We saw continuing improvement in our core market indicators this week allowing us to add exposure to the market in our Long / Cash hedge strategy. We are now 60% long and 40% cash. Most of our measures of market strength, trend, and risk are positive, while most of our measures of the economy and quality are lagging. This is the point during strong bear market rallies where we often see whip saws. During the 2000 to 2002 bear market this level of exposure was often associated with a market peak within a few weeks. However, during normal up trends this level of exposure generally signals a continuation of the up trend. In the chart above green lines are adding exposure and yellow lines are raising cash.
I keep seeing talk about a double and triple top forming in the S&P 500. These market prognosticators are foretelling doom for the stock market because it is approaching a double top. They often cite all the problems in Europe, a slowing economy, and even the US debt problems as to why the market is going to fail right here. Although I agree that all of the fore mentioned items are problems, I don’t agree that reaching a previous price point will bring those problems to a crisis point. Double tops (and double bottoms) are simply places of short term support or resistance. I’m always amazed to hear technicians pointing to a double top as a great place to get short over the intermediate term. If you’re not eating cat then a cursory glance at a medium to long term chart will tell you that double tops and bottoms should only be used for a trade with the trend or for a very short term trade against the trend. Take
It’s interesting to see the difference in sentiment for Apple and the S&P 500 index. Both the index and AAPL had significant corrections from March to late May or early June. The corrections were followed by a retracement that has brought them both back to within a percent of the previous highs. However, that’s where the similarities end. Take a look at the chart of AAPL and you’ll see that Twitter sentiment continues to improve as it moves higher. Even the few sharp sell offs have barely taken the sentiment indicator negative. Meanwhile Twitter sentiment for SPX has exhibited the exact opposite behavior. It has had a hard time getting above the zero line even though it has several peaks above peak and valleys above valley. Right now sentiment for SPX is breaking down hard even though the market is merely consolidating above 1400. It appears that market participants think AAPL will break out to the upside while SPX is a good short at these
Our smoothed Twitter Sentiment Indicator broke down from a triangle pattern today. Levels this low on the smoothed average haven’t been seen since the June lows. We’ll be watching the market over the next few days to see if it indicates selling pressure or too much bearish sentiment.
One of the less frequent and lesser known patterns in Dow Theory is a “line”. Robert Rhea defines a line as, “A price movement extending two to three weeks or longer, during which period the price variation of both averages move within a range of approximately five percent. “ He goes on to state that the narrow price movement indicates either accumulation or distribution. When a line is broken to the upside the pattern is most likely accumulation. When a line is broken to the down side the pattern indicates distribution. At the first of the year the Dow Jones Transports entered a 5% trading range that lasted over 4 months. The Dow Jones Industrials traded in a narrow range for 3 months. On May 15th, 2012 the industrial average broke down from the line and was confirmed by the transport average on 5/17. William Peter Hamilton believed that the breaking of a line indicated a change in the general market direction. This change in trend could be of either
Sentiment on Twitter for the S&P 500 Index continues to compress. The smoothed average of sentiment is reaching the apex of a triangle pattern. We’ll be watching closely to see if a break of the triangle coincides with a clear direction for the market. Overall sentiment for SPX continues to be negative with most tweets calling for a top or at least some backing and filling before moving higher. So far the rally out of the June lows just hasn’t been believed by market participants. An 11% rally hasn’t been enough to garner conviction from the majority of traders. On the positive side our Twitter Support and Resistance numbers continue to climb with several more calls for 1420 and 1500. Fewer and fewer tweets have calls for the recent lows or the June bottom. Will the calls for higher prices win or will it be the negative sentiment brought about by 1400 on SPX?
Our core market indicators continued to improve this week allowing us to increase our long exposure and reduce our hedge. We are currently 70% long and 30% short. The increase was fairly rapid as it appears more market participants are joining this rally. The long portion of the portfolio consists of stocks we want to own due to many factors including; individual company growth prospects, value, and beta. Our current short is simply a short of the S&P 500 Index. The current hedge ratio is .43. The green lines on the chart above represent us adding longs to our portfolio and reducing shorts. The yellow lines represent increasing short positions and decreasing our portfolio of long stocks. The red line represents aggressive hedging with instruments like puts, volatility, or actively managed short funds.
Our internal indicators of core market strength improved enough today to allow us to add more exposure to the market. We are now 40% long and 60% cash. In the following weeks we’ll continue to add exposure if our core market indicators continue to rise. We’ll raise cash if market conditions deteriorate. On the chart below our purchases of additional longs are represented by the green lines. The yellow lines represent selling stock and raising cash.
Over the last two months as the S&P 500 index has been moving steadily higher, financial stocks have put on a stealth rally. Little noticed has been the underlying strength of Twitter sentiment for C, GS, and BAC. While sentiment for SPX pokes above zero only to fall again, sentiment for the banks can’t be kept down. It’ll dip for a day or two below zero only to pop right back up. In the last couple of weeks sentiment has risen sharply as investors think the bottom is in for financials. The chart of Goldman Sachs below is representative of the most of the other bank stocks. It has rallied about 15% off the recent lows with Twitter sentiment skyrocketing. It’s too early to tell if the .74 reading on sentiment delivered on 8/8/2012 represents an over bought condition since 8/9 brought a 1% increase in the stock, but sentiment still remained high. I would have expected more negative tweets as GS approached its 200 day moving average and
The SPX is bumping up against 1400 which is a good place to pause and catch its breath. Our Twitter support and resistance levels (all the red dots) put 1400 as a target with some influence. It has been mentioned repeatedly on Twitter so it’s a logical place for people to take profits or adjust their portfolio allocations. If this uptrend is to continue then a consolidation at or near 1400 for several days would be healthy. One indication that we’ll stall at these levels is our Twitter Sentiment Indicator (top panel). It fell sharply today even as the market broke even. Previous occasions of sentiment weakness when SPX was making new short term highs has brought 3 to 5 days of selling. If sentiment improves while the market consolidates we should see a continuation of the up trend. Once 1400 is cleared convincingly then 1422 will be the next logical level to consolidate. However, not too many people are talking about that level anymore. It was mentioned much more