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
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
As I mentioned last Friday the S&P 500 Index should see some sideways action near the 2000 level. We’re now three days into sideways motion on relatively low volume. It’s the last week of the summer so we could continue to drift for the rest of the week. Once everyone gets back to work next week we should see some movement as people evaluate their portfolio performance and start to position themselves for the end of the year. Our indicators only have a few kinks that suggest we may be putting in a longer term top. The Russell 2000 (RUT) is still lagging the other indexes, but has been playing catch up this week. Junk bonds (JNK) have had a huge run, but haven’t recovered from the July damage. They’re telling us that investors are still positioning themselves away from risk. The ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX) is still below its 20 week moving average. This is a sign of rotation
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
The trend that started two or three weeks ago where our core indicators moved up and ancillary indicators fell continues again this week. Below are updates to some of the things I’m watching without much commentary. You can view this post for an explanation. I use the ratio between VIX and VXV to signal “all clear” when it falls back below .9 after a choppy of falling market. It couldn’t quite get there this week. Large caps are still outperforming small caps…rotation to safety starting? Junk bonds (JNK) are still under performing high quality bonds (LQD)…risk off. The individual stocks I’ve been watching for clues to a direction are starting to diverge. Market participants are becoming more selective in the momentum names which caused a decline early in the year. Here are some examples. Twitter (TWTR) is still in a holding pattern and hasn’t decided which way it wants to go. Baidu (BIDU) is breaking higher. 3D Systems (DDD) looks like it’s breaking down.
This week we saw more of the same. Our core indicators strengthened while ancillary indicators weakened. The only core indicator that got worse was our measures of risk. Early in the week they were showing more concern from market participants even as the market moved higher. Thursday did some serious damage to them and Friday only saw a partial recovery. So far they’re providing early warning, but no signals. It will most likely take another few weeks to shake out. One thing I follow that suffered a lot of damage this week is the relationship between high quality bonds (LQD) and junk bonds (JNK). While LQD appears to be painting a bullish flag, JNK is falling sharply. This suggests that bond owners are shifting money from risk (JNK) to safety (LQD). The events in Ukraine and Gaza on Thursday had LQD rising while JNK fell. Watch this relationship going forward because a shift in bonds often occurs before a flight to safety in stocks. Speaking of stocks, the symbols I
Last week’s market action didn’t affect our core health indicators too much, but many of the ancillary indicators I watch suffered some damage. While the market looks healthy on the surface there are enough indicators warning to suggest the worst isn’t behind us yet. Currently we have a tale of two markets. Although our core health indicators are positive most of them have weak enough readings that they could turn negative over the next few weeks. However, this would be very unusual given the fact that many of them turned positive just last week. Generally, when all of them move above zero they stay there for at least two months. Weakness in these indicators will provide significant warning. Another indicator that is telling two stories is our core measure of risk. It is still showing low perceptions of risk, but just came out of an overbought condition. This often marks the beginning of corrections larger than 10%. Momentum stocks are also acting indecisive. Many of them have had good runs over
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
Over the past month High Yield (junk) bonds (JNK) have lagged the performance of Investment Grade (high quality) bonds (LQD). This shows a move to quality within the bond space. In addition, money that came out of stocks during the last dip went into quality bonds instead of high yield. Bulls want to see JNK recover their previous highs. As neither a bull nor a bear, but a guy who changes my portfolio allocations based on the evidence I’m keeping an eye on JNK vs. LQD. If the divergence continues it will warn of investors slowly moving away from risk.
Over the past month I’ve been seeing signs of a market that might be in the process of putting in a longer term top. Today something happened that often marks short term tops. The S&P 500 Index closed down (SPX), Corporate Grade Bonds closed up (LQD), but High Yield or Junk Bonds closed down (JNK). During a healthy stock market when investors are confident Junk Bonds generally move with Corporate Grade Bonds. When investors get scared and start moving out of stocks and into bonds LQD (high quality bond) gets the money and moves up. Scared investors also sell JNK with their stocks. That’s what happened today. Enough fear entered the market today to cause a spike in LQD and a drop in JNK. One day doesn’t make a trend…but it can start one. Keep an eye on LQD and JNK for another warning that the market may be putting in a top.