Over the past week all of our market health indicators strengthened except for our measures of the economy. None of them moved enough to change our core portfolio allocations. Our measures of market strength are increasing fast enough that there is a good chance of adding more exposure if the trend continues into next week. Below is a chart with the normalized values of our indicator categories.
The S&P 500 Index (SPX) finally closed and held above 1850 a couple of times this past week. This is a positive development for the market if 1850 continues to hold. A break back below 1850 will indicate that the market needs more time to digest the 2013 gains. This coming week price is the indicator to watch most carefully. Although price has broken a major resistance level there are still several indicators giving mixed signals. Our market health indicators that monitor the economy and market strength are still negative, and our measures of market quality keep bouncing along just above zero. This isn’t the underlying environment I like to see when the market is breaking out to all time highs. This suggests a bit of caution is warranted over the next few weeks. Our investor contentment index continues to fall from fairly high levels while our market stability indicator is recovering from very low levels. This suggests investors are less comfortable the higher the market goes, but are losing
Over the past week our market health indicators bounced around a bit, but had no major changes. It seems they are all stabilizing and attempting to move upward with the market, but not racing higher. None of them moved enough to change our core portfolio allocations so we still have a small to moderate hedge (20% short and 80% long) in the hedged portfolio. The long/cash portfolios are 60% long and 40% cash. Below is a chart with the current market health categories.
Over the past few weeks I’ve highlighted some things that suggest the market is in a trading range between 1800 and 1850 on the S&P 500 Index (SPX). Another thing I’m seeing that indicates uncertainty is the lack of trade signals generated from the Twitter stream. During the early months of 2013 as the market was coming out of a choppy period there were a lot of long signals generated (green vertical lines on the chart below). As the market started to turn over in May several short signals were generated (red lines). Throughout most of the year the pattern of buy signals as the market rallied out of lows and sell signals at the beginning of declines continued. The dip into early February this year has broken that pattern. There were a few sell signals as the market declined, but no buy signals on the subsequent rally. When I look at individual charts I see sentiment confirming the price decline as a stock consolidates. Bank of America (BAC) and
The S&P 500 Index (SPX) is finally trading above 1850, but traders on Twitter still aren’t targeting higher prices. There is still a fairly well defined range between 1800 and 1850. I suspect that today’s action will bring with it calls above 1850 as the day progresses, but so far 1850 is the highest target with any significant number of tweets. Smoothed sentiment also has a fairly large negative divergence with price as many traders don’t believe prices can move much higher. Nevertheless, price is what matters. A few daily closes above 1850 will clear the way for a new leg higher. Sector sentiment continues to be mixed and doesn’t give us much information about the market. The one thing that has surprised me is the under performance of Consumer Staples while the other defensive sectors of Utilities and Health Care have been so strong.
Over the past week our market health indicators were mixed again. Our measures of trend strengthened while measures of market quality and strength fell. The current trajectory of market quality is falling slightly, but is so close to zero that it won’t take much weakness in the next few weeks to drive it below that level resulting in us adding a larger hedge and/or raising more cash. But for now it is still positive so we’re not making any changes to our core portfolios this week. Below is a chart with the current readings for our core health indicator categories.
As many of you know, my goal at Downside Hedge is to provide information and ideas that you won’t find in other places. This week I suspect will be one of those times where I share a theme that many (most) will disagree with. I believe we’re in a trading range. I could be wrong, but for now I think the most important information we’re getting from the market is the range between 1800 and 1850 on the S&P 500 Index (SPX). First let’s look at the evidence that makes my point of view look foolish (then I’ll give my justification). SPX has just put in a very steep V bottom. That chart pattern almost always resolves with the market going on to new highs. The Nasdaq 100 (NDX) is leading the market and has already printed new highs. The NYSE cumulative Advance/Decline (NYAD) line turned up sharply over the past few weeks and is confirming the move higher. The percent of stocks above their 200 day moving average has
Over the past week our market health indicators were mixed. Some rose slightly while others fell slightly. This is a bit concerning given the strength of the strong move in price this week. I prefer to see market internals follow price and want to see them confirming strong rallies. I’m not seeing that right now so a bit of caution is warranted. I suspect we’ll see a resolution of the current divergences over the next several weeks. Either our health indicators will start to rise or the market will stall. Yeah, this is one of those post that basically says, “I don’t know so I’m waiting for more information.” Nevertheless, we follow the indicators and none of them moved enough to change our core portfolio allocations so were standing pat. Have a good weekend. Below is a chart with the current health category readings.