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Market Health Still Weak

150130markethealth

Over the past week our core market health indicators mostly fell. The notable exception is our measures of trend. They continued to move higher in the face of a falling market. This is an encouraging sign even though almost every indicator we track in the intermediate term is mired in negative territory. Another measure that has been supportive for the market is cumulative NYSE Advance / Declines (NYAD). More stocks continue to rise than fall on a weekly basis. This is creating a positive divergence with price. Meanwhile the percent of stocks above their 200 day moving average continues to weaken. It remains to be seen which breadth indicator will win. Until we get a resolution we’re hedged in the core portfolios. The volatility hedge isn’t seeing enough risk in the market to be hedged. It’s still 100% long.

 
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Shaky Foundation

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The S&P 500 Index (SPX) is starting to paint a pattern that often leads to instability and a quick drop lower. Look at the chart below and you’ll see wide quick swings going in both directions. This indicates uncertainty by market participants. It is a pattern we haven’t seen for a very long time which makes it more important. Another thing I’m seeing is perceptions of risk rising. Three of four components of our market risk indicator are warning at the moment. We still have one hold out, but it is dropping rapidly. As I’ve mentioned over and over again I don’t think the market can have a substantial correction until breadth breaks down. One measure that is getting close to warning is the percent of stocks above their 200 day moving average. I get concerned when it falls below 60%. Add it all together and we’ve got a market with a shaky foundation. Caution is warranted.

 
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Market Health Bounces from Oversold Conditions

150123MarketHealth

This past week almost all of our indicators turned up from oversold conditions. So far the turns are slight. This indicates that the market is still under pressure even though price spiked higher. What I’m seeing looks like extreme uncertainty. Longer term market participants appear to be standing aside while traders are chasing. This adds a bit of volatility that will create larger range days both up and down on any news. One thing of note is that due to the oversold conditions and the distance our indicators need to travel to get above zero it is likely that it will be several weeks before we’ll make any changes to our portfolio allocations. The one exception is our core measure of risk. It could move higher over the next few weeks if the market gets to new highs and sustains the move. Bottom line, we’re still waiting for clear conditions before taking any risk in the market.

 
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Dow Theory Best Indicator Since 2009

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Out of the lows in 2009 there has only been one of the indicators that I follow that hasn’t had whipsaws or bad signals somewhere along the way. That “indicator” is Dow Theory. It has continued to confirm  a long term bull market for the entire period from its bullish trend change in July 2009. This is due to time being an important factor in Dow Theory. The system outlined by Charles Dow and William Peter Hamilton waited for roughly three weeks of trend before declaring a secondary reaction point. The lack of secondary lows that subsequently failed has kept Dow Theory bullish. On the chart below I’ve annotated the secondary low and high points from the last several years. In addition there is a Dow Theory line during the first several months in 2012. We’re now approaching a month long decline in the Transportation average (DJTA). The industrial average (DJIA) will need to break below the December lows to pass the three week mark. At this point we’ll need

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Risk Rising

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Once again our core measures of risk are negative. They’ve been there all week long. I suspect that it will take a close above 2050 on the S&P 500 Index (SPX) by Friday to get the category positive. That’s about the point where SPX has been when the risk measures flip. If they are negative on Friday the Long / Cash portfolios will go 100% to cash. The hedged (Long / Short) portfolio will be 50% long high beta stocks and 50% short SPX. Our market risk indicator has three of four components warning at the moment. The fourth component continues to slowly fall, but hasn’t gone negative yet. The volatility hedge is still 100% long and will stay that way unless the fourth component falls by the end of the week. One thing I’m seeing is a lot of mixed signals…I’ll post more about them on Friday, but here are a few examples. NYAD advance / declines are acting well, but the percent of stocks above their 200 day

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Gold Stocks and the Market

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I did a write up on Trade Followers about a buy signal for gold stocks generated from Twitter momentum / sentiment. It’s time to watch the trade closely for signs that it might turn into a long term trend change for gold and gold stocks (GDX). Here’s the associated chart…as a teaser. In addition, there are some interesting things happening with small cap stocks (RUT) and the NASDAQ 100 (NDX) that will likely tell us which way the market will break. Those two indexes will likely tell the tale. The short story is if sentiment for RUT breaks lower the market will likely follow. If sentiment for NDX breaks higher then odds favor new all time highs. Here’s a link to the post.

 
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Weak Internals Near All Time Highs

150109markethealth

Over the past week the majority of our core market health indicators fell. Most significantly was our core measure of risk. It bounced back and forth between positive and negative, but managed to eek out a win and stay above zero near the close on Friday. As a result, there are no changes to our portfolio allocations this week. Our core measure of risk has been positive for eight weeks now, but the other indicators are refusing to follow. The only other time since January 2000 that one indicator cleared and the others didn’t follow within two months started in June of 2000. It took nearly three months (until late August) before two other categories cleared. Those signals ended up being whip saws and the market turned over in early September. Those of you who lived through it know what came next. I’m not making a prediction that the same results will follow now. I’m merely highlighting the one occurrence I have recorded of a similar situation. Nevertheless, internal indicators

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Still Not Believing

150102markethealth

Over the past week the majority of our market health indicators improved. None of them improved enough to change our core portfolio allocations. Unfortunately, the indicators still aren’t believers in this rally. They continue to show underlying weakness. Happy New Year everyone!

 
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More Deterioration

141226markethealth

Over the past week most of my core market health indicators fell. This is a bit discouraging in the face of rising market indexes. Only the measures of risk are currently positive. The risk indicators show a market that is drifting under the surface rather than exhibiting underlying strength. As a result, it won’t take much weakness to move them into negative territory. There are no changes to the core portfolio allocations this week and the overall condition of the other categories suggest that no changes will be made next week either. Enjoy the Holidays!  

 
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Still Waiting for Clarity

141219markethealth

Over the past week our market health indicators bounced around a bit, but none of them changed enough to modify our core portfolio allocations. During the week our core measures of risk went negative, but recovered and closed slightly higher than last week. This tells us how close we are to a tipping point. Nevertheless, I follow the indicators so there will be no portfolio changes until I see more clarity.

 
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