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Risk vs. Internals

Over the past week our core market health indicators fell slightly, but we made no changes to our core portfolios. The details are in this post.

We’re seeing a battle between event risk and market internals.  Overall our measures of market health and internal structure are constructive, while our measures of risk are signalling skittishness by investors.

The S&P 500 Index (SPX) held up fairly well last week in the face of several market scares. It seemed like every day brought some new rumor that drove the market up and down. But when the dust settled SPX only gave up a little over one percentage point.  Meanwhile measures of intermediate term breadth like the percent of stocks above their 200 day moving average and the bullish percent index still have very healthy readings.  Looking at market internals this appears to be a garden variety consolidation.  We’re not seeing any real damage under the covers as price pulls back.  SPX has held a critical support level near 1600 and bounced twice from the 50 day moving average.  At the same time sentiment from the Twitter stream has improved which suggests market participants are buying at that level.  All of these things suggest the market is healthy.

When we take a look at our measures of risk we get a completely different picture.  Our investor contentment index has fallen sharply over the past four weeks and is now accelerating downward at the fastest pace in three years. This is in contrast to 2011 and 2012 where skittishness built slowly over several months before high levels of fear showed up from longer term investors.  Our market stability indicator has fallen over the past several weeks and is now in negative territory. Our market risk indicator has all but one of its components signaling higher risk in the near term.  From a risk perspective it appears that everyone is ready to jump out of their long positions at any moment.  All that is needed is an event to trigger the selling.

As intermediate to long term investors this is the type of market we hate. We prefer to see recognition of risk rise slowly as it gives us plenty of time to sell the top.

Twitter Indicators

Our sentiment indicator calculated from the Twitter stream for the S&P 500 Index (SPX) continues to show fairly positive readings in the face of market volatility.  The large moves in price over the past week only produced one moderately negative print on a daily basis.

Smoothed sentiment has broken out above its short term down trend line after bouncing from a longer term uptrend line. This suggests that traders were buying the dip to 1600 on SPX and also the 50 day moving average. Both of those touches on support came with higher sentiment readings than the previous dips. Smoothed sentiment stayed above zero over the past week while price fell indicating an overall positive bias by market participants.

Stock market indicator from the Twitter stream

Support and resistance levels gleaned from the Twitter stream widened over the past week suggesting that traders are becoming uncertain about the depth and length of the current consolidation.  We got several calls for prices falling as low as the 1535 area on SPX. There were slightly fewer tweets targeting 1575 and the vast majority came in near the 1600 level.  The tweets calling for 1600 mentioned it as critical support or a place traders were expecting a bounce.  This indicates that any solid break of that area will most likely bring sharp selling.

Above the market traders are targeting 1650 and 1700 consistently, with scattered tweets in the 1660 to 1687 area.  For now we’ll leave our resistance levels at 1650, 1680, and 1700.

Sentiment in the sectors are still showing a mixed picture, but becoming more constructive with energy, industrials, and technology showing strength. The defensive sectors are still showing a bit to much strength to give us a completely bullish outlook.

Putting it all together, sentiment is telling us that traders want the market to go higher, but fear much lower prices. The tweets targeting several levels below 1600 indicate a recognition of risk. The uncertainty in sector sentiment suggests that some investors are still rotating to defensive stocks.  While smoothed sentiment reconfirmed the uptrend and shows a willingness by traders to give the market the benefit of the doubt. Over the coming week we’ll be watching how price and sentiment react to any dip near the 1600 level as it will provide clues about a rally or resumption of the down trend.


The market is healthy, but people are scared.  Event risk from Japan, Europe, and the US Fed tapering have investors dancing close to the door.  As a result, we’ll continue to watch our market risk indicator for a signal to protect our portfolios.

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