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Market Changing Character

150629DowTheory

Here are a couple of things that haven’t happened since late 2012. First is a downtrend in the Dow Jones Industrial Average (DJIA) that is more than a month long. Since the last secondary low for DJIA the down trends have lasted roughly a month. If DJIA closes at the current level today it will be in a down trend that is now six weeks old. The transports (DJTA) are now in a down trend that is six months long. One of the tenets of Dow Theory is that bull markets will have long up trends and short down trends. In context of the two and a half year rally out of the 2012 lows neither of these declines are significant, but they do point to a changing character in the market. As a reminder, Dow Theory is still in a long term bullish trend. The current declines haven’t changed that trend. I’ll keep you updated to any significant or interesting things that happen with Dow Theory. Another thing that

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Core Indicators Healthy But Risk Rising

150626MarketHealth

Over the past week the market has dipped a bit, but for the most part my core market health indicators have held steady. The one exception is my measures of risk. They have risen a bit and once again two of the four components of my market risk indicator are warning. The other two are a long way away so at the moment this appears to be just another short term dip in a long term uptrend. All of our portfolios are still 100% long. There’s been a lot of talk about the transports (DJTA) this week and the implications of their downtrend. If you look at the decline in a longer term context you can see that DJTA’s downtrend has only retraced about 20% of the rally out of its last secondary low. A “normal” decline in a bull market can decline more than 50% or even 67% of a move from a secondary low and still be healthy. With the industrials (DJIA) only a few percent away from

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Why Breadth Matters

150610bpspx

A few weeks ago Urban Carmel at The Fat Pitch wrote a post that concluded that the NYSE Advance / Decline line (NYAD) was a poor timing indicator. I generally agree with his assessment. I think that most measures of breadth by themselves are poor timing indicators. Markets can fall when breadth is healthy and breadth often diverges at market tops for a very long time before the market actually falls. For example, the Bullish Percent Index (BPSPX) and the percent of stocks below their 200 day moving average have been diverging with the S&P 500 index (SPX) for over a year (or two depending on how you count). The fact that breadth isn’t timely is why I don’t use it as a part of my “core” indicators. Instead, you’ll hear me refer to various forms of breadth as ancillary or secondary indicators that give good background information. So what information does it give?  Answer: When breadth is poor the odds increase that a decline will be large. If breadth

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Crosscurrents

150605markethealth

Over the past week my core measures of risk held steady while all of the components of my market risk indicator moved closer to warning. This is a crosscurrent where we’ve got positive core strength, but increasing skittishness by market participants. When this condition occurs we usually see higher volatility until both indicators start moving the same direction again (either up or down). Currently one of the four components of market risk is warning and a second is on the edge. The other two are still a safe distance away so it will likely take a sharp decline in the market to generate a warning signal. Another sign of crosscurrents comes from my core market health indicators vs. ancillary indicators. All of the core categories rose or held steady (even though the market fell). While, measures of breadth and other ancillary indicators are deteriorating. I suspect this likely result in more volatility before the market can move higher. Here are some things I’m seeing that provide background information that increases

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No Fear Yet

150417markethealth

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

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Pivot Point

150313markethealth

Over the past week all of our core market health indicators fell slightly. The volatility and large range days in the market didn’t do a lot of damage. The one exception is our core measures of risk. They fell quite a bit and will likely go negative if the market continues to fall next week. On the other hand our measures of trend want to go positive, but just can’t get any upward momentum. If the market can rally next week then they will likely go positive. That puts us at a pivot point between increasing risk or a continued up trend. Another sign that the market is at a critical point comes from Trade Followers. Their algorithm that captures support and resistance levels for the S&P 500 Index (SPX) puts 2040 as a must hold level. If that level breaks then 2020 is the next level of support, but minor in nature. There is very little support below that level which sets up the potential for a cascade lower

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Shaky Foundation

150128spx

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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Risk on the Rise and Core Indicators Oversold

150116MarketHealth

Over the past week our core measures of risk fell into negative territory. It was the last category to go negative. Our other measures of market health started going negative in early September and haven’t recovered. In fact, they have continued to deteriorate to the point where several of our indicators are now oversold. Our measures of market quality and strength are at points that have often marked lows similar to May 2012 and April 2013. The only recent occurrence of oversold conditions when the market was close to all time highs came in early 2008 and persisted into July/August of 2008. This puts the market in a position where it could go either way. Until conditions clear our Long / Cash portfolios will be 100% in cash. Our Long / Short hedged portfolio will be 50% long stock that we believe will outperform in an uptrend (high beta stocks) and 50% short the S&P 500 Index (using SH or a short of SPY). Our Market Risk Indicator has only

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Risk Rising

150114sh

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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Risk Rising

141212markethealth

Over the past week all of our core market health indicators fell. Most notable is our measures of risk. Our core measures of risk fell from moderate levels to almost warning. It will take a large sell off in the last hour to take this category below zero and have us increase our hedges and/or raise cash. Our market risk indicator has three of its four components warning. This is very unusual given the fact that the market is only down about 3% from all time highs. This tells me that market participants are skittish…which increases the risk of a sharp sell off. If this indicator signals we’ll be changing the hedge to an instrument that benefits from higher volatility. I don’t expect it to signal today, but if it does I’ll update this post before the market closes. Another sign of rising risk is the performance of Junk Bonds (JNK) compared to High Quality Bonds (LQD). LQD is rising while JNK is falling. This tells us that bond holders

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