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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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Bullish Percent Index Mixed

As with many of the internal indicators for the market over the past several weeks the Bullish Percent Index of the S&P 500 Index is showing some indecision.  This index is one of our favorite broad market breadth indicators because it uses point and figure charts to determine if a stock is in an uptrend or down trend.  This method takes much of the ambiguity out of technical analysis. Currently the BPSPX is showing good strength as the market has rallied out of the June bottom.  It is increasing in value each week as more stocks enter up trends.  This is normal behavior for a sustainable rally that we’d like to see continue.  On a daily basis, the BPSPX has been trading sideways for the past several days, which is also normal for a healthy market that is consolidating.  We don’t want to see the daily turn down for any extended period of time.   One thing that concerns us is the negative divergence of the BPSPX with the value

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