I’m seeing several signs that suggest the market is getting ready to make a breakout to new all time highs. Over the past few weeks my core indicators didn’t deteriorate much as the market consolidated. This week they all strengthened with the exception of the economy category. Most notable is that my measures of market quality moved back above zero again. That changes the core portfolio allocations. The current allocations are below: Long / Cash portfolio: 80% long and 20% cash Long / Short Hedged portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or the ETF SH) Volatility Hedged portfolio: 100% long (since 10/9/15) One thing I’m seeing that suggests we’re headed to new highs is the Trade Followers sentiment indicator which is calculated from the text of tweets about the S&P 500 Index. 7 day momentum is turning up from a level that has historically been an oversold level during bullish trends. These upturns are generally associated with a resumption of the uptrend in
Over the past week all of my core market health indicators fell. However, they’re holding up relatively well considering the price destruction in the S&P 500 Index (SPX). Even the sharp decline of the past two days isn’t doing serious damage. As a result, this looks like consolidation of the steep rally that started in late September rather than the start of a new down trend. Things can change, but for now it looks like normal profit taking after a strong rally. Two of four components of my market risk indicator are currently warning, but the other two are quite far away from a warning. This is in contrast to the panic that occurred the last time SPX fell below 2040. Currently, I judge market risk as moderate. The core portfolio allocations remain unchanged this week. They have a small hedge or 40% cash. The volatility hedged portfolio is still 100% long.
Over the past week all of my core measures of market health rose with the exception of the economy, which held steady. As price for the S&P 500 Index (SPX) rises, the internal indicators continue to improve. There are some short term divergences that may cause some consolidation in the near term, but overall the direction of the majority of indicators support a break to new highs. Although there was good improvement in the majority of the health categories, none of the negative ones rose enough to get above zero. I expect that both strength and trend may go positive by next week even if we get some small consolidation. A rally may drag market quality above zero as well. With the current readings the core portfolio allocations remain the same. The volatility hedge is still 100% long (from 10/9/15).
On August first I warned that the meme of poor breadth would likely cause a “substantial disruption in the markets“. This week a new meme is emerging that the all time highs in the CBOE SKEW Index indicates everyone is afraid of a black swan event and thus the market is due to crash. There has been a spike in searches on Google for “skew index” confirming the frenzy. So, is the market going to fall due to an all time high in SKEW? I’m sorry, but I just don’t buy it. Why? Because the SKEW data doesn’t correspond to market tops. Take a look at the chart below and you’ll notice that SKEW doesn’t have a good track record of predicting declines. It has a plethora of false signals and just a few correct signals. What do you think would have happened to your portfolio if you had gone to cash or added a hedge every time SKEW spiked above 135? Side note: I pulled 135 as a signal
The most significant thing I’m seeing this week is my measures of risk strengthening amid large range days and high volatility. Market participants are getting comfortable with wide swings in their portfolios. The improvement in my measures of risk still aren’t enough to clear my market risk indicator, but a continued rally next week just might do it. On the other hand, my measures of stock market quality, trend, and strength all fell this week even with four days of rally. This action is similar to what I was seeing a few weeks ago that indicate we’re probably seeing another dead cat bounce. Last week I said that I intended to take some profit from the hedge if the market retested the August low. I didn’t do it for a couple of reasons. The major reason is that at the lows on Monday the hedged portfolios were roughly allocated still at 50% long, 33% aggressively hedged (with mid term volatility), 17% short the S&P 500 Index. As a result, I
Over the past week all of my core market health indicators fell. They continue to be mired in negative territory and aren’t responding much when the market rallies. My market risk indicator is also still negative, however, it continues to improve. It will take some positive price action next week to clear the warning. One thing of note is that a daily chart (closing prices) of the S&P 500 Index (SPX) appears to be painting a bear flag that is consolidating the August losses. This pattern has high odds of breaking lower. If that occurs then we’ll almost certainly see the August lows again and have a high likelihood that they won’t hold. That would put 1800 to 1820 on SPX in play as the first area for a bounce. If the market makes it back to the August lows I’ll take more profit from the hedge and soften it again…just in case the lows hold. Conclusion Core indicators are falling while risk is abating. Meanwhile, SPX is painting a
Last week I mentioned that I thought the small triangle consolidation would be broken to the upside before the market ultimately turns lower. We’ve had the break higher and the turn lower so the market is now at a very critical junction. The action over the next few weeks will likely point not only the short and intermediate term direction, but determine the long term trend as well. It is critical that the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) hold the August lows or the long term trend will almost certainly be down. If on the other hand, the indexes can hold up the odds increase that the worst is behind us. My core market health indicators with the exception of risk all declined this week. This isn’t the type of action I like to see during a rally. It suggests that we’re seeing a dead cat bounce rather than a resumption of the uptrend. It appears that more time (and probably price weakness)
Three weeks ago my market risk indicator signaled which caused me to change the portfolio allocations to an aggressive hedge. After the decline into the August 25th low the S&P 500 Index (SPX) has been consolidating…although in a very wide and loose fashion. The current rally is consolidating the steep losses after the break of 2040 on SPX. As a result, the most likely resolution will be a break lower sometime in the next few weeks. However, my expectation is that the short term triangle from daily closing prices will be broken to the upside before the market ultimately turns lower. Looking at a point an figure chart which removes the linear time scale shows the consolidation and volatility much more clearly than a line chart. The current down trend line is on target to meet price at about 2000 on SPX which should provide some resistance. The 50 day moving average for SPX is also on a trajectory that should meet price near the 2000 level as well. The
At the end of August monthly momentum for the S&P 500 Index (SPX) joined MACD in warning that the long term trend has changed from bullish to bearish. This is just one more domino to fall in the ongoing battle between bullish indicators and bearish. Over the past week my core market health indicators bounced around a bit, but all of them are still warning. In addition, my market risk indicator is still warning and is showing no signs of abating at the moment. As a result, the portfolios are still aggressively hedged. This post shows the current allocations. Below is a chart with the current market health indicator categories. Please note: If we get a good washout next week that basically retests the August low I’ll likely (based on my read of the washout) take more profit from the hedge and rebalance to the following allocations: 50% long, 25% aggressively hedged, and 25% short SPX.
I’m seeing a lot of people pointing to last week’s strong rally and making comparisons to October 2014. Here are a few charts that show some big differences between then and now. First is a point and figure chart of the S&P 500 Index (SPX). Last October the decline was deep, but it still held the long term trend that started in late 2012. The current decline broke that uptrend and two more attempts to create a new uptrend. In addition, the decline broke a tight six month price range. This pattern indicates that a lot of distribution was occurring during the sideways trading. This will create strong overhead resistance if price makes it back to the 2040 area on SPX. Another chart that shows the difference is SPX with its 50 and 200 day moving averages. Last October the decline started well above the 200 day moving average on SPX. As a result, it was an easier level to reclaim. The current decline started in earnest when SPX broke