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
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.
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
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
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
Below are charts with the bearish intensity scores for the most bearish stocks on Twitter for the week and month ending 1/7/13.
Below are charts with the bearish intensity scores of the most bearish stocks on Twitter for the week and month ended 11/5/13.
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
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.