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Slight Improvement in Market Health

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Over the past week our market health indicators had a slight improvement. However, the improvement isn’t keeping up with the rally in the S&P 500 Index (SPX). Overall the indicators are very weak considering the market is within a few percentage points of an all time high. All we can do is wait for clarity. I suspect we’ll see enough changes in the next few weeks that we’ll either be removing hedges or adding more. Bottom line, the market is still trying to decide what it wants to do.  As a result, we’ll wait patiently with a moderately large hedge in place. Below is a chart that highlights our core health indicator categories.    

 
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Consolidation Warning for S&P 500 Index

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Today at the close a consolidation warning for the S&P 500 Index (SPX) was issued from the Twitter stream. As I noted over the weekend, the signals have been coming late over the past several months as traders seem to be chasing price. The nature of the current bounce should give more clues as to the strength of the market. This signal has plenty of room to fail so I’ll be watching to see if the Twitter stream cheers the bounce or fades it.

 
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Make or Break Time

By almost all the measures I track it’s make or break time for the market.  I’m seeing a pattern in both core and ancillary indicators that has often marked lows in the market over the past few years.  Each time our indicators were close to signalling an extreme warning the market promptly turned back up and resumed the rally out of the 2009 lows. Over the longer term when our indicators have reached these levels the market rallied 35% of the time and had an extended decline or choppy period 65% of the time.  As you know, I can’t see the future so all we do is go with the odds.  As a result, our core portfolios raised cash and/or added a hedge yesterday.  Here are some highlights of things I’m seeing that makes me cautious. The ratio between near term volatility (VIX) and 3-Month volatility (VXV) is currently rising as a result of both VIX and VXV moving up.  This is a condition that has only occurred a few

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Raising Cash and Adding More Hedge

This past week our core market health indicators continued their recent trend.  All of them except for our measures of the economy fell. Our measures of trend fell sharply and ended the week well below zero.  As a result, we’re raising more cash and/or adding a larger hedge to our core portfolios.  By the close today our Long/Cash portfolios allocations will be 20% long and 80% cash.  Our hedged portfolio will be 60% long stocks that we believe will out perform the market in an uptrend and 40% short the S&P 500 Index (or use the ETF SH).  Below is a chart of our portfolio changes over the past year.  The yellow lines represent raising cash/adding hedges.  The green lines represent removing hedges and adding more longs to the portfolios. As I pointed out a few weeks ago, historically our indicators deteriorating to these levels have resulted in an extended choppy market or an extended decline 65% of the time.  35% of the time these conditions marked a short term low

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Keep an Eye on Junk Bonds

Published on April 9, 2014 by in Market Comments

Over the past month High Yield (junk) bonds (JNK) have lagged the performance of Investment Grade (high quality) bonds (LQD). This shows a move to quality within the bond space.  In addition, money that came out of stocks during the last dip went into quality bonds instead of high yield. Bulls want to see JNK recover their previous highs.  As neither a bull nor a bear, but a guy who changes my portfolio allocations based on the evidence I’m keeping an eye on JNK vs. LQD.  If the divergence continues it will warn of investors slowly moving away from risk.

 
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Twitter Sentiment Compressing

Over the past week our Twitter Sentiment indicator for the S&P 500 Index (SPX) moved dramatically on a daily basis, but the smoothed indicator is being compressed as the market moves sideways to up.  When the market moved to all time highs the daily indicator confirmed the move with prints in the +25 area, but that was quickly reversed as price consolidated on Thursday then fell on Friday.  This suggests that traders are being whipped around by price and are a bit jittery. Smoothed sentiment has held its confirming uptrend line for nearly two months, but is also being held in check by a three month down trend line that has a negative divergence with price. This compression indicates that the battle between the bulls and the bears is becoming more evenly matched as time moves forward. It also suggests some indecision which will need time to resolve. Support and resistance levels also show indecision by traders on the Twitter stream.  Last week when SPX moved above 1885 only a

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Broad Based Selling Without Fear

Published on April 5, 2014 by in Market Comments

Last weekend I mentioned that the stock market was undergoing rotation, however, no real fear was associated with the selling.  This week we have a market that looks like it may have started some broad based selling, but again without much fear from market participants.  During the week most of the indicators that I follow strengthened. Then came Friday, which showed an entirely different character than I’ve seen in a long time.  It reversed the gains in our internal indicators and also created some concerning chart patterns in individual stocks. As you know, I try to give a few things each week to watch as the most important clue to the direction of the market.  This week what I’ll be watching most closely is the action of the stocks that had held up while momentum, bio tech, and social media stocks were being ravaged by selling. On Friday, many of these stocks were sold aggressively along with stocks that have been weak since the first of March. Google (GOOG) is

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Fragile Market

Throughout this last week all of our core market health indicators were rising…until today (Friday). The decline today is doing serious damage to the strength we saw in internal indicators during the week.  All of the categories except for our measures of the economy fell again.  Our measures of trend continue to hang by the slightest of a thread.  As long as it holds into the close (which I suspect it will) there will be no changes to our core portfolio allocations.  We’ll still be 40% long and 60% cash in the Long/Cash portfolios and 70% long and 30% short the S&P 500 index in the hedged portfolio. One thing to note is that our measures of risk and our Market Risk indicator aren’t showing a lot of concern for an accelerated market decline.  This is consistent with normal rotation in the market.  However, today I’m seeing some signs of a more dangerous market ahead.  The stocks that had been the beneficiaries of the money coming out of the momentum

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And the Trend Continues

Today at the close (4/2/14) quantified messages from the StockTwits stream reconfirmed the uptrend in the S&P 500 Index (SPX).  It closed the consolidation warning that was previously in place with smoothed messages breaking above the down trend line that was confirming the consolidation.  Unlike the last two times SPX got to all time highs the smoothed indicator moved above its previous peak.  This indicates that the StockTwits community is more comfortable with new highs now than they were in early and mid March. The message from this signal is that the odds favor the market continuing its uptrend in the near future.  Here’s a post with  more information about consolidation warnings and confirming signals. Our sentiment indicator for SPX from the Twitter stream is slightly at odds with the StockTwits community. First, the Twitter indicator didn’t issue a consolidation warning on the recent weakness.  Second, it is more reluctant to push higher as the market breaks out which continues the negative divergence with price.  This indicates a bit more

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Rotation Without Fear

Over the past week the rotation out of the most loved and momentum stocks into value stocks continued. The rotation is causing internal damage to our core indicators, but our measures of risk aren’t showing any fear.  This paints a picture of market participants simply taking profit on the stocks in their portfolios that had the largest gains over the past year.  Any fear appears to be limited to the high flying stocks, not the market as a whole…yet.  I’m seeing a lot of warning signs which suggest caution, but not aggressive action. The percent of stocks in the S&P 500 Index above their 200 day moving average has recovered from its early February dip and is holding steady near the 80% level.  However, a look at individual charts shows many stocks painting bearish flag patterns just above their 200 day moving average.  General Electric (GE) is a good example. The number of new highs on NYSE diverging from the market shows that a significant number of individual stocks (like

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