Over the past week my core market health indicators bounced around a bit, but none of them moved enough to change the core portfolio allocations. Have a good holiday everyone!
Over the past week the non-confirmation in Dow Theory between the industrials (DJIA) and the transports (DJTA) widened. Both indexes have been painting a line for over two months. Now both indexes have broken out of their lines. The problem is DJIA broke upward and DJTA broke down. This creates a non-confirmation that warns of a possible long term trend change in the near future (next several months…remember Dow Theory is about the very long term trend). Until this non-confirmation clears with the transports moving to new highs (and of course the industrials too) investors should be cautious about adding new long positions. On the other hand, if DJIA breaks the lower boundary of its range along with the transports then it will add a larger warning that the long term trend might be changing. Any low created after a break lower from the range in both indexes will create a new secondary low that will be the trigger point of a change from a bullish trend to a bearish
Last week I mentioned that my intermediate term indicators strengthened while some short term indicators that I follow were showing weakness. This week I’m seeing the short term indicators right themselves and the intermediate term indicators continue to strengthen. This increases the odds that the market will finally break out of the current range to the upside. Of course, price is truth so 2120 on the S&P 500 index must be decisively broken to the upside (along with the current Dow Theory line breakouts) for confirmation that the next intermediate term trend is underway. One positive indicator comes from support and resistance levels generated from the Twitter stream. Traders are now tweeting higher price targets which indicates they’re putting on bullish trades. Another positive sign this week is NYSE new highs are rising and new lows are falling as the market gets close to new all time highs. We still want to see new highs break its recent down trend for confirmation that investors are willing to buy shares that
Here are a couple more things showing up that are small warning signs. First is the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX). It is close to breaking below its 20 week moving average. The S&P 500 index is weighted by market capitalization so the larger stocks have more influence on its movement. SPXEW is weighted equally so a ratio between SPXEW and SPX will show money moving between large cap and mega cap stocks (because SPX is made up of large and mega caps). When the ratio moves down it indicates money moving into mega caps. Possibly from a flight to safety, but is most likely market participants buying companies with global exposure in reaction to recent dollar weakness. A move below the 20 week moving average often results in a choppy market for a few weeks due to the rotation. Another thing that is a bit concerning is the NYSE Advance / Decline line (NYAD). Since the lows in October NYAD
At the end of April monthly MACD for the S&P 500 Index (SPX) created a bearish crossover. However, momentum is still fairly strong. As a result, I take the monthly MACD signal as notice to start paying closer attention to the market because it is starting to stall (but not a signal that a long term top is in). If momentum crosses below 100 it will increase the odds that a long term trend change has occurred. Of course I’ll want to see confirmation from all the other indicators I follow before making a call. Here’s a close up view of the MACD crossover.
Another week gone and the market is still in a range. The S&P 500 index (SPX) has climbed back to the top of the range at 2120, while the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA) are lagging a bit. As I mentioned last week the direction of the break in SPX, DJIA, and DJTA will point the direction of the next intermediate term trend. So we’re left waiting again this week for confirmation of the uptrend or a rejection at the current level which will result in more time waiting. On thing I’m watching on a longer term scale is the continued negative divergence from several indicators. Negative divergences aren’t good timing devices for the simple fact that they can last for month or years, but they do provide important information if price declines. The percent of stocks above their 200 day moving average has been diverging from price for over two years (although from abnormally high levels). This indicates that market participants are getting
Earlier in the month I highlighted some technical analysis indicators that showed a battle between accumulation and distribution. As of Friday we have more evidence of a battle between people accumulating stock and distributing it. This evidence comes from Dow Theory. Friday’s decline in the Dow Jones Industrial Average (DJIA) created a Dow Theory line. Both averages are now showing a pattern that indicates either accumulation or distribution is underway, but we’ll have to wait and see how these patterns resolve to know which will win. William Peter Hamilton stated: When a ‘line’ is in process it is the hardest thing in the world to tell either the nature of the selling or that of the buying. Both accumulation and distribution are at work, and no one can say which will ultimately exercise the greatest pressure. When the pattern is broken we’ll have an answer that will have a significant impact on the market. Hamilton said that the break of a line will indicate a change in general market direction
The sharp drop in the market today is creating a lot of buzz from the financial press, but isn’t really showing up as fear or panic in the measures I follow. None of the four components of my Market Risk Indicator have gone negative. This is unusual given the fact that the drop is a result of the fear of a global macro event (speculation that Greece may leave the Euro) which could cause a large disruption in currency valuations. The day isn’t done yet, so there is the possibility that my measures of risk escalates into the close, but at the moment my they are treating this as a “normal” profit taking event. Our core measures of risk fell a bit this week, but like our Market Risk Indicator they aren’t showing panic. Our other market health indicators dipped slightly but haven’t been damaged enough to change any of our core portfolio allocations. I suspect that we’ll have enough evidence by next Friday to determine if the current dip
Over the past week our core market health indicators continued to churn along with the market. Most of them rose, but none significantly. We still have every category with the exception of the economy with positive readings. As a result, none of our portfolio allocations will change this week. For a longer term view I’m currently watching Dow Theory for a warning or confirmation of a renewed uptrend. Dow Theory should give us some clues over the next few weeks if there is cause for concern, but it will take longer to confirm the uptrend. Until we have more evidence I’ll wait and watch with a small hedge.
Over the past six months there has been distribution occurring in the market. However, the market has been able to move higher due to bottom fishing and value buying. So far the choppy market we’ve seen since the first of the year has been a result of profit taking (distribution) in stocks that had been making new highs with the money raised being put to work (accumulation) in stocks that have been beaten down enough that they were making new lows at the end of last year. When the S&P 500 index (SPX) broke higher in March the number of new highs jumped to healthy levels. Currently, SPX is within 2% of those highs, but NYSE new highs aren’t rising rapidly. This is a bit of a concern and suggests that distribution is still occurring, but nothing to worry about yet. Another sign of the battle between the accumulators and distributors comes from Trade Followers breadth. It is holding up at healthy levels with the same condition as NYSE new