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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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Most Bearish Stocks on Twitter

Below are charts with the bearish intensity scores of the most bearish stocks on Twitter for the week and month ended 11/5/13.

 
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Profit Taking as the Market Moves Higher

Over the past week we got enough weakness in our measures of market quality to cause a shift in our portfolio allocations. Both of our long/cash portfolios are now 80% long and 20% cash. Our hedged portfolio is 90% long and 10% short (using SH). As the market moves higher I’m seeing profit taking in the momentum stocks that had strong runs through the summer.  Take a look at the charts of some of the stocks that are currently in the Twitter Top 10 Portfolio and you’ll see some very choppy tops. As money moves out of the momentum stocks it is finding its way into stocks that consolidated across the summer. This rotation is creating an improvement in market breadth which indicates that money managers are expecting a year end rally, but are getting more selective in the high fliers.  One thing of concern is that some of the stocks that are rallying are defensive in nature or have high dividends which indicates a rotation to safety. Our investor

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Indecision Continues

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

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Inflection Point

Twitter and the Stock Market

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.

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Index Updates

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

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Apple’s Continuing Saga

Apple (AAPL) twitter sentiment, support, and resistance

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

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QQQ and IWM vs. TLT

Twitter Sentiment for Nasdaq (NDX, QQQ)

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

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Apple vs. Nasdaq 100 Index

Twitter sentiment for QQQ, NDX, Nasdaq 100

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

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