Over the past week our core market health indicators improved slightly, but didn’t move enough to change our portfolio allocations. Market Positives Once again the market ignored bad news. It won’t matter until it matters… What else can we say? Our measures of risk are still positive, but didn’t recover with the move up in the S&P 500 Index (SPX) last week. Market participants are starting to recognize that a small dip could turn into something larger. Nevertheless, risk levels are positive which gives the market room to rise. Mixed Signals The Nasdaq 100 Index (NDX) finally recovered with SPX, however it is still below the peak made last September so we consider it mixed. The Russell 2000 Index (RUT) regained its 50 day moving average, but has a very short term series of lower highs and lower lows. These conditions need to clear before we’ll believe higher prices in the broader market. Measures of breadth like the percent of stocks above their 50 and 200 day moving averages continue
We’re starting to see a few scratches on this Teflon market. Our core market health indicators fell significantly this past week even though the move in price was minor. We normally don’t see them with such negative readings when price has only fallen about 4%. None of them moved enough to change our portfolio allocations, but the amount of internal damage is disconcerting. Market Positives The S&P 500 Index fell below its 50 day moving average, but didn’t stay there. This is one more sign that buyers continue to step up when the market dips. Large moves down in price one day are met with a rally the next showing the conviction of people who are under invested. Our measures of market risk are still positive, but they deteriorated sharply this past week. Our market risk indicator isn’t close to a signal yet, which suggests complacency by market participants. Mixed Signals Measures of breadth such as the stocks above their 200 day moving average are starting to diverge from price.
I wanted to do just a quick update today on the fight between the bulls and the bears on Twitter that we mentioned over the weekend. Twitter Sentiment for the S&P 500 Index (SPX) on a daily basis took a dip below zero again today even as the market moved substantially higher. It was still close to zero at -5, but not normal on a good rally day. This caused smoothed sentiment to break its confirming trend line. We take this as our first warning that the current rally may stall. It does not mean that a correction has begun, but it does tell us that traders and investors don’t like the break above 1500 and many of them are selling into it. This should at least cause some headwinds. Our next warning of a more serious correction would occur if smoothed sentiment drops below zero as that would signal that the negative sentiment and selling has occurred over several days. In the past this has often been enough to
We’ve been following the Apple (AAPL) saga with our Twitter Sentiment Indicator since AAPL’s bad earnings report in July. In mid August while AAPL was trading near 640 we posted that based on sentiment AAPL would “break out to the upside”. Sentiment proved correct as AAPL continued to rally up to 705 in mid September then started to paint a negative divergence with price. That negative divergence brought about a 10% correction that we believed was merely a profit taking event due to the lack of a serious break down in sentiment. However, we warned that we wouldn’t try to catch a falling knife and that we’d “wait for a price reversal that shows extremely positive sentiment”. We never got that condition. Instead, AAPL continued to fall and broke below its 200 day moving average in early November. In that post we mentioned that since AAPL had broken the 580 Twitter Support level that “the first most likely target range is near 520 with 500 just below that”. Those
Today we want to highlight three charts that give a pretty good picture of the current conditions in the market. They are for the Nasdaq 100 (QQQ), The Russell 2000 (IWM), and Long Term Bonds (TLT). Since the first of December, Twitter Sentiment for QQQ has been painting a triangle pattern. During the same time period price is forming a megaphone. These two conditions together show some indecision for the Nasdaq 100 Index. We’re seeing slowing momentum in sentiment that could be pointing to a head and shoulders pattern forming (with the trend line we’ve drawn as the neckline). It’s still to early to tell which direction QQQ is going to break, but sentiment should give us a clue over the next few weeks as it reaches the apex of its triangle. IWM has a much stronger price pattern with sentiment confirming its current move. However, there is a short term divergence with price that suggests IWM needs to pause for a bit before going substantially higher. Small stocks aren’t
Over the past several years Apple (AAPL) has been a driving force in the market. Traders have watched AAPL on a daily basis to decide the direction and timing of trades in other stocks. They have used AAPL as a leading proxy for the market. Is this about to change? Over the past few days it appears that AAPL has disconnected from the market and traders are seeing it as a single story stock. AAPL is breaking down, but the major indexes, including Nasdaq are holding up relatively well. Can the two disconnect? Let’s compare Twitter Sentiment charts for the Nasdaq 100 (QQQ) and AAPL to see if it provides any clues. If you look at the chart below you can see that QQQ painted an initiation thrust in our daily Twitter sentiment indicator last week. It printed a very low reading on a day where price reversed. This is similar to the initiation thrust painted in late September as the market was making a sharp move down from 52
One thing that concerns us about the recent rally is the lack of new highs and the increasing amount of new lows. If you look at the chart of the Nasdaq Composite below with its new highs in green and new lows in red you can see that all is not well with the index. We’re seeing negative divergences when we want to see confirmation of the rally. An example of a positive divergence happened at the low made in early June. As the market was breaking to new lows the number of stocks also hitting new lows was decreasing. At the same time the number of stocks hitting new highs was increasing. This was a positive divergence that gave hints that a good rally could follow. Once the rally started the number of new highs and new lows on Nasdaq performed properly for a lasting rally. Then we got a bad jobs report on 7/6/2012. You can see in the chart the serious damage the jobs report