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Holdouts

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In mid July, the major indexes started making new highs. The Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) broke higher first, followed by the NASDAQ 100 (NDX) then the NASDAQ Composite. The pattern on a weekly chart of SPX shows a long consolidation followed by a breakout, retest, and subsequent rally. This suggests that the market should continue to move higher in the intermediate term. Although most of the major indexes have reached new highs there are still a few holdouts. The most significant holdout is the Dow Jones Transportation Average (DJTA). It is still 17% below the December 2014 high. From a Dow Theory perspective, DJTA is still about 3.5% away from signaling a bull market (needs a move above its last secondary high). The industrials however, are above their last secondary high so a Dow Theory non-confirmation is currently in place. With the SPX showing a strong bullish chart pattern I suspect DJTA should signal a bull market in the coming weeks/months. Nevertheless, keep

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Leadership Waning

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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

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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

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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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Risk Rising

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Over the past week all of our core market health indicators fell. Most notable is our measures of risk. Our core measures of risk fell from moderate levels to almost warning. It will take a large sell off in the last hour to take this category below zero and have us increase our hedges and/or raise cash. Our market risk indicator has three of its four components warning. This is very unusual given the fact that the market is only down about 3% from all time highs. This tells me that market participants are skittish…which increases the risk of a sharp sell off. If this indicator signals we’ll be changing the hedge to an instrument that benefits from higher volatility. I don’t expect it to signal today, but if it does I’ll update this post before the market closes. Another sign of rising risk is the performance of Junk Bonds (JNK) compared to High Quality Bonds (LQD). LQD is rising while JNK is falling. This tells us that bond holders

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Market Health Improves

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Over the past week most of our market health indicators improved. None of them moved enough to change our portfolio allocation, however our measures of market quality and strength are getting very close to going positive. I expect at least one of them to go positive by the end of next week if the market continues upward. If we get a dip then we may have to wait as long as the first of the year before making any allocation changes. We’re experiencing a market that is trying to sort itself out after a huge decline and retracement. The retracement still hasn’t repaired the damage done to market internals during the decline. Below are some examples. As I mentioned recently, the NYSE Advance / Decline line (NYAD) finally broke above its previous peak. This is an encouraging sign, but the breakout is weak and NYAD turned down last week even though the S&P 500 Index (SPX) posted a small gain. In an strong bullish market I would expect to see

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Another Heads Up

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Our measures of trend have been bouncing back and forth across the zero line this week and are currently negative. If they are still negative on Friday we’ll be raising more cash and/or adding a larger hedge before the week ends. Here are some of the things I’m watching at the moment. The actively managed short ETF HDGE is currently rising even though a simple short of the S&P 500 Index (SH) is trending lower. This indicates that shorting selected stocks is starting to work. This often happens before the general market falls. In addition, mid term volatility (VXZ) is rising as well. This indicates that investors are getting nervous going into the end of the year. Small cap stocks (IWM) broke below the triangle I’ve been watching with an associated break in momentum from traders on Twitter. The negative gap in breadth between small and large cap stocks continues to grow. While everyone is watching small cap stocks I’m seeing deterioration in large caps under the cover of new

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Market Health Diverging

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Over the past week we saw a bit of divergence between our core market health indicators. Our measures of quality and risk got better, while our measures of trend and the economy weakened. None of them moved enough to change our core portfolio allocations. Our core measure of risk is still diverging with the last several peaks in the market. Since the extremely overbought condition on this indicator in late 2013 it has mostly painted lower highs as the market moves higher. This indicates that investors are getting less confident with each rally. As I’ve noted before, it takes time to build a top so this indicator provides information and something to watch carefully, but nothing to act on…yet. The most important thing to watch for a sign of a long term top continues to be breadth. So far we’re seeing small chinks in the armor, but nothing serious. The NYSE Advance / Decline Line (NYAD) is an example. It isn’t confirming the new highs in the S&P 500 Index

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Discipline Amid Fear

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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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Back to Normal

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In early May I mentioned that the  conditions of our indicators gave a 60% chance that the sideways consolidation in the S&P 500 Index (SPX) was “normal rotation and profit taking that will result in higher prices when it’s done”. They also gave a 40% chance that an intermediate term top was in the works. In that post I also mentioned that various measures of breadth and risk “will need to break down if the market is going to correct”. These measures held up and SPX moved on to new highs. It looks like the odds played out correctly this time and market internals are getting back to normal…although reluctantly. One thing many bears have been mentioning is the number of new highs on NYSE being very low during May even though SPX was within a few percentage points of all time highs. That condition resolved itself this week. The one sign of breadth that has shown the most weakness over the past month is the ratio between SPX equal weight

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