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That Was Quick

160701MarketHealth

Last week we got a market risk warning due to the surprise of the Brexit vote. This week, that warning has been cleared as market participants realize it will take a couple of years to sort out… so they can wait until then to panic. My core market health indicators, with the exception of trend, improved last week. The overall numbers are still soft, but positive enough to change the portfolio allocations to the following. Volatility Hedged portfolio: 100% long Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or the ETF SH) Long / Cash portfolio: 60% long and 40% cash One thing of note that happened over the past few weeks is the Dow Jones Transportation Average (DJTA) created a new secondary high near 8110. The Dow Jones Industrial Average (DJIA) also created a new secondary high near 18100. DJIA is above November 2015 secondary high, but DJTA is below all of its recent secondary highs. As a result, Dow

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Mixed Messages

160429spxPnF

The market is exhibiting behavior that we often see during times of indecision. Price is swinging in a large range and at the same time intermediate and long term indicators are giving mixed messages. Take a look at how compressed the the Y axis is on a point and figure chart for the S&P 500 Index (SPX). This clearly shows the sideways range of the past two years along with with multiple changes in the short to intermediate term trend (over the past year). The current trend is up and will stay that way as long as SPX stays above 2020… which coincidentally is about where the 200 day moving average is. The next set of mixed messages comes from a weekly chart of SPX. Weekly RSI is trying to turn down near normal bear market peak levels, while at the same time MACD is moving above levels associated with bear markets. Monthly momentum and MACD are mostly exhibiting bear market behavior. MACD is a little stronger than we normally

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Dow Theory Non-Confirmation

Published on April 15, 2016 by in Dow Theory, Featured
160415DowTheory

Yesterday the Dow Jones Industrial Average (DJIA) closed above its last secondary high point, however the Dow Jones Transportation Average (DJTA) is still about 4% away from its last secondary high. This creates a non-confirmation where one index is making new highs while the other is lagging. When a non-confirmation occurs it puts the current trend in doubt… kinda. As I’ve said before, most non-confirmations just don’t matter. They’re normal conditions during any trend so we have to wait for both averages to agree before drawing any conclusions. Until then the long term trend is still considered bearish. But, it’s time to start watching the transports closely. If they can surpass their last high it will indicate that a new bull market has begun (or that the bear call in February was a whip saw or false signal). Along with the non-confirmation that is inherently bullish my core market health indicators are improving rapidly. The measures of market trend and strength are improving quickly enough that one or both categories

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Dow Theory Update

Published on April 13, 2016 by in Dow Theory
160413DowTheory

The Dow Jones Industrial Average (DJIA) closed about 10 points below its last secondary high point today. The transports (DJTA) are still about 4% away from their last secondary high. If both indexes can close above those levels in the coming weeks the bear will be dead. If the bear market is going to continue I’d guess we’ll see a non-confirmation of the bear that looks something like DJIA closing above 17,918, but not reaching new highs. While at the same time DJTA won’t be able to make it above 8302. Keep an eye on DJIA and DJTA over the next few weeks because they’ll give clues to the long term trend. Another chart I’ve been watching is the S&P 500 Index (SPX) daily. It’s rallied back to its downtrend line. If it can close above that level for a few days then I suspect that we’re going on to new all time highs. Looking at a weekly chart of SPX, one could argue that we’re merely painting a bull

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Watch the Dip

160408DowTheory

It’s been almost eleven months since the Dow Jones Industrial Average (DJIA) has made a new high. It’s been over fifteen months since the Dow Jones Transportation Average (DJTA) has made a new high. But, DJIA is only about 5% away from its highs. This makes it difficult for many people to determine if we’re in a bull or a bear market. According to Dow Theory, we’re in a bear, but getting close to levels that would turn the bear to a bull. When that occurs it’s time to watch the dip. All we have to do is watch to see if the downtrend resumes in force or if we get a small consolidation that rallies and breaks above the last secondary highs in DJIA and DJTA. A break higher will turn the bear to a bull. While we wait for a resolution, the core portfolios are moderately hedged or have a small exposure to the market. The volatility hedged portfolio, that is much more aggressive than the core portfolios,

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Identifying the Long Term Trend

160318spxPnF

As most of you know, I believe the market is currently in a long term down trend. However, I’m starting to see things that put the bear market in doubt… which should be a really good sign that we’re still in a down trend — because bear market rallies create enough doubt to suck people in. Back to the point, take a look at the chart below. It is a point and figure chart of the S&P 500 Index (SPX). This chart shows an intermediate or short term up trend within the confines of a longer term downtrend. But a closer look at the short scale indicates a long term sideways range. It will take a break of the range to add clarity to the pattern. A daily chart of SPX has a fairly clear downtrend channel. This indicates a new bear market is underway. We have to consider the current rally as a bear market rally until the upper bound of the trend channel is broken. If that channel

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Is the Bear Market Over?

160306MarketRisk

On Friday my market risk indicator cleared its warning. Does that mean the bear market is over? I doubt it. I’ll show you why in several charts below, but lets start with a longer view of market risk indicator warnings. Take a look at the chart below and you’ll see that the indicator is prone to whipsaws. As I’ve mentioned many times before, the indicator generally warns at inflection points — right before the market resumes its uptrend or accelerates to the downside. It also often clears just as the market is peaking. Especially, when the market is entering a more volatile phase like late 2007 thru early 2008, then again in the summer of 2011. I suspect that’s what we’re seeing now… but because I can’t see the future I set my bias aside and follow the signals. Who knows, this recent signal could be followed by a huge rally like the cleared warning in 2012. Long story even longer, the indicator has a lot of whipsaws, but the

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Dow Theory Bear Market

Dow Theory Bear Market

The Dow Jones Industrial Average (DJIA) closed at 15,660 today (six points below the last secondary low). DJIA is now confirming the long term down trend with the Dow Jones Transportation Average (DJTA). With both indexes below their previous secondary lows we’re officially in a Dow Theory bear market. The expectation is that both indexes will continue to make lower lows for the next one to three years. There will be strong rallies during the process, but when the primary trend is down, rallies generally fail. In order to change the primary trend back to bullish, DJIA will need to surpass about 17,920 with DJTA confirming the trend by surpassing about 8302. Those targets will stay in place until they are surpassed or new secondary highs are created. A new secondary high would require a rally that lasts more than three weeks and retraces 33% to 66% of the decline from the November highs for the indexes. Conclusion Dow Theory has signaled that we’re in a bear market. It’s time

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Bear Market Signs

160201spxWeekly

Although Dow Theory hasn’t confirmed a bear market yet, a lot of other S&P 500 Index (SPX) indicators are starting to show bear market behavior. I’ve mentioned before that monthly MACD and Momentum are starting to look like we’re in a bear market. In addition, the long term timing indicator at Trade Followers (breadth between bullish and bearish stocks) is signalling that we’re in a long term down trend. Now it appears that weekly MACD and RSI for SPX are starting to show strong signs that we’re in a bear market. Notice on the chart below that during bear markets RSI spends most if its time below 50 with peaks in the 55 to 60 area. That has been the case for RSI since the May peak. MACD is also showing the same type of weak behavior. During short term rallies in long term down trends MACD is usually constrained by the zero line. The last rally barely moved MACD above zero and it is now well below that level.

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Missed it by That Much

Published on January 21, 2016 by in Dow Theory
160121DowTheory

During the day yesterday, the Dow Jones Industrial Average (DJIA) traded as low as 15,450. This was well below the last secondary low for DJIA at 15,666. Fortunately for the bulls, the market rebounded and closed a hundred points above the last secondary low. Remember, Dow Theory uses closing prices (not intra-day) so yesterday’s action didn’t break the long term bull trend. The bull market is still intact, but it’s on life support. The market is bouncing today so now we wait until the market turns down again… to see if 15,666 can hold again or is broken.

 
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