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Setting Up for Year End Rally

161007MarketHealth

Over the past week, my core measures of market quality moved back above zero. During the same period my measures of market trend and strength surged higher as well. The strength in these indicators suggest that the market will rally into year end. Earning season could change the market’s opinion, but without major problems during the first few weeks I suspect we’ll be off to the races. The move in market quality changes the current core portfolio allocations 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 (or use the ETF SH) Volatility Hedged portfolio: 100% long (since 7/5/2016) Here is a chart that shows the core portfolio allocations over the past year. Green lines represent adding long exposure. Yellow is raising cash or adding hedges. Red is an aggressive hedge using mid term volatility. Another sign that market participants are expecting a year end rally comes from the ratio between the

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Adding Exposure

160805MarketHealth

Over the past week the majority of my core market health indicators improved. Most notably is the market strength category. It has finally pushed above zero, resulting in a change to the core portfolios. The new allocations are as follows. Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short Volatility Hedged portfolio: 100% long (since 7/1/2016) In early July, I highlighted some problems with leadership in the market. Most of those problems have been resolved. As you know, I’ve been watching the ratio between the Nasdaq 100 (NDX) and the S&P 500 (SPX). It made a good break higher two weeks ago and is currently fueling the rally as NDX plays catch up to SPX. One thing that hasn’t fully resolved itself is the ratio between the S&P 500 Equal Weight index (SPXEW) and SPX. The current rally has this ratio moving sideways, which shows lackluster participation from the “smaller” big cap stocks in SPX. If the ratio

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Slow Improvement

160715MarketHealth

Over the past week all of my core market health indicators improved. None of them improved enough to change any portfolio allocations. One thing that is still concerning is that technology isn’t participating strongly in this rally. I’d like to see the ratio between NDX and SPX break above its 20 week moving average as a sign the rally has legs. Some consolidation here then a resumption of the rally that is led by financials and technology would be a very healthy sign of a big run ahead.

 
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Leadership Waning

160708BPSPX

Over the past couple of months, I’ve highlighted some encouraging signs that had accompanied price strength in the market. Unfortunately, most of those signs of strength haven’t persisted as the market is moving close to all time highs. First lets look at the Bullish Percent Index (BPSPX). It finally got above the 2015 highs in March and April of this year, but the subsequent consolidation in the market did serious damage to this indicator. It is still below 60% which is a big drag on the market (and adds the risk of a big decline). Basically, a lot of point and figure charts turned bearish during the last consolidation and haven’t righted themselves. Next is small caps stocks compared to big caps. They have lagged during the last rally. I like to see them lead as a sign of investors taking risk in their portfolios. Money flowed into mega cap stocks faster than big cap stocks during the last rally too. Another poor sign for a sustained rally. It looks

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Leadership

160603spxew

One thing I like to see during market rallies is strong leadership from three areas of the market at the same time; big cap stocks, small cap stocks (RUT), and the Nasdaq 100 (NDX). For big cap leadership, I like to see broad participation from a majority of stocks in the S&P 500 index (SPX). One way to measure large cap breadth is from indicators like the Bullish Percent Index or percent of stocks above their 200 day moving average. A few weeks ago, I highlighted their recent strength. Another way to measures large cap breadth is by comparing mega cap stocks to large cap stocks. I do this by comparing the S&P 500 Equal Weight index (SPXEW) against SPX. Long time readers know that I use a dip below the 20 week moving average in the SPXEW v. SPX ratio as a warning sign that some chop is ahead (and possibly danger). When this occurs it signals that money is rotating out of big cap stocks and into mega

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Gold Stocks and the Market

150112gdx

I did a write up on Trade Followers about a buy signal for gold stocks generated from Twitter momentum / sentiment. It’s time to watch the trade closely for signs that it might turn into a long term trend change for gold and gold stocks (GDX). Here’s the associated chart…as a teaser. In addition, there are some interesting things happening with small cap stocks (RUT) and the NASDAQ 100 (NDX) that will likely tell us which way the market will break. Those two indexes will likely tell the tale. The short story is if sentiment for RUT breaks lower the market will likely follow. If sentiment for NDX breaks higher then odds favor new all time highs. Here’s a link to the post.

 
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Possible Allocation Change on Friday

150107ndx

Our core measures of risk have been bouncing back and forth across the zero line this week. The category closed today barely above. A weekly close below zero will cause us to change our allocations in the long / cash portfolios to 100% cash. The long / short hedge portfolio will go 50% long and 50% short the S&P 500 Index (using SH or an outright short of SPY). Our market risk indicator has two of four components warning at the moment. Two are deep in negative territory. One has been moving back and forth across zero over the past several weeks. The fourth component is still a good bit away from turning negative so it appears that the market risk indicator won’t signal this week. As a result, the Volatility Hedge will most likely stay 100% long. A sharp move lower between now and Friday would be required to trigger a hedge signal in that portfolio. One chart I’m watching at the moment for clues to which way we

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Discipline Amid Fear

140822markethealth

As we suspected last week the market was poised to rally to new highs in the absence of bad news. The early August dip had our risk indicator showing concern, but or core indicators held steady. The recent events provide a good example of maintaining discipline when fear enters the market. Even though we saw a lot of ancillary indicators and our risk indicator getting close to warning we held our portfolio allocations steady. The reason for this is that our core indicators weren’t substantially affected by the dip in the market. This past week all of our core indicators with the exception of the economy rose. This keeps us 100% long in all portfolios. I only see a few concerning things at the moment. Small cap stocks (Russell 2000 – RUT) continue to under perform and indicates that investors are reducing risk. This in conjunction with the sharp declines in momentum stocks during the first four months of the year warns that a longer term top may be in the

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In a Trading Range

As many of you know, my goal at Downside Hedge is to provide information and ideas that you won’t find in other places.  This week I suspect will be one of those times where I share a theme that many (most) will disagree with.  I believe we’re in a trading range.  I could be wrong, but for now I think the most important information we’re getting from the market is the range between 1800 and 1850 on the S&P 500 Index (SPX). First let’s look at the evidence that makes my point of view look foolish (then I’ll give my justification).  SPX has just put in a very steep V bottom.  That chart pattern almost always resolves with the market going on to new highs. The Nasdaq 100 (NDX) is leading the market and has already printed new highs.  The NYSE cumulative Advance/Decline (NYAD) line turned up sharply over the past few weeks and is confirming the move higher.  The percent of stocks above their 200 day moving average has

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Most Bearish Stocks on Twitter

Below are charts with the bearish intensity scores for the most bearish stocks on Twitter for the week and month ending 1/7/13.

 
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