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Emerging Markets and Financials Holding Up – Not Always Good

SPX vs EEM

Over the past six weeks emerging market stocks (EEM) and financial stocks (XLF) have shown surprising relative strength against the S&P 500 Index (SPX). Both of these indexes have been able to hold their 50 day moving averages even as SPX has clearly broken below its own. In addition, while SPX has broken several levels of support including its recent uptrend line, both EEM and XLF have held theirs.  EEM in particular looks to be consolidating just above a breakout of a down trend line.  This should be a very positive sign.  EEM and XLF are generally leading sectors.  We often see them create positive divergences with SPX at the tail end of major corrections. The problem we have now is that these two sectors are showing strength near the end of a rally (rather than the first of one).  When leading sectors lag it tends to cause confusion…and confusion leads to consolidation or a down trend. These two sectors are trying to tell us something about the market.  One

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Market Overview 10/27/2012 – Time for a Bounce

Twitter Sentiment Support and Resistance for the S&P 500 Index

We had fairly serious down movement in the market last week, with Friday showing signs of a near term bottom.  Although we’re due for a bounce, we’re still aggressively hedged because of the weakness in our Market Risk Indicator.  Our core market health indicators are also deteriorating with many of them barely holding above the trigger line. Market Positives Our Twitter Sentiment indicator is currently painting a positive divergence with price.  The break of support in the S&P 500 Index (SPX) at the 1420 level printed a large down day in price, but Twitter sentiment didn’t confirm that break.  On Tuesday, while price was falling there were still a large number of tweets suggesting that SPX 1400 would hold.  Many people talked about their confidence of the market’s ability to recover.  Surprisingly, there were enough positive tweets on Tuesday that daily sentiment did not reach oversold levels (which would have indicated an initiation thrust and project much lower prices). The next three days of sideways to down movement in price

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Market Internals Continue to Weaken

S&P 500 stocks above 200 day moving average chart

From the middle of September to the middle of October the S&P 500 Index (SPX) traded largely in a range.  During this time we hoped that market internals would hold up signalling a healthy consolidation.  The first trip down from 1375 on SPX didn’t do much internal damage.  However, the rally back up and the subsequent sell off brought with them diverging internal indicators.  These divergences served as a warning that the support range of 1420 to 1430 might not hold. As an example, take a look at the percent of S&P 500 stocks above their 200 day moving average in the chart below.  The first decline from 1475 to 1430 in SPX brought the percent of stocks above their 200 DMA lower, but not to an extent that caused concern.  On the following rally it was evident that many stocks could not regain their 200 DMA.  This served as our first warning that traders were now selling many of those stocks as they bounced back toward their moving average.  However,

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Market Overview 10/20/2012 – Market Deteriorating

Twitter Sentiment, Support, and Resistance

What a week.  We’re in the same place as we were last week, but it doesn’t feel like it.  After making a trip to the top of the range and back down again we saw deterioration in many of our indicators.  Most importantly our Market Risk Indicator went negative.  This indicator overrides all of our other indicators as it often signals an acceleration to the down side.  We’re not predicting a break of support in the 1420 to 1430 range on the S&P 500 Index (SPX).  Rather we’ve been warned of a the chance of substantial risk so we’re buying insurance by aggressively hedging our portfolio.  We’re effectively 50% long stocks we want to own and 50% short, however, we’re using aggressive hedging instruments like puts that match our portfolio or mid term volatility (like VIXM or VXZ). Market Positives Our measures of the economy and trend strengthening slightly, however they are slowing in momentum. Financial stocks are showing better relative strength which would bode well for the market if

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Financials Trying to Catch Up

Financial Stocks XLF vs SPX

Financial stocks (XLF) are once again reaching an important level.  After the initial rally out of the 2009 bottom, financial stocks have traded largely in a sideways range.  During this time the S&P 500 Index (SPX) continued to grind higher, although in a choppy fashion.  XLF is now reaching the highs of the range it has been in for over two years. One of the reasons that this rally hasn’t been believed is that financials have lagged.  Strong rallies that garner support from institutions and retail investors alike are often led by financial stocks.  Money managers always feel better if the companies they work for are making money.  Brokers are more confident if they can move product.  Employees of large financial institutions know if deals are getting done and if the bank is making money.  Whether it’s underwriting IPOs, backing mergers, engaging in proprietary trading, or selling product to retail investors, people in the financial industry see activity (or lack thereof) and it influences their psyche.  So when financial stocks

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Twitter Sentiment for SPX Lagging

SPX Twitter Sentiment Support and Resistance

We’re seeing something interesting in our Twitter Sentiment Indicator for the S&P 500 Index (SPX).  Over the past two days we’ve had strong price moves on SPX that aren’t generating the high scores in sentiment that we’d expect.  The behavior of the indicator caused me to dig down into the actual tweets for an explanation.  We’re seeing a lot of people tweeting that they are adding to their shorts.  They are mentioning bearish technical evidence such as divergences  in weekly charts and Fibonacci retracement levels being met. A lot of traders believe the top is in and we won’t see higher prices.  In addition, there haven’t been tweets calling for 1475 or 1500 since the 11th of this month.  All of these things are keeping our daily Twitter Sentiment Indicator low. Our smoothed sentiment indicator had a negative divergence with price the last time SPX got above 1465.  Then it painted a positive divergence in price on the last low.  We interpret this as indecision and caution by traders.  For

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Market Overview 10/13/12 – Crunch Time

Twitter Stock Market Sentiment Support and Resistance

Once again we had a week where our market health indicators were mixed.  While our measures of the economy rose slightly all of our other indicators fell a bit.  We’re not concerned yet, but we’re getting close to levels that will cause us to start hedging if the market doesn’t move upward in the next few weeks.  For now we’re still 100% long in our portfolio. Market Positives Our Twitter Sentiment Indicator is showing a positive divergence with price on the S&P 500 Index (SPX).  Even as the market fell last week sentiment continued to rise.  This was a result of many people tweeting that the 1420 to 1430 level would hold.  Many investors are also commenting about wanting to buy in the 1420 area.  The volume of positive tweets were enough to keep our daily sentiment indicator in positive territory on both Thursday and Friday even though SPX painted poor chart patterns. Our smoothed sentiment indicator continued to show strength hovering just below the zero line in a week

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When Lines Converge

S&P 500 Index Support Levels

Yesterday we posted that the market was reaching a critical point of support somewhere between 1420 and 1430.  We also stated that the next several days should be critical to the next major move in the market.  I have a colleague who often jokes that if we just wait until tomorrow we’ll have enough information…so take my comments that follow for what they’re worth.   We’ll know tomorrow. Mark Curtis Even though we’ll never have enough information to know for certain, when several lines of support all converge at the same time at the same price point you should pay attention.  Take a look at the chart below.  It is several charts of the S&P 500 Index with annotations of the various support levels that are all converging. Our Twitter Support and Resistance levels (computed from the Twitter stream for $SPX) show a huge line of support at 1430.  SPX 1430 has the longest streak of tweets than any other level we’ve recorded (meaning several mentions every day in a row

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Critical Day for the Market in Your Near Future

Just after Labor Day we made a post about value stocks warning of the market nearing a top.  Today we’ve updated the chart that shows Berkshire Hathaway (BRKB) and the S&P 500 Index (SPX).  As you can see, the rotation to value has continued over the past month.  This is evident by the price of BRKB continuing up while SPX moves sideways.  As we mentioned in the previous post, this is a sign that we’re closer to the top of a rally than a bottom.  Money managers continue to move slowly but surely to safety. This in itself isn’t a near term problem because it takes managers with a lot of money time to make major adjustments to their portfolios.  Big dollar sellers try to sell into strength so they don’t move the markets much as they change positions.  This slow steady distribution and rotation is what creates tops that last several months before they are recognized. When we look at value stocks (using BRKB as a proxy) out performing

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Market Overview 10/6/2012 – Healthy Consolidation

Last week our market health and risk indicators were mixed.  Some were up slightly and others were slightly down.  This is a normal condition for a healthy consolidation and as a result we made no changes to our portfolio.  We’re still 100% long in both of our hedging strategies. Market Positives Our Twitter Sentiment Indicator for the S&P 500 Index (SPX) strengthened substantially last week.  The current move up started with a positive divergence with price as people tweeted that 1430 was a durable low.  It had stalled early last week at the zero line as traders talked about their fear that the market couldn’t break out above the previous highs of 1475.  But the consolidation on our daily sentiment indicator was resolved to the upside on Thursday due to the sharp upward move in price which held into the close for SPX.  The move was strong enough to push our daily indicator into over bought territory.  In fact, Thursday registered the highest reading to date which is an encouraging

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