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
During the recent consolidation in the market we became concerned that we weren’t seeing a lot of positive divergences or buy signals from Twitter sentiment. Unlike the small dip in April which created several good long setups, the larger consolidation and retracement rally in May and June didn’t produce any. Our concern was that the general market was moving higher, but actively traded and momentum stocks weren’t being bought with conviction (as evidenced by sentiment on the Twitter stream). That situation now appears to be resolving itself. Over the past few days we’ve had three long setups. Those setups come just behind a reconfirmation of the uptrend from sentiment for the S&P 500 Index (SPX) and the Russell 2000 index (RUT). This is a positive sign for the market going forward as it shows widely held individual stocks supporting the rally. Below are charts of the three recent buy signals (green vertical lines indicate the setup date). All of them are now getting extended and close to their all time
Over the weekend we mentioned that although the S&P 500 Index (SPX) has painted three very ugly daily candles in the past few weeks we still believe we’re merely seeing some healthy consolidation. Our only concern at the moment is event risk, not general market weakness. As a result, we’re fairly long in our portfolio allocations, but watching our market risk indicator very closely. In order to guess how far the market will retrace we like to use very simple tools like trend lines, moving averages, support levels generated from the Twitter stream, and Fibonacci retracement levels. What we look for is a cluster of support. Take a look at the chart below and the 1600 area on SPX jumps out as a likely level for the first major bounce (or even bottom) of the consolidation. Here are several ways we arrived at that number. One fairly reliable chart pattern that we like occurs when price falls sharply for a few days and then consolidates higher (and then breaks the
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
Recently I’ve seen a lot of people mention on Twitter and various blogs that the market doesn’t give you time to get out at tops. I have to politely disagree. If you’re an intermediate or long term investor the market will almost always give you warning that it is preparing to consolidate. As an example, here is one of our early warning posts from last October. Often the first warning signs are well ahead of the actual top, so the key to successful investing is in waiting for the weight of evidence to turn before making major changes to your portfolio. Here at Downside Hedge we move money slowly as market conditions change. From mid February we’ve been seeing signs of deteriorating market conditions. Our canaries in a coal mine post on 2/19 highlighted some of the deterioration that we’ve been seeing. The S&P 500 Index (SPX) was trading near 1520 at the time. SPX is now near 1565 and most of those conditions are still in place. For a
Below are the stocks with the most bearish intensity (volume and scores) on Twitter for both the past week and past month.
We posted last week that Twitter Sentiment for IWM was diverging from price and that small cap stocks would likely consolidate before moving a lot higher. As of the close yesterday, smoothed sentiment for IWM has now had a divergence from price and also broken the confirming uptrend line. This meets the Twitter sentiment trade setup requirements we’ve observed before. As we mentioned in that post, don’t trade these setups because we don’t have a large enough sample set to know if they’re valid or profitable. In addition, this setup is a trade against the intermediate and long term trend for IWM. Trades against the trend are much more likely to fail and they also have much higher risk than reward potential. What this signal is telling us is that IWM will most likely consolidate for a more than just a few days. This is because sentiment from traders has turned from a bullish bias to a bearish bias. Momentum stalled with the negative divergence, then it turned down with
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
We’re starting to see some rotation out of small caps, technology, and the general market into big cap stocks. At this point we’re not sure if it is merely profit taking and re-balancing of portfolios or if it represents distribution and a flight to safety. It is one of the things we’ll be watching closely over the next few weeks. If the trend continues it will be one more sign that the current rally is loosing steam. Add that to the Dow Jones Transports trying to break critical support and we should start seeing the market rounding out a top. Of course, if the transports hold, as they did today, and the short term rotation to big caps turns out to be re-balancing then the market is simply setting up for the next run higher. Keep an eye on RUT, NDX, and DJIA over the next few weeks as they will provide clues to the next market move.
At the end of July we posted our concern about the Russell 2000 not confirming the uptrend in the S&P 500 Index. We mentioned that we’d like to see RUT close above 818. Today we got that close. We view the strength over the past two weeks in RUT vs. SPX as confirmation of the up trend. Our view was helped by the reversal off the lows this morning by all of the major indexes. Our Twitter Sentiment indicator for RUT (show in the top panel above) is also showing some encouraging signs as the smoothed indicator spent the last several days above zero. It appears that smoothed sentiment is forming a higher high which is confirming the move in the index. A few more days above 818 will add more evidence that we should be moving high enough on SPX to break out above the recent range. For now it is one more thing making us comfortable with our 60% long exposure in our