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Crosscurrents

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.

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Here are some things I’m seeing that provide background information that increases the odds we’re going lower before the market can move on to new highs. First is the NYSE Advance / Decline line (NYAD). It never confirmed the last new highs and is now leading the market lower. This is structural shift that often means a larger than “normal” decline.

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Another indication that we’re likely going lower before we go higher is the S&P 500 Index Elder Impulse on a weekly chart. It is currently painting a red bar. A weekly close with a red bar generally results in lower prices in the week(s) to come.

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One more significant thing that happened this week is the percent of SPX stocks above their 200 day moving average fell below 60%. This usually results in a decent decline (maybe correction) in the market.

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Conclusion

I’m seeing good underlying support from my intermediate term core indicators, but warning signs that suggest we will likely go lower in the short term. My core indicators are showing enough strength that they won’t likely change our portfolio allocations (which are still 100% long) over the next few weeks so I expect to ride out any moderate volatility. If the market starts showing significant weakness I suspect we’ll get warning from my market risk indicator which would result in an aggressive hedge.

 

 
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