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Trade Followers Momentum Shows Chasing

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Social media indicators are showing mostly positive signs with some indecision and chasing by traders on Twitter. You can see the full commentary here. In addition, here are some charts of individual stocks with social media indicators for those of you who are interested.

 
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Market Health Diverging

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Over the past week we saw a bit of divergence between our core market health indicators. Our measures of quality and risk got better, while our measures of trend and the economy weakened. None of them moved enough to change our core portfolio allocations. Our core measure of risk is still diverging with the last several peaks in the market. Since the extremely overbought condition on this indicator in late 2013 it has mostly painted lower highs as the market moves higher. This indicates that investors are getting less confident with each rally. As I’ve noted before, it takes time to build a top so this indicator provides information and something to watch carefully, but nothing to act on…yet. The most important thing to watch for a sign of a long term top continues to be breadth. So far we’re seeing small chinks in the armor, but nothing serious. The NYSE Advance / Decline Line (NYAD) is an example. It isn’t confirming the new highs in the S&P 500 Index

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False Alarm

On Tuesday we mentioned that our measures of trend were negative. That condition has resolved itself so it looks like we won’t be making any portfolio changes tomorrow. This is a good example of avoiding a whip saw by waiting for Friday’s data to make decisions. Our portfolios are designed to be long term in nature and have infrequent allocation changes. Since we use weekly data for all of the signals they tend to track the intermediate term trends. The sensitivity in our measures of trend show how long in the tooth the current long term trend is. Even with new highs our trend measures are barely positive so it won’t take much weakness to raise more cash. I’ll do an update of all of our core market health measures tomorrow.

 
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More Warning Signs

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It’s still early in the week, but I wanted to give you a heads up that our measures of trend are currently negative. We require a weekly close below zero before changing any portfolio allocations so this is simply early warning that we might be raising some cash and adding a larger hedge come Friday…but I’ll wait till Friday to make any changes in order to avoid whip saws. Our market risk indicator has two of its four components signalling, but the two positive components are a long way from a warning. What is interesting about their current condition is that the least sensitive components are warning while the most sensitive are a long way from a signal. This means there is some instability in the underlying market and that we’d quickly get a market risk signal if prices drop substantially. Our core measure of risk fell out of over bought readings in early July, moved back up to kiss overbought in August, and is now falling again. This is

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Chinks in the Armor

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Although almost every indicator I follow is still positive I’m starting to see some chinks in the armor that suggest that a longer term top is in the making. Tops are a process and take a long time to form so there’s nothing to worry about yet, but here are some things to watch over the next several weeks. First is the ratio between the S&P 500 Index (SPX) and S&P 500 Equal Weight Index (SPXEW). We use the 20 week moving average as a bullish/bearish line. When the ratio is below the 20 week ma the market is often choppy as a result of reallocation rotation or the ratio falls as investors are rotating to safety. Recently it fell below the 20wma then retraced back to it and has turned down again. Investors are continuing to rotate to larger cap stocks which often precedes longer term tops. Next, the NYSE Advance Decline Line (NYAD) is reacting much more quickly to small price declines. This tells us that fewer stocks are

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Raising Cash and Adding a Hedge

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This past week our measures of the economy dipped into negative territory. As a result, we’ll be changing our core portfolio allocations (details below). All of the rest of our core market health indicators dropped as well. They had held up fairly well earlier in the week, but Thursday’s market action did some damage to them.  As a side note, it is extremely unusual for one indicator to warn without others warning within a month so it is likely we’ll be raising more cash over the coming weeks. But as always, we’ll wait for a signal before making further moves. Our core measure of risk turned down after touching over bought readings the last few weeks. It is painting lower peaks which suggests investors are getting more concerned as the market moves higher. Our market risk indicator still has one component that is negative even though the market has moved to all time highs. All the other risk components peaked recently and have turned back down. Right now it is

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Short Term Caution Signs from Social Media

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Although the intermediate term indicators we follow are mostly positive, I’m seeing some short term caution signs from the Trade Followers Twitter and StockTwits indicators. An example is the chart for volatility below. You can see the full article here.

 
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Market Health Slips

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This past week as the market drifted our health indicators have been slipping. The majority are a long way away from a signal, but our measures of the economy are a whisper away from going negative. This increases the likelihood that we’ll be raising some cash next week and/or adding a small hedge to the portfolios…but as always we’ll wait for a signal before making any changes. Our measures of risk abated this week with our core risk indicator sitting right on the edge of being over bought. It is painting a negative divergence with the peak it made in June. This is something I’m watching carefully, because this type of action often precedes a 10% decline in the market. Our market risk indicator is showing signs of market participants dancing close to the door. This is at odds with our core risk indicator and adds some instability. It appears that it won’t take a lot of downside in price to create a risk signal. Nevertheless, the current conditions are

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Still On Track

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As I mentioned last Friday the S&P 500 Index should see some sideways action near the 2000 level. We’re now three days into sideways motion on relatively low volume. It’s the last week of the summer so we could continue to drift for the rest of the week. Once everyone gets back to work next week we should see some movement as people evaluate their portfolio performance and start to position themselves for the end of the year. Our indicators only have a few kinks that suggest we may be putting in a longer term top. The Russell 2000 (RUT) is still lagging the other indexes, but has been playing catch up this week. Junk bonds (JNK) have had a huge run, but haven’t recovered from the July damage. They’re telling us that investors are still positioning themselves away from risk. The ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX) is still below its 20 week moving average. This is a sign of rotation

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Discipline Amid Fear

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As we suspected last week the market was poised to rally to new highs in the absence of bad news. The early August dip had our risk indicator showing concern, but or core indicators held steady. The recent events provide a good example of maintaining discipline when fear enters the market. Even though we saw a lot of ancillary indicators and our risk indicator getting close to warning we held our portfolio allocations steady. The reason for this is that our core indicators weren’t substantially affected by the dip in the market. This past week all of our core indicators with the exception of the economy rose. This keeps us 100% long in all portfolios. I only see a few concerning things at the moment. Small cap stocks (Russell 2000 – RUT) continue to under perform and indicates that investors are reducing risk. This in conjunction with the sharp declines in momentum stocks during the first four months of the year warns that a longer term top may be in the

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