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Breadth Checkup

141008spxew

I’ve stated several times over the past year that breadth must deteriorate for the market to fall substantially. In mid July I pointed out the weakness in the ratio between the S&P 500 index (SPX) and SPX equal weighted (SPXEW). When it falls below its 20 week moving average it is often a sign of choppy markets to come. The market rallied after SPXEW’s initial failure, but during that rally SPXEW only made it back to the underside of its 20 week moving average then turned back over again taking the market with it. This is a great example of how tops are a process, not a single event. I’m not suggesting that we’ve seen the top, but wanted to point out how much time it takes for one indicator after another to weaken, then fail, before a top is actually in place. Tops usually take several months and are often fraught with whipsaws in our indicators (and portfolio allocations) before the weight of selling causes a severe down turn.

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Due for a Bounce

141001nyad

Our core measures of risk are very close to going negative. If they make it below zero by Friday we’ll be raising more cash and/or adding a larger hedge. Our measures of market quality and strength are also falling, but they’ve got a bit more room before going negative. With that said, the market is due for a bounce so conditions could change quickly.  I’ll do a post on Friday well before the close with any changes to our portfolio allocations. This decline is different in nature than the previous two this year in that it appears to be more about portfolio positioning for the longer term than fear (of any kind). The most sensitive components of our Market Risk Indicator aren’t being severely impacted while the slow moving components have rounded out tops and moved below zero. Our core measures of risk (that are completely independent of our Market Risk Indicator) have mostly been diverging with price since the end of last year and are now close to going

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Watch the Bounce

140810vixRvxv

It’s looking like the market is ready for a bounce. The nature of any bounce will tell us whether we should expect new highs or if the rally will fail. Here are some of the critical charts I’ll be watching over the next week or two. A chart I show often when the market is starting a move lower is the ratio between near term volatility (VIX) and mid term volatility (VXV). Spikes in this ratio show immediate fear is greater than longer term fear. They are usually associated with an event or a sudden recognition of danger by many market participants. When the market bounces out of a short term low this ratio can help us determine if near term fear is subsiding or lingering. Over the next few weeks we want to see it fall below .9 to give the all clear signal. If it can’t move below that level the odds favor more downside ahead. This indicator couldn’t clear the warning two weeks ago and signaled that

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Breadth the Indicator to Watch

Published on August 3, 2014 by in Market Comments
140801spxew

Over the course of this year I’ve been consistent in repeating that I didn’t think the market could suffer a correction unless breadth broke down. Even though many other indicators have warned on and off this year, breadth has held strong. This week the picture changed a bit. First let’s look at the breadth indicator that warned first. The ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX) warned in early July when it broke below its 20 week moving average. It turned back up this week but as a result of large caps selling faster than small caps. When a ratio turns up I like it to result from upturns in the numerator and denominator so this upturn isn’t exactly positive. The NYSE Advance/Decline line (NYAD) is currently experiencing its largest decline in a year. This indicator shows that since the first of July there has been broad based selling as more stocks are declining than advancing. Other declines in the market this year

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Time For A Direction

140510spx

Over the next couple of weeks the market will be forced to choose a direction. The S&P 500 Index (SPX) is being squeezed between its 50 day moving average near 1860 and its last peak near 1900.  Each day that goes by the 50 dma will move higher and put more pressure on the index. The pressure will force SPX to either move higher or fail at its 50 dma so we should get a direction over the next few weeks. Coincidentally, support and resistance levels gleaned from the Twitter stream are compressing in  the same range. There are a few scattered tweets down near 1850, but the majority are near 1860.  Above the market the most tweeted level is near 1900. This tight range suggests that traders are watching closely for a break before committing themselves. Quantified messages from the StockTwits community issued a consolidation warning for SPX Friday at the close. Please note, this isn’t a prediction that the market will move lower, merely warning that sentiment and

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Make or Break Time

By almost all the measures I track it’s make or break time for the market.  I’m seeing a pattern in both core and ancillary indicators that has often marked lows in the market over the past few years.  Each time our indicators were close to signalling an extreme warning the market promptly turned back up and resumed the rally out of the 2009 lows. Over the longer term when our indicators have reached these levels the market rallied 35% of the time and had an extended decline or choppy period 65% of the time.  As you know, I can’t see the future so all we do is go with the odds.  As a result, our core portfolios raised cash and/or added a hedge yesterday.  Here are some highlights of things I’m seeing that makes me cautious. The ratio between near term volatility (VIX) and 3-Month volatility (VXV) is currently rising as a result of both VIX and VXV moving up.  This is a condition that has only occurred a few

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Rotation Without Fear

Over the past week the rotation out of the most loved and momentum stocks into value stocks continued. The rotation is causing internal damage to our core indicators, but our measures of risk aren’t showing any fear.  This paints a picture of market participants simply taking profit on the stocks in their portfolios that had the largest gains over the past year.  Any fear appears to be limited to the high flying stocks, not the market as a whole…yet.  I’m seeing a lot of warning signs which suggest caution, but not aggressive action. The percent of stocks in the S&P 500 Index above their 200 day moving average has recovered from its early February dip and is holding steady near the 80% level.  However, a look at individual charts shows many stocks painting bearish flag patterns just above their 200 day moving average.  General Electric (GE) is a good example. The number of new highs on NYSE diverging from the market shows that a significant number of individual stocks (like

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Stock Above 200 Day Moving Average Give Warning

Stocks above 200 day moving average

Just a quick note today.  The percent of stocks in the S&P 500 Index (SPX) above their 200 day moving average broke below a critical point.  Over the past several years once more than about 40% of stocks break below their 200 day moving average the market starts to accelerate downward.  This is usually a result of traders finding many more shorting opportunities.  So the next bounce in the market should be watched carefully to see if this indicator can recover.  If it doesn’t it means that traders are shorting as stocks rally back to touch the underside of their 200 day moving average. In addition, the Bullish Percent Index for SPX is starting to break down too.  So not only are stocks breaking their 200 day moving average, many stocks are also breaking bullish chart patterns.  Once the scales get tipped the market generally moves fairly quickly downward.  

 
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Market Health Indicators Similar to November 2010

The correction that began on 9/14/2012 has brought with it some surprisingly similar readings on our market health and risk indicators as the correction that occurred during November of 2010.  What makes it eerie is that the November 2010 correction coincided with the QE2 official announcement.  Now we’re seeing a sell the news event coincide with the QEternity announcement. Just for fun I’ve posted a chart of the S&P 500 Bullish Percent Index (BPSPX) with illustrations of the similarities.  Notice first the divergence from the peak of April 2010 to the peak in November 2010.  It looks very similar to the current divergence in that; it sprang from an oversold condition, followed by a strong rally, which culminated in a final burst upward, caused by a Federal Reserve Quantitative Easing announcement.  Even the levels in which the BPSPX reached each time are similar.  This is somewhat encouraging since the current BPSPX level gives the market room for one more leg higher before becoming overbought. In addition, we’re now seeing momentum

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Active Bear Outperforming Short of S&P 500

Over the past few weeks we’ve observed the Active Bear ETF (HDGE) outperform a short of the S&P 500 Index (SH).  The last time we saw this same behavior starting was in late February and early March of this year.  That time period ended up being the last leg in a market rally before an 11% correction.  Money flowing out of weak stocks is something we often see as a rally nears a top. This isn’t something that is concerning in itself as the natural progression of most rallies see breadth indicators diverging from price as the rally moves higher.  The problem we have now is volatility rising with weak stocks getting weaker.  The combination of a thinning market and rising volatility often signals the start of a larger correction. When volatility stays low and actively managed bear funds like HDGE (or weak stocks) begin to fall rapidly we’re not generally concerned as it usually simply shows money flowing out of weak holdings and into stocks that have performed well

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