Over the past week we saw improvement in almost all of the market health indicators that we track allowing us to move to a 100% long position in our hedging strategies. Our measures of market quality improved slightly, market strength improved substantially, and our trend indicators finally confirmed. Our measures of the economy turned positive, but are still on the weak side causing concern that the positive signal may not last long. Our measures of risk remained positive, but flat, even as the market moved higher. Positive Our Twitter sentiment indicator for the S&P 500 Index turned positive on a short term basis. In fact, it had the highest reading to date on a daily basis. This reading signified confirmation of the close on SPX above 1422. Our smoothed sentiment indicator has strengthened over the past three weeks, but is still painting a series of lower highs for the entire rally out of the June lows. This comes as a result of many market participants tweeting over
Our Long/Short Hedge strategy is now 100% net long. The break out above 1422 in the S&P 500 Index brought with it strength in enough of our indicators to get us fully invested on the long side of the market. Our long portfolio consists of stocks that we want to own over the long run. The current situation in our indicators has occurred several times over the past 12 years. Almost all of these instances were followed by multi-week (or month) rallies. We did have one occurrence in May of 2006 that was reversed one week later to an aggressively hedged position and resulted in a whip saw. Here are some examples of where we were 100% exposed to the market after coming out of a correction. July 2003, December 2005, May 2009, November 2010, and January 2012. We can’t see the future so we don’t know if this will be a good signal, but we follow where the market leads. On the chart above the green lines indicate adding
Our Long/Cash Hedge strategy is now 100% long stocks. For an explanation of current conditions see our Long Short Hedge Strategy update. On the chart below the green lines represent adding long exposure. The yellow lines represent raising cash.
Three weeks ago amid the frenzy surrounding the bearish implications of the newly formed double top we posted that double tops are meaningless to intermediate term investors. Our point was that trends tend to continue so a double top in an uptrend is broken to the up side much more often than price reversing and starting a new trend. Price often stalls at previous price points and create opportunities for short term trades, but an intermediate or long term investor should use those dips to accumulate more shares. The price action today signaled a shift in expectations among market participants. While most people were uncertain over the past month as evidenced by the sideways action in SPX, today showed some conviction buying. This action in SPX and Nasdaq is encouraging for the bulls. We still don’t have confirmation from DJIA or RUT but it should follow shortly if the market continues upward. We want to see the Russell 2000 confirm, but aren’t too concerned about the Dow Industrials. The lag
A few weeks ago we highlighted Nasdaq new highs as one of the things that had us concerned that this up trend is in the late stages (rather than a new long term up trend off the June lows). We like to watch several measures of market health to get a feel for where the S&P 500 Index or Nasdaq is headed next. Another sign that we could be near the end of this up trend is the rotation to value stocks that started in April of this year. In the chart below we show Berkshire Hathaway (BRKB) as a proxy for value stocks compared to the S&P 500 Index (SPX). Notice that the small sell off in April and the subsequent rally in May created a divergence between BRKB and SPX. BRKB made new highs and SPX didn’t confirm. The next leg down in SPX created a decent size correction, however, BRKB diverged again by not making a lower low. This action showed money moving out of stocks in
At the end of July we posted our concern about the Russell 2000 not confirming the uptrend in the S&P 500 Index. We mentioned that we’d like to see RUT close above 818. Today we got that close. We view the strength over the past two weeks in RUT vs. SPX as confirmation of the up trend. Our view was helped by the reversal off the lows this morning by all of the major indexes. Our Twitter Sentiment indicator for RUT (show in the top panel above) is also showing some encouraging signs as the smoothed indicator spent the last several days above zero. It appears that smoothed sentiment is forming a higher high which is confirming the move in the index. A few more days above 818 will add more evidence that we should be moving high enough on SPX to break out above the recent range. For now it is one more thing making us comfortable with our 60% long exposure in our
While Ben Bernanke and previous Federal Reserve chairmen have chosen Jackson Hole for their annual retreat I prefer to visit Lake Tahoe in August or September. The weather is always beautiful this time of year providing a myriad of different shades of blue in the water, sky, and the mountains that surround the lake. Sorry for the poor picture quality…I used my phone for the pictures…also sorry for the girl that kept stepping in front of me every time I broke out the phone. The view from the summit on Highway 50 takes my breath away every time I make the drive. If you’re ever in San Francisco, Napa Valley, or Silicon Valley you should plan at least one night on the South Shore of Lake Tahoe. The drive is just over 3 hours from the bay area and well worth the trip.
During the last few weeks while price on the S&P 500 Index consolidated we saw improvements in all of our indicators except for our Market Risk Indicator. None of our indicators improved enough to change the position in our portfolio, leaving us at 60% net long. Positive Our economic indicators strengthened slightly this week. They are still trying to create a bottom. As we mentioned last week, previous attempts over the last 18 months have failed so we’re crossing our fingers that this time will be different. Measures of market quality are still positive and moving up a small amount. Most of our market strength indicators are positive and improving significantly. This makes us feel comfortable with our current positions going into September. Mixed Our Twitter Sentiment indicator for the S&P 500 Index drifted lower all week as the market consolidated. We prefer to see it strengthen during consolidations, but are encouraged that it isn’t deteriorating rapidly. Our smoothed sentiment indicator still has a pattern of declining tops over
Precious metals are once again attempting to form a bottom. Both gold and silver have traded sideways to up for the last two or three months and have had Twitter sentiment increase during the move. It is encouraging to see that sentiment got oversold even as price formed higher lows early in the bottoming process. Many tweets were full of predictions for lower lows and a continuation of the down trend (hopefully shaking out weak holders). For SLV specifically, 26 was a critical level that traders believed would not hold. The next touch on the lows or the newly established up trend lines was met with significantly higher sentiment readings as investors started to believe that the danger was past. SLV has broken a short term down trend line while GLD has broken out of a short term triangle pattern. Both ETFs had sentiment confirm the break to the upside. Most important to us is that GLD and gold stocks have risen to meet a long term down trend
Here’s a quick update on Twitter sentiment, support and resistance ahead of Bernanke’s Jackson Hole speech. We’re seeing sentiment hold up this week even as the market chops around. This is in stark contrast to the huge level of negative sentiment we saw when the S&P 500 Index was consolidating just above 1400 earlier this month. So we have more positive sentiment ahead of Friday. The change comes as people are optimistic about the news coming from Wyoming (for those of you in New York and Chicago that don’t cross the Mississippi unless you’re going to Los Angeles or Hawaii…Wyoming is a western state with a small town called Jackson Hole). Many tweets are also softening their stance that 1425 can’t be broken. The support and resistance numbers are coming in a tight range between 1390 and 1425. If one of those levels are broken we could see 1500 to 1550 on the upside and 1300 to 1260 on the down side. We do have several outliers calling for 666