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Dancing on the Line

Just a quick note today to update you on some of our indicators that are dancing on the line between positive and negative.  First and most important is our market risk indicator has been bouncing back and forth between a warning signal during the day lately.  All but one of its components have been mostly negative for a few weeks now, but the one hold out has only started printing negative readings yesterday and today.  Since we’re intermediate to long term investors we don’t like to hedge our portfolio unless there is a high probability of a substantial decline (we ride out the smaller dips).  Currently, our risk indicator is telling us that the market could accelerate to the downside, but to avoid whipsaws we wait for a weekly warning signal (close the week with all components negative). As a result, we won’t be adding aggressive hedges or raising cash unless the current conditions persist into Friday.

Our measures of market quality and strength have been flirting negative territory as well.  If they close below zero on Friday it will cause us to raise cash to 40% in our core Long / Cash portfolio.  It is time to look at your portfolios and see what you’d cut if you have to, but not jump ship yet.

Another thing I’m watching closely is the NYSE cumulative Advance / Decline line.  It is still painting the triangle pattern we’ve mentioned over the past few months.  If it breaks lower then it will be a very strong indication that an intermediate term top has been put in place and the market is due for the most serious correction in more than a year (or two).  I keep seeing people mention the negative divergence from price (peaks), but not the positive confirmation from the valleys. The pattern suggests that many stocks are not advancing, but that could simply be healthy consolidation after the very strong rally this year.  Just remember, this pattern can be resolved with an upside breakout as well.  If that occurs then we’ll most likely see a good rally into year end.  This is a time to keep an open mind and simply watch the indicators.

Here’s a quick chart of the Twitter and StockTwits sentiment (quantified tweets and messages).  Both are still holding up fairly well with smoothed sentiment staying above zero and in an uptrend.  Traders are not getting extremely nervous.  Instead, what I’m seeing is a lot of bulls standing aside or getting their stops washed which is causing downward pressure on prices. The general tone is that many people want to buy the next dip.  However, there are a few well known voices doing some top calling.  I’ll be watching smoothed sentiment to see who’s right.

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