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Market Risk Warning

I mentioned on Monday that my market risk indicator was warning. It still hasn’t cleared and it doesn’t look like it has a chance to clear by the end of the day. As a result, I’m calling a warning signal. Market risk warnings come in two varieties. Ones that last for only a week or two (a false signal) and ones that last for several months (a significant correction or bear market). This signal has the odds tilted to more downside because the Bullish Percent Index (BPSPX) is below 60. When it is below 60 and my market risk indicator is warns the odds increase substantially (3 times more likely) that we’ve still got at least another 10% drop from here before we make an ultimate low. This isn’t a prediction, merely stating the odds based on history. This signal changes the portfolio allocations as follows: Long / Cash portfolio: 100% cash Long / Short portfolio: 50% long high beta stocks and 50% long midterm volatility (an ETF/ETN like VXZ or VIXM) Volatility

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All Green Again

Over the last week, I saw broad based strength in my core market health indicator categories. My measures of market quality moved back into positive territory. This means that all of the portfolio allocations are now 100% long.

 
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Diverging Indicators

Over the past couple of weeks, my core market health indicator categories have started diverging. The market risk, economy, and strength categories are soaring higher, while the market quality and trend categories are lagging substantially. This is another sign that the market is due for some consolidation. Nevertheless, the market continues to move higher so we continue to watch and wait.

 
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Consolidation Likely

Last week, I mentioned that it might be time for some consolidation. This week, it appears more likely. My measures of market quality have dipped below zero and my measures of market trend are dropping pretty fast. This indicates that we should get some sideways to down movement over the next several weeks. I suspect that the market has at least one more good rally in it, but we’ll need a pause before it happens. The consolidation will most likely be due to rotation out of mega cap stocks into smaller stocks as a “sell the news” event when/if the tax plan passes. With market quality falling below zero the core portfolio allocations change as follows: Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short the S&P 500 index Volatility Hedged portfolio: 100% long (since 11/11/2016)

 
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On the Edge

Several of my core market health indicators are sitting on the edge of going negative. One notable exception are my core measures of risk. That category has moved into overbought territory. Normally, this means several weeks of continued rally, however, I’m in a bit of doubt due to the weakness in all the other categories. This time it might mean it’s time for some consolidation. I expect we’ll get more clarity over the next few weeks.

 
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Bouncing Around

Over the past week, my core indicators bounced around again. The only significant thing I’m seeing is some weakness in my measures of the economy, but I suspect this category won’t have much impact on the market in the near term. Instead, focus on the tax plan will continue to drive investor’s purchases and sentiment.  

 
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Continued Strength

My core market health indicators continue to show strength. Most notably, are the core measures of risk which are getting into over bought territory. This is often a good sign that results in a melt up that lasts several weeks. The last time this happened was the first week of October which resulted in a nice run followed by a bit of consolidation that should fuel the next run higher.

 
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Bouncing Around

My core market health indicators are bouncing around as the market consolidates in a sideways pattern. This is healthy behavior and should resolve with another leg upward.

 
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Jump in Market Health

Last week, I said that we’ve got everything we need for the next leg of this bull market. This week we’re getting confirmation of the rally with all of my core market health indicators jumping substantially. Some of them are starting to get into overbought territory, but when this happens it often fuels the rally for several weeks before it ends. Enjoy the ride.

 
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This Should Be It

Over the past week, my core market health indicators mostly improved. Most significant is that my measures of market strength have now moved above zero. This changes the core portfolio allocations as follows: Long / Cash portfolio: 100% long Long / Short portfolio: 100% long high beta stocks Volatility Hedged portfolio: 100% long since 11/11/2016   Another thing of note is that we’ve been seeing broad based buying of the stocks in the S&P 500 Index (SPX) again. If the ratio between the SPX Equal Weighted Index (SPXEW) and SPX can get back above its 20 week moving average it will be a very healthy sign. Since the first of the year, investors have favored mega cap stocks. We want to see the smaller stocks in SPX rallying faster than the mega caps as it will indicate broad based buying and increased tolerance for risk. Add to that, SPX looks like it’s now got a clear break above 2500 and we’ve got the recipe for a rally.   Conclusion It looks

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