This past week has seen a significant increase in my stock market risk indicator components. Currently, two of the four components are warning, however, three components warned at times during the week. The fourth component still has a bit of room before creating a market risk signal. With the market so close to all time highs it is odd behavior to see market participants so skittish. The behavior I’m seeing in the indicator components is similar to the action during the dip in mid June 2011. This isn’t a prediction of any decline to come, merely a heads up to let you know that a warning could come quickly if the market continues to fall. Risk is rising, but we don’t have a warning yet so there is no change to the Volatility Hedged portfolio. It remains 100% long.
My core market health indicators are still suffering damage as the market dips. Most significantly, my measures of trend could go negative over the next few weeks if the market can’t sustain a rally. Another thing of note is that the quality category is getting close to oversold levels. This condition often results in at least a short term bounce. None of the health categories moved enough to change any portfolio allocations.
The market needs a rally or I’m afraid we’re going much lower. Risk is rising, measures of trend are close to going negative, but oversold conditions in market quality give a bit of hope for at least a short term bounce. I’ll be watching my market risk indicator components closely whether we get a bounce or not.