In early August we posted that we were watching for strength in emerging markets (EEM) as a sign that world economies are getting healthy (see post for why). At the time we thought emerging markets looked like they were trying to make a bottom. We annotated the chart with trend lines we felt were important. The chart below shows those trend lines extended to the end of the chart (I also added a long term trend line to the bottom of both charts…more about that later). As you can see, both EEM and the S&P 500 Index (SPX) have obeyed their respective trend lines. This is a healthy sign, however, after two months of good behavior we’re reaching a critical point. EEM has broken above its down trend line. This is happening just as SPX is touching the upper boundary of a long term rising wedge. The breakout and movement in price from EEM is positive in its out performance of SPX over the past few months. This is a
The S&P 500 Index (SPX) painted and ugly chart pattern today. The market had a strong move upward in the first half hour of trading, then sold off the rest of the day. Selling after the initial pop is what we call a pop and drop. This isn’t the type of chart pattern we like to see during healthy rallies. It is continued evidence that there are still sellers waiting for opportunity to take profits. At the least, it means we need further consolidation before we can move substantially higher. Our Twitter Sentiment Indicator for SPX had a pop and drop today too. Initially, it registered strong readings, but then after the first hour there were many tweets about shorting the market and “I told you so” type tweets. There are a large number of people who think the top should be in. Many are pointing to the weekly charts that show two weeks of lower highs and lower lows. Adding insult to injury, it appears that the rotation to
During the last week all of our market health and risk indicators showed weakness, however, this is a normal condition during market consolidations. As long as the indicators continue to paint chart patterns similar to price we won’t be concerned. We get nervous when our indicators turn down faster than price. When that happens it is signalling underlying weakness in the market. So far we’re of the opinion that we are currently in a normal, healthy consolidation. None of our measures of the economy, risk, quality, trend, or strength deteriorated enough to cause any changes in the portfolio. We’re still 100% long. We’re aware of the fact that consolidations can turn into larger corrections so we’ll continue to monitor our indicators closely for signs of weakness. Market Positives Our Twitter Sentiment Indicator for the S&P 500 Index (SPX) continued to show relatively good strength again last week. Two weeks of downward price movement has only brought smoothed sentiment back to the trend line we drew near the beginning of September.
The correction that began on 9/14/2012 has brought with it some surprisingly similar readings on our market health and risk indicators as the correction that occurred during November of 2010. What makes it eerie is that the November 2010 correction coincided with the QE2 official announcement. Now we’re seeing a sell the news event coincide with the QEternity announcement. Just for fun I’ve posted a chart of the S&P 500 Bullish Percent Index (BPSPX) with illustrations of the similarities. Notice first the divergence from the peak of April 2010 to the peak in November 2010. It looks very similar to the current divergence in that; it sprang from an oversold condition, followed by a strong rally, which culminated in a final burst upward, caused by a Federal Reserve Quantitative Easing announcement. Even the levels in which the BPSPX reached each time are similar. This is somewhat encouraging since the current BPSPX level gives the market room for one more leg higher before becoming overbought. In addition, we’re now seeing momentum
Over the past few weeks we’ve observed the Active Bear ETF (HDGE) outperform a short of the S&P 500 Index (SH). The last time we saw this same behavior starting was in late February and early March of this year. That time period ended up being the last leg in a market rally before an 11% correction. Money flowing out of weak stocks is something we often see as a rally nears a top. This isn’t something that is concerning in itself as the natural progression of most rallies see breadth indicators diverging from price as the rally moves higher. The problem we have now is volatility rising with weak stocks getting weaker. The combination of a thinning market and rising volatility often signals the start of a larger correction. When volatility stays low and actively managed bear funds like HDGE (or weak stocks) begin to fall rapidly we’re not generally concerned as it usually simply shows money flowing out of weak holdings and into stocks that have performed well
The S&P 500 Index (SPX) broke below our primary support level of 1450 today. Along with that break we’ve seen two days of fairly negative sentiment. Today’s sharp move lower with a substantial move down in our daily Twitter Sentiment Indicator could prove to be an initiation thrust to the down side. This isn’t a good short term sign. As we mentioned in our weekly update, a break of 1450 could take us down to the 1422 level or even our major support level of 1400. We don’t consider 1440 to be anything more than minor support (see the weekly update for an explanation), so the market must catch and rebound at 1440 in the next few days or we’ll be headed for at least a 3% to 5% correction. On the positive side, even though support has been broken and we’re seeing a substantial move lower in daily sentiment, our smoothed sentiment indicator is still above a rising trend line. We don’t like to see it go below zero
We’re starting to see some rotation out of small caps, technology, and the general market into big cap stocks. At this point we’re not sure if it is merely profit taking and re-balancing of portfolios or if it represents distribution and a flight to safety. It is one of the things we’ll be watching closely over the next few weeks. If the trend continues it will be one more sign that the current rally is loosing steam. Add that to the Dow Jones Transports trying to break critical support and we should start seeing the market rounding out a top. Of course, if the transports hold, as they did today, and the short term rotation to big caps turns out to be re-balancing then the market is simply setting up for the next run higher. Keep an eye on RUT, NDX, and DJIA over the next few weeks as they will provide clues to the next market move.
Over the course of last week most of our market health indicators showed consolidation in line with the S&P 500 Index (SPX). Some of the indicators were up slightly and others were slightly down. All in all, a normal response to consolidation. Our Market Strength indicator rose into overbought territory during the week. Our measures of risk and quality showed continued strength. Our measures of trend stalled as would be expected during a consolidation of market gains. Our measures of the economy showed the most weakness of all our indicators, but is still clearly positive. The continued strength in the health of the market is keeping our current allocation in our hedging strategies at 100% long. Market Positives The S&P 500 Index showed surprising strength last week considering the quick move from 1440 to 1475 in the prior week. Generally a move of that nature needs a fairly significant consolidation (often back down to the break out point). Instead, we saw buying on every small move lower. Even the intra-day
We’re seeing some much needed consolidation after the big run from 1400 on SPX. The move was almost straight up causing price to move above the top of its Bollinger band. A few days to a week of sideways to down action will be very healthy for the market. We’d like to see price get inside the Bollinger band, then crawl along the top side of it as the next phase of this run. As you can see from the chart, hitting the top of the band is not a problem in a strong market as price can move for a long time along the top. We’ll be watching for the bands to narrow because that’s when direction changes occur. On a side note, our Twitter Sentiment indicator is still providing readings above or barely below zero on a daily basis. This is keeping our smoothed sentiment indicator above zero even as the market is consolidating. So far the action looks like a much needed rest. It doesn’t look like
During the first part of last week the market consolidated just below 1440 on the S&P 500 Index, then broke out above minor resistance on Thursday and Friday. This move higher brought with it a sharp rise in all of our market health indicator categories (quality, trend, strength, economy, and risk). Even our measures of the economy accelerated sharply to the upside. Even more encouraging is that we’re seeing what appears to be the start of a larger rotation towards risk. Enough of our indicators are positive to leave us in a 100% long position in our hedging strategies. Market Positives Our Twitter Sentiment Indicator strengthened early last week while the market was waiting for news out of Europe and the US Federal Reserve. This occurred even as the S&P 500 Index moved sideways. When SPX broke through minor resistance at 1440 it was accompanied by a sharp move up in our smoothed sentiment indicator. This move confirmed the rally as it also broke the trend of lower highs that