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Core Indicators Healthy But Risk Rising

Over the past week the market has dipped a bit, but for the most part my core market health indicators have held steady. The one exception is my measures of risk. They have risen a bit and once again two of the four components of my market risk indicator are warning. The other two are a long way away so at the moment this appears to be just another short term dip in a long term uptrend. All of our portfolios are still 100% long.

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There’s been a lot of talk about the transports (DJTA) this week and the implications of their downtrend. If you look at the decline in a longer term context you can see that DJTA’s downtrend has only retraced about 20% of the rally out of its last secondary low. A “normal” decline in a bull market can decline more than 50% or even 67% of a move from a secondary low and still be healthy. With the industrials (DJIA) only a few percent away from all time highs Dow Theory is still confirming a long term bullish trend. I’ll need to see a decline in both indexes that are large enough to create new secondary lows before getting concerned about the long term trend.

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Elder Impulse for the S&P 500 Index weekly (SPX) is currently painting a red bar. That usually results in a few weeks of chop so don’t be surprised if we have more short term weakness.

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The one thing I’m seeing that suggests we may be getting closer to a decent sized dip is the percent of stocks in SPX that are above their 200 day moving average. It’s back below the 60% level. When various measures of breadth get weak the odds increase for a large decline.

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Conclusion

The long term trend is still up, most market internals are healthy, but I’m seeing signs that short term weakness is ahead. If we get a signal from my market risk indicator the odds will increase that we’ll finally see a 10% decline.

 
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