Since the low in October 2014 the market has largely been reacting to the strength or weakness in the dollar. This isn’t a common condition. Usually the market reacts to other macro factors or events, but the quick moves in currencies over the past several months has investors worried about the impact of a strong dollar on earnings of multinational (or mega cap) companies. But, as the dollar has fallen over the past three months investors have started a rotation back to the mega caps. You can see this rotation by comparing the S&P 500 Index (SPX) to SPX equal weighted. When the ratio is rising it shows money moving into the smaller stocks in SPX. When the ratio is falling it shows money moving into the largest companies in SPX (mega caps). I consider a rising ratio a sign of broad participation in the market. A falling ratio can often mean a flight to safety, but currently I suspect it is simply relief from the falling dollar rather than a warning of increasing risk. Nevertheless, when the ratio falls below its 20 week moving average it often means a choppy market is ahead…which is what we’ve seen over the past three weeks. So far I don’t see this as anything to worry about.
One thing that is starting to show a small warning is breadth. Several measures are showing weakness that often precede large declines. Remember, weak breadth doesn’t mean a decline will occur, but used in conjunction with market risk it gives higher odds of a large decline. As an example, the percent of SPX stocks below their 200 day moving average has been below 60% over the past three weeks. If it continues down and we get a market risk indicator signal it should be taken seriously. Until then, it is background information that should cause you to pay closer attention to the market.
My core market health indicators with the exception of risk weakened this week. They’re not responding well to the current rally. So far none of them have deteriorated enough to change our core portfolio allocations. They’re still 100% long.
We’re seeing choppiness in the market from a rotation in and out of mega caps due to currency and earnings concerns which is being compounded by a lack of value buying as evidenced by breadth. But, until price deteriorates further or risk warns we’re left waiting with full exposure to the market.