My core market health indicators are bouncing around as the market consolidates in a sideways pattern. This is healthy behavior and should resolve with another leg upward.
Jump in Market Health
Last week, I said that we’ve got everything we need for the next leg of this bull market. This week we’re getting confirmation of the rally with all of my core market health indicators jumping substantially. Some of them are starting to get into overbought territory, but when this happens it often fuels the rally for several weeks before it ends. Enjoy the ride.
This Should Be It
Over the past week, my core market health indicators mostly improved. Most significant is that my measures of market strength have now moved above zero. This changes the core portfolio allocations as follows: Long / Cash portfolio: 100% long Long / Short portfolio: 100% long high beta stocks Volatility Hedged portfolio: 100% long since 11/11/2016 Another thing of note is that we’ve been seeing broad based buying of the stocks in the S&P 500 Index (SPX) again. If the ratio between the SPX Equal Weighted Index (SPXEW) and SPX can get back above its 20 week moving average it will be a very healthy sign. Since the first of the year, investors have favored mega cap stocks. We want to see the smaller stocks in SPX rallying faster than the mega caps as it will indicate broad based buying and increased tolerance for risk. Add to that, SPX looks like it’s now got a clear break above 2500 and we’ve got the recipe for a rally. Conclusion It looks
No Changes
Just a quick update this week. Most of my core indicators improved, but no changes to the core portfolio allocations. My measures of market strength are still negative, but are just a whisper away from going positive. I suspect to see that happen in the next week or two.
Get Ready For A Breakout
Last week, I said you should get ready for a rally. This week my core market health indicators are telling us to get ready for a breakout above 2500 on the S&P 500 Index (SPX). Most of them improved and various measures of breath also improved. One breadth indicator that I’m watching closely is the percent of SPX stocks that are above their 200 day moving average. There are still about 32% of these stocks below their 200 dma. If SPX breaks above 2500 I expect this measure to rise quickly as money managers look for value as the market rallies.
Get Ready
Over the past two weeks, my market health indicators have bounced around a bit and while doing it have been compressing near the zero line. When this happens, an strong move often follows. At the moment, the odds favor the bulls. Get ready for a rally.
No Changes
Just a quick note this week. No changes to the portfolio allocations. Most of my core indicators improved, which bodes well for this being a temporary dip rather than a long term top.
Damage Done
Over the past week, quite a lot of damage was done to my core market health indicators. Two of the categories are at risk of going negative if the market can’t rally next week. Most significant is my core measures of risk. They fell substantially over the past two weeks. This means that risk from core market internals is rising. Meanwhile, the most sensitive components of my market risk indicator aren’t showing the same type of warning. They’re still in the very healthy range. This indicates that risk in the market at this moment is from core market internals and not investor perception of risk or an event. If my core market risk indicators warn without significant movement toward a warning from my market risk indicator, it will be an unusual occurrence for a longer term top. Other times where this condition has happened resulted in short to intermediate term dips during a longer term bull market. Here are some dates: Mid 2004, spring 2005, late 2005, and early 2006 thru August
Weakness Without Much Fear
Over the past week, most of my core market health indicators fell. Most notably, my measures of market strength went negative. This changes the core portfolio allocations (below). Another thing that was interesting this week is that the fear everyone is talking about isn’t showing up in my Market Risk Indicator yet. The most sensitive components of that indicator think the saber rattling this week is a non-event event. That’s not to say a negative risk reaction won’t materialize, but until it does we have to operate under the assumption that this event will quickly fade as a market moving issue. The new portfolio allocations are as follows: Long / Short Hedged portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or use the ETF with symbol SH) Long / Cash portfolio: 80% long and 20% cash Volatility Hedged portfolio: 100% long (Since 11/11/2016) One thing you can keep an eye on is the bullish percent index (BPSPX). It is still a good distance above my
Still Positive
Over the past week, my core market health indicators bounced around, but all still held positive readings. I expect we’ll continue to see some chop, but it should resolve higher.
Market Risk Falling
Volatility Hedged Portfolio
Long / Short Hedge Portfolio
Long / Cash Portfolio
