Today didn’t do much damage to our core indicators, however, two of the four components of our Market Risk Indicator are warning. A third component is very close to warning and it won’t take much to trigger it. The fourth component is further away and will take a sharp down day like today to make it warn. I just wanted to give you warning that there may be changes to the core portfolios tomorrow (Friday). I’ll update the site and post to Twitter and StockTwits by 3 PM Eastern what our allocations will be going into the close. IF the risk indicator signals the hedged portfolio will go 50% long and use the other 50% to hedge with a mid term or dynamic volatility instrument like (VXZ, XVZ, or VIXM). If you don’t like volatility ETFs then a managed short fund like HDGE is an alternative. For those of you who use put options the strategy would be to stay 100% long, but cover your complete portfolio with intermediate term
If you’re interested in Twitter and StockTwits momentum (previously sentiment) I posted some charts at Trade Followers.
The Elder Impulse indicator now has four blue bars. In the past this condition has usually preceded a down turn. This is one more ancillary indicator that is stalling. Remember, tops are a process and we usually see indicators fall one at a time until they reach critical mass and cause the market to fall. We’re still a long way away from any warning from the totality of indicators I watch, but every day it seems one more caution sign appears. It’s time to make a list of stocks you wouldn’t want to hold during a down trend…and think about other methods to hedge your portfolio. The NYSE Advance/Decline (NYAD) line is painting the largest divergence in nearly a year, but still isn’t at a critical level. As I’ve stated many times before, I don’t think the market can suffer a substantial decline unless breadth breaks down. Keep an eye on NYAD, stocks above their 200 dma, and the bullish index.
The trend that started two or three weeks ago where our core indicators moved up and ancillary indicators fell continues again this week. Below are updates to some of the things I’m watching without much commentary. You can view this post for an explanation. I use the ratio between VIX and VXV to signal “all clear” when it falls back below .9 after a choppy of falling market. It couldn’t quite get there this week. Large caps are still outperforming small caps…rotation to safety starting? Junk bonds (JNK) are still under performing high quality bonds (LQD)…risk off. The individual stocks I’ve been watching for clues to a direction are starting to diverge. Market participants are becoming more selective in the momentum names which caused a decline early in the year. Here are some examples. Twitter (TWTR) is still in a holding pattern and hasn’t decided which way it wants to go. Baidu (BIDU) is breaking higher. 3D Systems (DDD) looks like it’s breaking down.
Over the past week our indicators are showing more risk entering the market while most of our core health indicators are improving. This is a change from the past 18 months where risk entering the market has been associated with deterioration in our core indicators. This signals a change in the character in the market that we should watch closely. Market participants are now starting to show concern about world events and earnings misses. In the past, earnings misses were considered company specific and didn’t have much impact on the market. This is something to keep an eye on. Since our core indicators are all positive we’re still 100% long in all portfolios. Any changes over the next several weeks will almost certainly come on the back of an “event” or a severe down turn. In the absence of a sharp market decline I doubt we’ll have any changes. Below is a chart of our core health categories.
FYI, The Twitter and StockTwits Top 10 Portfolios have moved to the TradeFollowers Blog. There are two new updates posted at Trade Followers.
This week we saw more of the same. Our core indicators strengthened while ancillary indicators weakened. The only core indicator that got worse was our measures of risk. Early in the week they were showing more concern from market participants even as the market moved higher. Thursday did some serious damage to them and Friday only saw a partial recovery. So far they’re providing early warning, but no signals. It will most likely take another few weeks to shake out. One thing I follow that suffered a lot of damage this week is the relationship between high quality bonds (LQD) and junk bonds (JNK). While LQD appears to be painting a bullish flag, JNK is falling sharply. This suggests that bond owners are shifting money from risk (JNK) to safety (LQD). The events in Ukraine and Gaza on Thursday had LQD rising while JNK fell. Watch this relationship going forward because a shift in bonds often occurs before a flight to safety in stocks. Speaking of stocks, the symbols I
Over the past week market health rose, but every measure of perceptions of risk rose too. It speaks to the current theme in the market where core indicators are rising and ancillary indicators are falling. While the underlying health of the market wasn’t affected by this week’s volatility it did do some damage to market participant confidence in the market. Our core measure of risk along with our Market Risk Indicator have slowly been moving closer to warning. At the moment they have plenty of room above the positive line so they aren’t overly concerning, but something to keep an eye on in the next few weeks. Below is a chart with our core health categories.
Over the weekend I mentioned that our core indicators were positive but other indicators were falling. As the week progresses and the market climbs I’m seeing more of the same. Our core indicators are showing more strength and the things I saw showing weakness are mostly getting weaker. Our core measure of risk is diverging from price after falling from overbought territory. It isn’t recovering even as the market moves higher. This is a pattern that I’ve seen many times before that often precede corrections of 10%. It is a signal of some underlying weakness in the market structure and change of perception by investors. Next the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index is falling sharply after breaking below its 20 week moving average. More rotation to large caps (which often means safety). Today was a good up day in the market, but the momentum stocks didn’t participate. This is the most concerning thing on my radar at the moment. If these
Last week’s market action didn’t affect our core health indicators too much, but many of the ancillary indicators I watch suffered some damage. While the market looks healthy on the surface there are enough indicators warning to suggest the worst isn’t behind us yet. Currently we have a tale of two markets. Although our core health indicators are positive most of them have weak enough readings that they could turn negative over the next few weeks. However, this would be very unusual given the fact that many of them turned positive just last week. Generally, when all of them move above zero they stay there for at least two months. Weakness in these indicators will provide significant warning. Another indicator that is telling two stories is our core measure of risk. It is still showing low perceptions of risk, but just came out of an overbought condition. This often marks the beginning of corrections larger than 10%. Momentum stocks are also acting indecisive. Many of them have had good runs over