Once again our core measures of risk are negative. They’ve been there all week long. I suspect that it will take a close above 2050 on the S&P 500 Index (SPX) by Friday to get the category positive. That’s about the point where SPX has been when the risk measures flip. If they are negative on Friday the Long / Cash portfolios will go 100% to cash. The hedged (Long / Short) portfolio will be 50% long high beta stocks and 50% short SPX. Our market risk indicator has three of four components warning at the moment. The fourth component continues to slowly fall, but hasn’t gone negative yet. The volatility hedge is still 100% long and will stay that way unless the fourth component falls by the end of the week. One thing I’m seeing is a lot of mixed signals…I’ll post more about them on Friday, but here are a few examples. NYAD advance / declines are acting well, but the percent of stocks above their 200 day
The last dip in the market caused some damage to the psyche of market participants. So much so that they are exhibiting signs of reducing risk in a variety of ways. Here are three examples. First is high quality bonds (LQD) against junk bonds (JNK). The damage done to junk bonds in July and October isn’t being repaired. People are shying away from junk. Which means they’re starting to get worried about cash flow and the ability to repay debt by middling companies. I’d like to see JNK start to mirror LQD again to give an all clear signal. Next is high beta stocks (SPHB) against low volatility stocks (SPLV). The October sell off did a lot of damage to high beta stocks that was largely recovered, but low volatility stocks held up and have sped to higher highs. This indicates some rotation to safety during the last rally. A move to higher highs by SPHB will be the first step in repairing this relationship. Another indication of reduction of
In late September I showed a chart that I use for general clues about the market. It compares a short of the S&P 500 Index (SH), an actively managed short fund (HDGE), and mid-term volatility (VXZ). In that post I mentioned that even though SH wasn’t showing any concern, HDGE and VXZ were. HDGE was telling us that traders were shorting stocks and their shorts were working. VXZ was telling us that investors were getting concerned about performance of the market going into year end. That same chart is now telling me that this bounce is merely short covering by traders so far. HDGE is falling while SH is still rising. This indicates the worst stocks are being bought during this dip while big caps (S&P 500 Index – SPX) are still being sold. In addition, mid-term volatility (VXZ) is still holding up which tells us that investors are still worried about a decline going into year end. I’m seeing the same condition expressed by traders and investors on Twitter.
Our measures of trend have been bouncing back and forth across the zero line this week and are currently negative. If they are still negative on Friday we’ll be raising more cash and/or adding a larger hedge before the week ends. Here are some of the things I’m watching at the moment. The actively managed short ETF HDGE is currently rising even though a simple short of the S&P 500 Index (SH) is trending lower. This indicates that shorting selected stocks is starting to work. This often happens before the general market falls. In addition, mid term volatility (VXZ) is rising as well. This indicates that investors are getting nervous going into the end of the year. Small cap stocks (IWM) broke below the triangle I’ve been watching with an associated break in momentum from traders on Twitter. The negative gap in breadth between small and large cap stocks continues to grow. While everyone is watching small cap stocks I’m seeing deterioration in large caps under the cover of new
Today didn’t do much damage to our core indicators, however, two of the four components of our Market Risk Indicator are warning. A third component is very close to warning and it won’t take much to trigger it. The fourth component is further away and will take a sharp down day like today to make it warn. I just wanted to give you warning that there may be changes to the core portfolios tomorrow (Friday). I’ll update the site and post to Twitter and StockTwits by 3 PM Eastern what our allocations will be going into the close. IF the risk indicator signals the hedged portfolio will go 50% long and use the other 50% to hedge with a mid term or dynamic volatility instrument like (VXZ, XVZ, or VIXM). If you don’t like volatility ETFs then a managed short fund like HDGE is an alternative. For those of you who use put options the strategy would be to stay 100% long, but cover your complete portfolio with intermediate term
The Active Bear ETF (HDGE) is rising, a short of the S&P 500 Index is falling (SPX), and mid term volatility (VXZ) is falling. It tells a simple story. Shorts are working, but not affecting the market, nor causing any fear.
Although I don’t see very many near term concerns in the market, we are seeing some cautiousness by longer term investors. One of the things I like to watch is a comparison between a S&P 500 short (SH), an actively managed bear fund (HDGE), and mid term volatility (VXZ). As the market started to decline at the first of May we saw a slight rise in HDGE which signaled that people were starting to short the market, but were being cautious in pressing them. At the same time VXZ started to rise much more rapidly, which indicated that investors who hedge their portfolios with futures or options further out on the curve were adding protection. VXZ rising shows investors placing bets that the market will become volatile sometime over the next four to seven months. The taper talk by Bernanke caused another surge higher in VXZ as people started targeting September to December as the beginning of the end of QE. Once other Fed officials started making dovish comments much
Every weekend I review the charts of the 50 most active stocks on Twitter then place them into categories. This past weekend I noticed that the number of stocks in a confirmed downtrend is growing. In addition, the number of stocks in a confirmed up trend is growing too. The number of stocks that are unclear, showing a divergence, or indicating that a counter trend move is falling. This is somewhat disconcerting for the longer term because it suggests that market participants are piling on to the strong stocks and ignoring the weak stocks. This type of divergence is often one of the first signs of a thinning market. The value players have stopped trying to pick up stocks in down trends while the momentum players are buying anything in an up trend. Our concern is that we may be in the early stages of a blow off top. We want to see this situation resolve with more interest in the weak stocks and also some divergences in sentiment for
Since mid April we’ve seen a bit of bottom fishing among the 50 most active stocks on Twitter. We currently have four stocks with counter trend bounce signals in place. Each of those stocks have rallied to moving averages (50 and 200 day) and also down sloping trend lines. This is a point where people who are bearish on the stocks should be selling them short. This creates a battle between the longer term investors who are picking up the stocks as they fall and bears who sell every bounce off the underside of moving averages. By watching these battles we can learn about the underlying strength of the general market. If the current rally is near a turning point we would expect to see more short selling in the market. In addition, the stocks that are being sold should fall and continue their long term down trends. For a general view we like to compare a short of the S&P 500 Index (SH) against an actively managed bear fund
Today the S&P 500 Index (SPX) broke to new all time highs and added over 19 points. It did so with a positive initiation thrust from daily Twitter sentiment. The intensity of tweets was very high as well. This is evidence that traders and investors on Twitter were hailing the move. Unlike other sentiment indicators, extreme bullish readings at new highs on Twitter sentiment confirm the move higher and signal that the market is likely to continue upwards. Basically, today showed that people were excited about the new highs, rather than accumulating a lot of shorts at this level. In fact, yesterday and today we saw a lot of short covering instead. The bears are throwing in the towel for the moment. Now we have to see what the bulls have in their tank. Do they still have enough gas to push the market higher? The way we’ll know is if we get some follow through. To remain positive about this market moving higher I’d like to see SPX stay