Our core market health indicators all improved this week, but are mostly refusing to move above zero. Our measures of risk abated quite a bit this week and are once again our only positive indicator. Our measures of the economy, market quality, trend, and strength all rose as well. The market trend improved the most, but is still well below zero. This is concerning considering the fact that the S&P 500 Index (SPX) is at all time highs.
We’re currently seeing the same pattern that our indicators painted in April and May of 2011 where the market was making new highs but our indicators refused to go positive. In May of 2011 our only positive indicator was risk just as is the case today. The market ended up resolving the disparity by first trading in a 8% range and culminating with a 20% correction. However, the worst of the decline came nearly four months after our indicators went negative. We’re 2 1/2 months into the current negative warnings so it’s nearing the time where our indicators must improve sharply or the market may correct.
None of our indicators improved enough to change our portfolio allocations. As intermediate and long term investors with an emphasis on reducing risk we’re comfortable being modestly hedged or with large amounts of cash until market internals resolve themselves…because we’ve learned over the years that patience and discipline almost always pay off.