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
HDGE plummeted 3.38% today on heavy volume. In the past, this type of action has signaled the beginning of a multi-week rally in stocks. We’re also seeing underlying strength in our core indicators that could expose us more to the market if this rally continues. We’re encouraged by the internals even though the past two sessions showed weakness in the last hour of the day.
We’re watching emerging markets closely here looking for signs that the world economy is strengthening. EEM is a good instrument to watch for clues to the economy because it is heavily weighted to financials, information technology (chips), energy, and materials. These are all sectors that do well when the economy is growing. In addition, EEM is weighted to Asia and Brazil, two areas that are sensitive to world economic conditions. EEM has been in a down trend for well over a year even as SPX has worked its way higher. In March as SPX was breaking above the 2011 highs, EEM tested its down trend line. It was a failure that signaled the world economy was weakening. It appears that EEM will test the down trend line again if SPX makes new highs above 1422. We’re watching EEM closely because a break above the trend line would be one sign the economy has some underlying strength. Another failure or non confirmation by EEM would point to a continued stall in
Our Twitter Sentiment Indicator for the S&P 500 Index continues to compress and paint a triangle pattern as the market moves higher. Based on the smoothed average of sentiment, twitter users still don’t quite believe this rally. It can’t get above zero and is painting lower highs even as SPX is painting higher highs. On the positive side sentiment is painting higher lows as well. We’ll have to see if the market follows the direction of sentiment once the triangle pattern breaks to the upside or down side. Our Twitter Support and Resistance numbers for SPX are starting to show some life to the upside again. People are talking about 1500, the old highs at 1422, and 1400. On the down side 1267 and 1300 are being mentioned, but less frequently. There continues to be clusters of people tweeting the recent lows around 1330.
Our core indicators improved enough today to remove a portion of our hedges. We added exposure by removing some of our hedge and using the money to add to our long portfolio. We are now 60% long and 40% short (using a short of the S&P 500 Index). The current hedge ratio is .67. Several of our core indicators are lagging so it’ll probably be more than a couple of weeks before we add additional exposure. But as always, we’ll keep you updated with any changes. The green lines on the chart below represent us adding exposure to the long portion of our portfolio. The yellow lines represent adding hedges. The red line represents aggressive hedging.
Our core indicators strengthened enough today to increase our exposure to the market to 20%. We’re 80% cash and 20% long in our Long/Cash strategy. We’re dipping our toes in the water as the underlying strength in the market could propel the market higher. The yellow lines on the chart represent raising cash and the green lines on the chart represent buying stocks (by lowering our cash position).
In an up trending market HDGE an actively managed bear fund, and SH an inverse of the S&P 500, tend to move together and paint similar chart patterns. HDGE, however, under performs in an up trending market. During the rally from last October’s low to early February HDGE was down roughly 30% while SH was down only about 21%. In mid February as the S&P 500 was continuing to rally, HDGE started to out perform SH. Both bear positions were still falling, however HDGE slowed it’s decline. Then at the first of April as the market began to fall both securities started to rise. The small rally into the the first of May brought the arrival of big divergence between HDGE and SH that has continued until today. This isn’t a good sign for the markets as it signals to us that market participants are separating the good stocks from the bad. It is often one of the first signs of a weakening market so we’re watching this carefully. What makes