finally wants to move higher. Our measures of risk and quality have now joined our measures of market strength in positive territory. If they can hold into Friday’s close we’ll be reducing our hedges and adding longs to the portfolio. Here are a few things I’m seeing from Trade Followers that bolsters the argument for a rally above 2100 on the S&P 500 Index (SPX). First is support and resistance levels. After months of next to no tweets above current prices, traders are now projecting prices as high as 2200. The majority of tweets are near 2040 and 2050 so a break above the strong resistance level of 2100 should carry to a minimum of 2040. Another thing that is improving is breadth. The number of strong stocks is rising and the first few days of this week saw the number of weak stocks fall even though the market is pausing

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Most Bullish Stocks on Twitter

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Trade Followers has taken down the pay wall for the most bullish and bearish stocks on Twitter and StockTwits for a few days. The other features still require a subscription, but we wanted to reward our long time readers with a few days of fun with the bullish and bearish lists. You can access today’s most bullish list and other menu items here. Below is a sample of today’s bullish stocks.

 
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Strong Rebound in Market Health

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Over the past week our core measures of market health rebounded sharply from over sold conditions. This is an encouraging sign that the current rally is being supported by better internals than the previous moves to the top of the current range. None of them have moved enough to change our core portfolio allocations. We’re still 100% cash in the long/cash portfolios. The hedged portfolio 50% long and 50% short. Our volatility hedged portfolio is still 100% long due to the fact that our market risk indicator isn’t registering extreme risk. Below is a chart with current readings for our core indicator categories.

 
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Market Health Still Weak

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Over the past week our core market health indicators mostly fell. The notable exception is our measures of trend. They continued to move higher in the face of a falling market. This is an encouraging sign even though almost every indicator we track in the intermediate term is mired in negative territory. Another measure that has been supportive for the market is cumulative NYSE Advance / Declines (NYAD). More stocks continue to rise than fall on a weekly basis. This is creating a positive divergence with price. Meanwhile the percent of stocks above their 200 day moving average continues to weaken. It remains to be seen which breadth indicator will win. Until we get a resolution we’re hedged in the core portfolios. The volatility hedge isn’t seeing enough risk in the market to be hedged. It’s still 100% long.

 
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Shaky Foundation

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The S&P 500 Index (SPX) is starting to paint a pattern that often leads to instability and a quick drop lower. Look at the chart below and you’ll see wide quick swings going in both directions. This indicates uncertainty by market participants. It is a pattern we haven’t seen for a very long time which makes it more important. Another thing I’m seeing is perceptions of risk rising. Three of four components of our market risk indicator are warning at the moment. We still have one hold out, but it is dropping rapidly. As I’ve mentioned over and over again I don’t think the market can have a substantial correction until breadth breaks down. One measure that is getting close to warning is the percent of stocks above their 200 day moving average. I get concerned when it falls below 60%. Add it all together and we’ve got a market with a shaky foundation. Caution is warranted.

 
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Market Health Bounces from Oversold Conditions

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This past week almost all of our indicators turned up from oversold conditions. So far the turns are slight. This indicates that the market is still under pressure even though price spiked higher. What I’m seeing looks like extreme uncertainty. Longer term market participants appear to be standing aside while traders are chasing. This adds a bit of volatility that will create larger range days both up and down on any news. One thing of note is that due to the oversold conditions and the distance our indicators need to travel to get above zero it is likely that it will be several weeks before we’ll make any changes to our portfolio allocations. The one exception is our core measure of risk. It could move higher over the next few weeks if the market gets to new highs and sustains the move. Bottom line, we’re still waiting for clear conditions before taking any risk in the market.

 
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Dow Theory Best Indicator Since 2009

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Out of the lows in 2009 there has only been one of the indicators that I follow that hasn’t had whipsaws or bad signals somewhere along the way. That “indicator” is Dow Theory. It has continued to confirm  a long term bull market for the entire period from its bullish trend change in July 2009. This is due to time being an important factor in Dow Theory. The system outlined by Charles Dow and William Peter Hamilton waited for roughly three weeks of trend before declaring a secondary reaction point. The lack of secondary lows that subsequently failed has kept Dow Theory bullish. On the chart below I’ve annotated the secondary low and high points from the last several years. In addition there is a Dow Theory line during the first several months in 2012. We’re now approaching a month long decline in the Transportation average (DJTA). The industrial average (DJIA) will need to break below the December lows to pass the three week mark. At this point we’ll need

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Risk Rising

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Once again our core measures of risk are negative. They’ve been there all week long. I suspect that it will take a close above 2050 on the S&P 500 Index (SPX) by Friday to get the category positive. That’s about the point where SPX has been when the risk measures flip. If they are negative on Friday the Long / Cash portfolios will go 100% to cash. The hedged (Long / Short) portfolio will be 50% long high beta stocks and 50% short SPX. Our market risk indicator has three of four components warning at the moment. The fourth component continues to slowly fall, but hasn’t gone negative yet. The volatility hedge is still 100% long and will stay that way unless the fourth component falls by the end of the week. One thing I’m seeing is a lot of mixed signals…I’ll post more about them on Friday, but here are a few examples. NYAD advance / declines are acting well, but the percent of stocks above their 200 day

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Gold Stocks and the Market

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I did a write up on Trade Followers about a buy signal for gold stocks generated from Twitter momentum / sentiment. It’s time to watch the trade closely for signs that it might turn into a long term trend change for gold and gold stocks (GDX). Here’s the associated chart…as a teaser. In addition, there are some interesting things happening with small cap stocks (RUT) and the NASDAQ 100 (NDX) that will likely tell us which way the market will break. Those two indexes will likely tell the tale. The short story is if sentiment for RUT breaks lower the market will likely follow. If sentiment for NDX breaks higher then odds favor new all time highs. Here’s a link to the post.

 
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