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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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Still Waiting for a Direction

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Not much has changed over the past week. The market is still compressing in the range we’ve been watching. However, a bit of volatility was present with a trip to both the top and the bottom of the range.  I’m still looking mostly at breadth for the most likely signs that the market will enter a correction or at least make a trip to the 200 day moving average. Our Sentiment indicator for the S&P 500 index (SPX) that reads the StockTwits stream is still on a consolidation warning and has made another lower high. Sentiment from the Twitter stream looks much the same, however it didn’t have a clear up trend so it couldn’t officially warn.  This week it made a higher low and a higher high so we have good triangle in place to watch for hints to the direction SPX will break from the range.  Currently the odds favor a break lower since smoothed sentiment has a negative divergence with price. Support and resistance levels gleaned from

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Market Health Falls Again

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Over the past week all of our core market health indicators fell. This isn’t encouraging considering the fact that the market rebounded from weakness early in the week.  It is starting to feel more like a top building than simple rotation.  If your portfolio was weighted towards momentum stocks it hasn’t felt like rotation for a few months.  As you know, we don’t make changes to the portfolio based on our feelings, we simply follow our indicators.  None of our indicators fell enough this week to change our current allocations.  Our hedged portfolio is still 70% long and 30% short (using SH). Our long/cash portfolios are both 40% long and 60% cash. I usually show our portfolio allocation changes against the S&P 500 index (SPX), but the recent divergence between indexes doesn’t give an accurate picture for people with higher beta portfolios.  So here’s a chart with SPX, Nasdaq Composite (COMP), and the Russell 2000 (RUT). The green lines represent adding long exposure to the portfolio (and removing hedges). The

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Stuck In The Middle

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For the last few months the major indexes have been diverging from each other.  While the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) have traveled sideways in a range, the Nasdaq Composite and Russell 2000 Index (RUT) fell to their 200 day moving averages and bounced back to their 50 dma.  As you must know by now this is a result of rotation out of the high fliers from 2013 into large cap and value stocks.  The rotation caused damage in Nasdaq and RUT while at the same time kept SPX and DJIA in the range (DJIA made a marginal new high this week, but not a clean break of the range). With Nasdaq and RUT stuck in the middle of moving averages and SPX and DJIA stuck in a range it’s decision time.  Over the next few weeks the market will most likely turn over and start a down trend or break higher out of the current range.  I wish I could tell you which

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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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Starting to See Some Buy Signals From Twitter Sentiment

Buy signal for Walt Disney stock (DIS)

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

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Where to Catch?

Published on June 3, 2013 by in Market Comments
Clusters of Support for the S&P 500 Index (SPX)

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

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