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
Many people have the mistaken idea that high volatility (VIX) means falling markets. They’ve been trained by financial news outlets to associate volatility with fear. This notion is only half right. Volatility is also connected to greed. In reality, volatility is a reflection of the size of a price movement regardless of the direction. Take a look at the chart below and you’ll see that during the late 1990s price was rising, but in wide daily ranges. This caused VIX to rise substantially while the market was going up. VIX went up from about 10 to 27 (170%) while the S&P 500 index (SPX) almost doubled from late 1995 to just before the Russian financial crisis of 1998. So without much “fear” in the market VIX nearly tripled. After the Russian financial crisis VIX stayed elevated in a range between roughly 19 and 30 as SPX climbed 38%. Large range days while the market was rising created an elevated VIX. SIDE NOTE: I’m using VIX to show the price move
The monthly chart of the S&P 500 Index (SPX) now has monthly momentum below 100. This condition needs to right itself before the end of the month or the odds will increase that we’re starting a longer term bear market. Just one more domino to fall for the long term bull market.
My market risk indicator is warning today. That changes the portfolio allocations of the Long / Short portfolio and the Volatility Hedged portfolio to 50% long high beta stocks and 50% aggressively hedged. An aggressive hedge is a vehicle that benefits from higher volatility such as put options, or volatility ETF/ETNs like VXZ or XVZ. Please note that XVZ is thinly traded so limit orders (and likely several small purchases) would be prudent. Use your own discretion in which product you use…and as always never buy a product you don’t understand. If you’re using put options our portfolio allocations indicate that you should fully cover your portfolio at or near the money. Use your own discretion in term structure, but be aware that I look to mid term (4 to 7 months) puts first. If you’re uncomfortable with volatility or put options an actively managed bear fund like HDGE is a short option to use as a hedge. It will likely offer more protection than a simple short of the
As a technical analyst I love it when independent chart patterns suggest the same resolution in the market. I’ve been highlighting two important chart patterns over the past month that will tell us if the market will eventually resolve in a rally or a decline. Yesterday both charts broke below their trigger lines suggesting a fairly large decline is ahead of us. The first chart is of the S&P 500 Index (SPX). It has been painting a tight line for most of the year. It finally fell below the bottom of the range. This break projects a minimum downside target of 1940 which would be about a 9% decline in total. I’m guessing that we’ll finally get the long awaited 10% projection. The second chart is of the Dow Jones Industrial Average (DJIA). It has been painting a rounded top pattern. Yesterday it broke below 17075. This break projects a minimum downside target of 15825 which would be a roughly 13.5% decline. From a Dow Theory perspective a decline to