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Continued Chop

Last week, I concluded: The market is trying to break out, but breadth isn’t improving. This condition often results in a choppy market. If the market can break out then bulls want to see breadth improve or we risk a good size decline when the rally ends. This week, it’s the same. Longer term indicators are trying to move into positive territory, but short term indicators and measures of breadth aren’t cooperating. My core indicators, which are intermediate term, chopped around a bit, but are still on a trajectory to go positive if the market can break decisively higher.   Another disconcerting breadth indicator is the percent of stocks in the S&P 500 Index that are below their 200 day moving average. This indicator is falling fast without much price damage, all while happening within a few percent of all time highs. If the market turns down from here I suspect the decline will be large. On the other hand, this is a condition that can lead to a buying surge if

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Breadth Not Improving

Over the past week, my core market health indicators bounced around a bit. They are mostly showing short term weakness, but longer term strength. This usually means the market should resolve higher. One thing of particular note is that my core measures of risk are deteriorating rapidly. This isn’t a normal occurrence near all time highs. The last time this occurred was in February of 2015 which was followed by several months of choppy movement, then a decent decline. This isn’t a prediction, just an observation and something to watch.   Another thing I’m watching closely is various measures of breadth. The most significant at the moment is the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). When it is below its 20 week moving average the market usually chops around (at the least). This is exactly what we’ve seen since it fell below the line in early February.   Another measure of breadth comes from the number of bullish stocks on the

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Ready for the Rally

Over the past few weeks, my core market health indicators improved significantly, with the exception of my measures of the economy. The strength seen suggests that the market wants to rally. Although my measures of trend and strength are still negative, they are on a trajectory to turn positive within a week or two.   One thing of note is that the current strength is coming from mega cap stocks. This isn’t a healthy condition. Normally, a healthy rally will have broad participation from the stocks in the S&P 500 Index (SPX). This isn’t happening. Look at the ratio between SPX equal weighted (SPXEW). It is still falling. Bulls want to see this ratio turn up if the market breaks higher.   Another sign of poor participation in the market comes from the percent of SPX stocks above their 200 day moving average. As SPX is approaching new highs, the percent of SPX stocks above their 200 dma is falling. This increases the risk that a breakout rally will be

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Waiting for a Direction

Over the past week, my core market health indicators bounced around, but had no significant changes. With most of the indicators compressing near the zero line, it appears that the market is waiting for a direction. One thing of note, is that my measures of market quality are very close to going negative. I suspect that the market will need to rally next week or this category of indicators will cause us to change the core portfolio allocations (raise some more cash or add more hedges). However, the volatility hedged portfolio is still a long way away from a negative reading. This means it would take substantial perception of risk in the market to hedge. This portfolio is still 100% long. Another sign the decline isn’t causing panic.   Conclusion My core indicators are compressing near zero. This indicates that market participants are waiting for a direction. Measures of risk are still healthy. This also suggests that everyone is waiting before taking any serious actions. So, we wait and see

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Not Much Change

Over the past week, my core market health indicators mostly deteriorated, but not in a significant way. The other indicators I’m following aren’t showing any real weakness. As a result, this still looks like consolidation of the recent rally rather than a change in the intermediate or long term trend. As always, make your own decisions about portfolio allocation based on your personal risk tolerance.

 
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Not Much Change

Over the past week, there wasn’t a lot of movement in my core market health indicators. It looks like we’ll have to wait and see if the current bounce holds or not.   One thing that is showing a lot of improvement is the NYSE cumulative Advance Decline Line (NYAD). It is leading price on the S&P 500 Index (SPX) and moving above its last high. This makes it much less likely that we’re painting a long term or even intermediate term top.   Conclusion My core indicators are showing lackluster response to a small bounce in price, but NYAD is signalling that there’s not much chance of a large decline starting from here. I’m in wait and see mode without much worry.

 
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Wait and See

Over the past week, my core market health indicators didn’t move much. They continue to bounce around with the market.   One thing of concern is that a few measures of breadth are starting to show some weakness. Last month I highlighted the decline in the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). It is still warning of a move to mega caps. The cumulative advance decline line for NYSE (NYAD) is now giving a small warning. The small dip in price for SPX caused a lot of damage to NYAD. The longer this indicator goes without making a new high the more serious the warning will become. I don’t get concerned until it diverges for two or three months so this is something to watch, not something to worry much about.   Another measure of breadth comes from Trade Followers Twitter sentiment. The count of bullish stocks diverged from price just before SPX moved to 2400. As the market tries to move higher

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Market Health Bouncing Around

Over the past week, my core market health indicators bounced around, but didn’t move enough to make any changes to the core portfolios.   I’ve started to see a lot of chatter stating that this is the start of a larger top. So far, I’m not seeing the same evidence. There is a bit of deterioration in some of my measures of breadth, but nothing drastic for a small decline in the general market. The most significant change comes from the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). As I mentioned last month, when this ratio dips below its 20 week moving average we usually see some consolidation. The dip was delayed, but it seems that we’re now experiencing it.   Another measure of breadth is the percent of stocks above their 200 day moving average. Long time readers know that I don’t worry until it falls below 60%. As you can see, there are still a healthy number of stocks above

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Consolidation Possible

The ratio between S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX) is giving a small warning sign that, at the least, we’ll see some sideways consolidation over the next few weeks. As you can see from the chart below, a dip below the 20 week moving average generally results in consolidation. It often precedes pull backs of 5% to 15%. The reason it occurs is that “smaller” big cap stocks are being sold as money is being moved into mega cap stocks. It takes more money to push a mega cap stock higher than it does to push a “smaller” large cap stock higher. It also takes less selling to drive the smaller stocks lower. Thus, mere rotation from large to mega caps creates a drag on SPX. At this point we don’t know if the rotation is just portfolio managers rebalancing or the start of a flight to safety so stay alert.   Over the past week, my core market health indicators mostly strengthened, but a few

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Widespread Buying

170106spxew

Since the US election in November, the market has had broad participation as evidenced by a strong relationship between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). During the month of December, however, SPXEW didn’t keep up with SPX. The ratio between the two fell sharply as both small and large cap stocks stalled, while at the same time mega cap stocks gained support. Now, the ratio is turning back up in an apparent resumption of the widespread buying. We can dig a little deeper into what stocks are getting the most attention by looking at the most bullish stocks on Twitter over the last two months, one month, and one week. Since the US election the most bullish stocks are across several industries. During December, the list gravitated toward more technology and health care. Over the past week, the list is once again widening in the number of industries listed. This is a condition we want to see going forward as evidence of widespread

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