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Pivot Point

150313markethealth

Over the past week all of our core market health indicators fell slightly. The volatility and large range days in the market didn’t do a lot of damage. The one exception is our core measures of risk. They fell quite a bit and will likely go negative if the market continues to fall next week. On the other hand our measures of trend want to go positive, but just can’t get any upward momentum. If the market can rally next week then they will likely go positive. That puts us at a pivot point between increasing risk or a continued up trend. Another sign that the market is at a critical point comes from Trade Followers. Their algorithm that captures support and resistance levels for the S&P 500 Index (SPX) puts 2040 as a must hold level. If that level breaks then 2020 is the next level of support, but minor in nature. There is very little support below that level which sets up the potential for a cascade lower

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Market Health Stable as S&P 500 Falls

150306markethealth

Over the last week our measures of market quality, trend, and strength all improved even though the S&P 500 Index (SPX) declined. Measures of the economy fell a bit and our core measures of risk started suggesting a little caution. Our market risk indicator is still a long way away from any warning signal with only one of four components currently negative. Overall, the indicators were fairly stable and suggest that the current decline is healthy consolidation. Of course this could change, but I take the evidence as it comes. What I’ll be watching most closely is our core measures of risk. None of the indicators moved enough to change any of our current portfolio allocations. One thing of note this week is that Elder Impulse for the S&P 500 index on a weekly chart has turned blue. It appears that it will close with a mild warning today. A blue bar often precedes at least a few weeks of sideways movement and occasionally is the start of a more

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Encouraging Signs

150215spxSR

After six weeks of consolidation I’m starting to see a lot of encouraging signs. It appears that the market finally wants to move higher. Our measures of risk and quality have now joined our measures of market strength in positive territory. If they can hold into Friday’s close we’ll be reducing our hedges and adding longs to the portfolio. Here are a few things I’m seeing from Trade Followers that bolsters the argument for a rally above 2100 on the S&P 500 Index (SPX). First is support and resistance levels. After months of next to no tweets above current prices, traders are now projecting prices as high as 2200. The majority of tweets are near 2040 and 2050 so a break above the strong resistance level of 2100 should carry to a minimum of 2040. Another thing that is improving is breadth. The number of strong stocks is rising and the first few days of this week saw the number of weak stocks fall even though the market is pausing

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Market Health Improving

150213markethealth

Over the past week our core market health indicators rose sharply again. Everything with the exception of our measures of the economy are hovering right near a pivot point. Our measures of market strength have gone positive while measures of risk, quality, and trend are barely negative. It appears that those three categories will most likely go positive next week if the S&P 500 Index (SPX) breaks to new highs. Overall I’m seeing healthy behavior after six weeks of consolidation. With the current conditions starting to look positive we’re adding a bit more exposure to the core portfolios. The long / cash portfolio will now be 20% long and 80% cash. The long / short (hedge) portfolio will be 60% long stocks that we believe will outperform SPX in up trends and 40% hedged with a short of SPX (or using SH). The volatility hedged portfolio remains 100% long (since 10/24/14) due to no signs of extreme risk in the market. Below is a chart with the core portfolio changes

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Shaky Foundation

150128spx

The S&P 500 Index (SPX) is starting to paint a pattern that often leads to instability and a quick drop lower. Look at the chart below and you’ll see wide quick swings going in both directions. This indicates uncertainty by market participants. It is a pattern we haven’t seen for a very long time which makes it more important. Another thing I’m seeing is perceptions of risk rising. Three of four components of our market risk indicator are warning at the moment. We still have one hold out, but it is dropping rapidly. As I’ve mentioned over and over again I don’t think the market can have a substantial correction until breadth breaks down. One measure that is getting close to warning is the percent of stocks above their 200 day moving average. I get concerned when it falls below 60%. Add it all together and we’ve got a market with a shaky foundation. Caution is warranted.

 
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Dow Theory Best Indicator Since 2009

150121DowTheory

Out of the lows in 2009 there has only been one of the indicators that I follow that hasn’t had whipsaws or bad signals somewhere along the way. That “indicator” is Dow Theory. It has continued to confirm  a long term bull market for the entire period from its bullish trend change in July 2009. This is due to time being an important factor in Dow Theory. The system outlined by Charles Dow and William Peter Hamilton waited for roughly three weeks of trend before declaring a secondary reaction point. The lack of secondary lows that subsequently failed has kept Dow Theory bullish. On the chart below I’ve annotated the secondary low and high points from the last several years. In addition there is a Dow Theory line during the first several months in 2012. We’re now approaching a month long decline in the Transportation average (DJTA). The industrial average (DJIA) will need to break below the December lows to pass the three week mark. At this point we’ll need

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Gold Stocks and the Market

150112gdx

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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Possible Allocation Change on Friday

150107ndx

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

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Risk Rising

141212markethealth

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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Consolidation Warning from Trade Followers

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The Trade Followers momentum indicators for many of the major indexes (DJIA, SPX, and Nasdaq 100) are warning of a short term correction in the market. This increases the odds that we’ve finally got the short term top I’ve been expecting for the last month. I still think that the most important index at the moment is the Russell 2000 so I’d like to see it confirm before getting too bearish. If we’re getting the expected dip then it will be important to watch how internal indicators react.

 
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