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Risk Rising

141212markethealth

Over the past week all of our core market health indicators fell. Most notable is our measures of risk. Our core measures of risk fell from moderate levels to almost warning. It will take a large sell off in the last hour to take this category below zero and have us increase our hedges and/or raise cash. Our market risk indicator has three of its four components warning. This is very unusual given the fact that the market is only down about 3% from all time highs. This tells me that market participants are skittish…which increases the risk of a sharp sell off. If this indicator signals we’ll be changing the hedge to an instrument that benefits from higher volatility. I don’t expect it to signal today, but if it does I’ll update this post before the market closes. Another sign of rising risk is the performance of Junk Bonds (JNK) compared to High Quality Bonds (LQD). LQD is rising while JNK is falling. This tells us that bond holders

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Market Health Improves

141206markethealth

Over the past week most of our market health indicators improved. None of them moved enough to change our portfolio allocation, however our measures of market quality and strength are getting very close to going positive. I expect at least one of them to go positive by the end of next week if the market continues upward. If we get a dip then we may have to wait as long as the first of the year before making any allocation changes. We’re experiencing a market that is trying to sort itself out after a huge decline and retracement. The retracement still hasn’t repaired the damage done to market internals during the decline. Below are some examples. As I mentioned recently, the NYSE Advance / Decline line (NYAD) finally broke above its previous peak. This is an encouraging sign, but the breakout is weak and NYAD turned down last week even though the S&P 500 Index (SPX) posted a small gain. In an strong bullish market I would expect to see

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Market Health Still Negative

141114markethealth

Almost all of our core market health indicators improved over the past week, however none of them could get back above the zero line. If the market can continue to climb it looks like our measures of risk and quality could clear by next Friday. The problem I see is that we’re due for a bit of consolidation so the nature of the next dip will be extremely important. A very healthy sign would be for our indicators to continue to rise in the face of falling prices. Here is a chart of our health indicator categories. Since they’re all below zero our core portfolios are either fully hedged or in cash. The volatility hedge portfolio is 100% long due to the fact that our market risk indicator isn’t warning. One thing I’ve been watching closely for the last several weeks is the performance of small caps (IWM). They should either break upward to new highs or consolidate fairly soon. I want to see any dip muted as a sign

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Another Heads Up

140924hdgeVvxz

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

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Consolidation Warning Ends for Small Caps

Small cap stocks (IWM) have cleared their warning as of the close today (11/19/13).  I’m still seeing weakness in some of our other indicators and the underlying tweets, so I’d wait for a break to new highs before giving the all clear signal.

 
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Profit Taking Continues

Much of the same conditions I mentioned last week are still in place.  Rotation and profit taking are still the major theme.  Our market health indicators mostly fell last week, but didn’t deteriorate enough to change our core portfolio allocations. Our Twitter sentiment indicator for the S&P 500 Index (SPX) fell sharply over the past week.  The daily indicator didn’t produce any strong readings even on days the market rallied.  The initial jubilation from traders on Twitter when SPX pushed above 1730 has quickly dissipated. Smoothed sentiment painted a negative divergence with price into the last peak which suggests traders were taking profit and shorting into that rally.  Then a small drop in price caused a steep drop in sentiment indicating that others started to pile on to the trade. That behavior was expected given the fact that SPX had a large volume of tweets projecting a top at the 1775 level.  The tweets lead price by two weeks and acted as a magnet to pull prices higher.  Once 1775

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Consolidation Warning for Nasdaq 100

A consolidation warning was issued for the Nasdaq 100 (QQQ) at the close on 10/29/13. Smoothed sentiment has been painting a negative divergence with price for over a month. The last rally in price did not bring with it significant tweets cheering the move. The selling in some of the momentum stocks has been weighing on QQQ as well. Please note, this isn’t a sell signal, rather fair warning that QQQ may need a bit of time to consolidate before moving higher. This consolidation warning comes a week after the small caps (IWM) warned.  Since that time IWM has been trading sideways even as the S&P 500 Index (SPX) has continued to move higher. This adds weight to the other indicators I’ve been seeing that suggest rotation out of the stocks that rallied over the summer into stocks that consolidated during that time. Although SPX is moving higher it is painting a negative divergence with sentiment from both Twitter and StockTwits.  They haven’t issued consolidation warnings yet, but the negative

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Profit Taking as the Market Moves Higher

Over the past week we got enough weakness in our measures of market quality to cause a shift in our portfolio allocations. Both of our long/cash portfolios are now 80% long and 20% cash. Our hedged portfolio is 90% long and 10% short (using SH). As the market moves higher I’m seeing profit taking in the momentum stocks that had strong runs through the summer.  Take a look at the charts of some of the stocks that are currently in the Twitter Top 10 Portfolio and you’ll see some very choppy tops. As money moves out of the momentum stocks it is finding its way into stocks that consolidated across the summer. This rotation is creating an improvement in market breadth which indicates that money managers are expecting a year end rally, but are getting more selective in the high fliers.  One thing of concern is that some of the stocks that are rallying are defensive in nature or have high dividends which indicates a rotation to safety. Our investor

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Twitter and StockTwits Sentiment Turning Back Up

Both Twitter and StockTwits sentiment for the S&P 500 Index (SPX) turned back up yesterday.  Since the previous two lows in Twitter sentiment (smoothed) weren’t quite three weeks apart I’ve redrawn the trend line connecting it from the August low to Monday’s low.  We now have an uptrend line to follow.  If sentiment falls below that line it will suggest that more consolidation and price weakness is ahead. The US Government shutdown hasn’t caused large negative prints in sentiment on a daily basis.  It appears that market participants prepared themselves for the event and are now simply waiting for a resolution.  The tone of tweets on Twitter is more mocking than worried.  The daily indicator is showing a positive divergence from price which suggests that we could see the market drift to the top of the current range (1700 on SPX).  For now smoothed sentiment from Twitter continues to confirm the uptrend and indicates that higher prices should be ahead. Traders on StockTwits are even more comfortable with the shutdown. 

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Starting to See Some Buy Signals From Twitter Sentiment

Buy signal for Walt Disney stock (DIS)

During the recent consolidation in the market we became concerned that we weren’t seeing a lot of positive divergences or buy signals from Twitter sentiment.  Unlike the small dip in April which created several good long setups, the larger consolidation and retracement rally in May and June didn’t produce any.  Our concern was that the general market was moving higher, but actively traded and momentum stocks weren’t being bought with conviction (as evidenced by sentiment on the Twitter stream). That situation now appears to be resolving itself.  Over the past few days we’ve had three long setups.  Those setups come just behind a reconfirmation of the uptrend from sentiment for the S&P 500 Index (SPX) and the Russell 2000 index (RUT).  This is a positive sign for the market going forward as it shows widely held individual stocks supporting the rally. Below are charts of the three recent buy signals (green vertical lines indicate the setup date).  All of them are now getting extended and close to their all time

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