As I noted yesterday, my Market Risk Indicator is issuing a warning. As a result, the portfolio allocations change as follows. Long / Short portfolio: 50% long high beta stocks and 50% hedged with mid term volatility (VXZ) Long / Cash portfolio: 100% cash Volatility Hedged portfolio: 50% long and 50% hedged with mid term volatility (VXZ) As I mentioned last week, the bullish percent index is below 60% which significantly increases the risk of another 10% decline from the current level. My core measures of market health had the economy improving and moving above zero this week, while the core measures of risk fell below zero. Conclusion We have a market risk warning in place. It’s time to aggressively hedge until the current storm passes.
Just a heads up. My core measures of risk have gone negative and my Market Risk Indicator is warning. If this condition persists into Friday afternoon then we’ll be adding an aggressive hedge to the Volatility Hedged portfolio and the Long/Short portfolio (using mid term volatility). The Long/Cash portfolio allocation will go to 100% cash. I’ll do a full post tomorrow before the close.
Over the past week, my core market health indicators collapsed. They are all moving quickly toward zero. Most notably, is my core measures of risk. They are very close to going negative. In addition to my core measures, breadth measures are starting to warn as well. The bullish percent index (BPSPX), which tracks the percent of stocks in the S&P 500 Index (SPX) that have bullish point and figure charts, has fallen below 60%. When this occurs the odds of a 10% decline (from current levels) increases substantially. Especially if my market risk indicator signals. Currently, two of four components of that indicator are warning. However, the other two are a long way away from a signal. I suspect it would take a quick fall through 2100 on SPX to create a warning. Another breadth indicator that is warning is the percent of stocks in SPX that are below their 200 day moving average. It is also below 60%. I’m sure you’ve all noticed that small cap stocks have broken
Over the past week, my core market health indicators mostly strengthened as the market bounced around. It continues to look like the market wants to go higher, it just needs a reason. The bullish percent index (BPSPX) is still holding above 60%. As long as it stays that way the odds favor a mild decline over a 10% or more from here. If BPSPX falls below 60%, I suspect it will be as the S&P 500 Index (SPX) falls below 2100, which is a major support level. Conclusion Waiting and watching as core indicators strengthen. It looks like the market wants to go higher. But, the range between 2100 and 2200 on SPX represents significant support and resistance so a break should point the next intermediate term direction.
It’s looking like make or break time for the market. So far, it looks like we’re seeing normal consolidation with healthy market internals. But, we’re getting close to a point where the risk of a 10% correction rises substantially. Long time readers know that when the bullish percent index (BPSPX) gets below 60% the odds of a large decline rises. We’re getting close to that warning level. Looking at a daily closing price chart of the S&P 500 Index (SPX) it appears that we’re painting a bull flag. Once the consolidation is over, this pattern should resolve upward. One positive thing that indicates we may have seen the worst comes from support and resistance levels tweeted by traders on Twitter (from Trade Followers). Yesterday, SPX caught at the first support level near 2120 then rallied sharply. This goes into the plus column, but SPX is still pretty far above its 200 day moving average. I wouldn’t be surprised if the current rally fizzles and takes the market down to the
Over the past week, my core measures of market quality moved back above zero. During the same period my measures of market trend and strength surged higher as well. The strength in these indicators suggest that the market will rally into year end. Earning season could change the market’s opinion, but without major problems during the first few weeks I suspect we’ll be off to the races. The move in market quality changes the current core portfolio allocations as follows: Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or use the ETF SH) Volatility Hedged portfolio: 100% long (since 7/5/2016) Here is a chart that shows the core portfolio allocations over the past year. Green lines represent adding long exposure. Yellow is raising cash or adding hedges. Red is an aggressive hedge using mid term volatility. Another sign that market participants are expecting a year end rally comes from the ratio between the
Today at the close Dow Theory signaled a bull market is underway. Bull markets are expected to last from one to three years. The current signal comes after what I consider a bad bear market call in February. On a side note, almost all of my core market health indicators surged strongly higher this week. They are also indicating that the market is preparing for a year end rally. The most notable change is that my measures of market quality have now moved above zero. If that holds, the core portfolios will be adding more exposure and reducing hedges.
The Dow Jones Transportation Average (DJTA) is once again bumping up against its last secondary high. It has failed to surpass it on the last two occasions. If it can clear the 8110 level on a daily closing basis it will signal that we’re in a long term bull market. If that occurs, I’ll consider the bear market call from Dow Theory last February a bad signal that resulted in a whip saw. Although the last signal might be a bad one, Dow Theory has a long track record keeping us on the right side of the market for long term trends.
Over the past week, all of my core market health indicator strengthened. Most notably, my measures of the economy and market quality, which had been laggards, rebounded sharply. Their current trajectory will likely see one or both of those categories go positive next week if the market continues to show underlying strength. It’s looking like the consolidation we’ve seen for the past two months is about to end. Another indication that the consolidation is about to end comes from Trade Followers. Their measure of sentiment for the S&P 500 Index (SPX) is calculated from investor and traders live comments on the Twitter stream. When the trend of sentiment changes it often leads the market. Earlier this week this indicator broke a downtrend line that had been in place for almost three months.This indicates investors are getting comfortable with the market moving higher and should provide fuel for a run at new highs. You can see a current chart of Twitter sentiment for the stock market here. The site also has
Last week, I highlighted the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). In that post I mentioned that a move below its 20 week moving average usually means a choppy market as money moves out of large cap stocks and into mega caps. This week, the ratio recovered. That suggests that SPX will make another attempt at a new high. Keep an eye on this indicator because a move back below the line should signal a failure and suggest we’re headed back to a choppy market at the least. My core market health indicators bounced around a bit, but my measures of market strength and quality fell further. This isn’t a good sign during a small consolidation. I prefer to see them strengthen. Conclusion Weakness in my core indicators, but strength in the ratio between SPXEW and SPX. It feels like the market wants to make another attempt at new highs, but doesn’t have the technical underpinnings to succeed.