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More of the Same

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This week we saw more of the same. Our core indicators strengthened while ancillary indicators weakened. The only core indicator that got worse was our measures of risk. Early in the week they were showing more concern from market participants even as the market moved higher. Thursday did some serious damage to them and Friday only saw a partial recovery. So far they’re providing early warning, but no signals. It will most likely take another few weeks to shake out. One thing I follow that suffered a lot of damage this week is the relationship between high quality bonds (LQD) and junk bonds (JNK). While LQD appears to be painting a bullish flag, JNK is falling sharply. This suggests that bond owners are shifting money from risk (JNK) to safety (LQD). The events in Ukraine and Gaza on Thursday had LQD rising while JNK fell. Watch this relationship going forward because a shift in bonds often occurs before a flight to safety in stocks. Speaking of stocks, the symbols I

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Tale of Two Markets

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Last week’s market action didn’t affect our core health indicators too much, but many of the ancillary indicators I watch suffered some damage. While the market looks healthy on the surface there are enough indicators warning to suggest the worst isn’t behind us yet. Currently we have a tale of two markets. Although our core health indicators are positive most of them have weak enough readings that they could turn negative over the next few weeks. However, this would be very unusual given the fact that many of them turned positive just last week. Generally, when all of them move above zero they stay there for at least two months. Weakness in these indicators will provide significant warning. Another indicator that is telling two stories is our core measure of risk. It is still showing low perceptions of risk, but just came out of an overbought condition. This often marks the beginning of corrections larger than 10%. Momentum stocks are also acting indecisive. Many of them have had good runs over

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Sentiment Compressing for S&P500 Index

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Sentiment (soon to be renamed momentum) from both Twitter and StockTwits for the S&P 500 index is currently painting a negative divergence from price and at the same time staying above a confirming uptrend line. A break from the resulting triangle should point the next short term direction for the market.

 
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Social Media Breadth Stays High

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Breadth from both Twitter and StockTwits is holding near the highs as the market moves up.

 
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Social Media Breadth Strong

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While the S&P 500 Index (SPX) consolidated below the 1900 level there was a period of weakness in breadth from both Twitter and StockTwits. After the breakout occurred breadth lagged price, but has now recovered. Many of the momentum stocks that had fallen out of the strongest stocks list have returned with strong support from traders on Twitter and StockTwits. This is an encouraging sign for the market.

 
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Twitter Sentiment Diverging

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Just a quick update this weekend. As the market pushes higher sentiment from the Twitter stream continues to diverge. We’ve got a good upward sloping confirming trend line in smoothed sentiment that if broken will warn of possible consolidation ahead. But as long as smoothed sentiment stays inside the triangle currently being painted or breaks above it odds favor higher prices. Support and resistance didn’t change as traders have gone pretty quiet this summer. Support is at 1925 on the S&P 500 Index (SPX). Resistance is at 2000, but almost no one is talking about that level any more. Sector sentiment is finally showing some weakness in Consumer Staples which suggests some of the rotation to safety is over. This is another positive for the market. Overall, it’s the same story I’ve been telling for weeks so we can expect more marginal new highs followed by a period of chop.

 
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Market Health Indicators Diverge

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Over the past week our core market health indicators diverged from each other. Our measures of the economy and trend rose while our measures of quality and strength fell. None of them moved much, but measures of trend moved back above the zero line.  This changes our portfolio allocations as follows. The long/cash portfolios are now 60% long and 40% cash. The hedged portfolio is 80% long stocks we believe will outperform in an uptrend and 20% short the S&P 500 Index (long SH as an alternative to shorting SPY). Our core measures of risk moved further into overbought territory this week. As I noted over the weekend, when this occurs a dip of more than 10% often follows within a month or two. For now it’s not too concerning, but something to watch closely going forward. Below is a chart of our current market health category readings (normalized).   Here’s a chart of our portfolio allocation changes over the past year. The green lines represent adding long exposure and removing hedges.

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Social Media Breadth Recovers

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Social media breadth is finally catching up with the market. Both Twitter and StockTwits had an increase in the number of stocks in the strong list and a decrease in the weak list. Twitter breadth still has a small negative divergence, but appears to be righting itself.  

 
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Lack of Belief

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Over the past week the market rallied, but our core market health indicators didn’t participate. In fact, all of them except for our measures of risk turned down. As a result, we’re still 30% short in our hedged portfolio and only 40% long in the Long/Cash portfolios. One thing of note this week is that our market risk indicator is diverging from our core measures of risk. Our core measures of risk have made it into over bought territory while our market risk indicator is well below that level. Historically, over bought readings have usually been followed by a dip of more than 10% within a month or two. Early 1999 and 2013 were exceptions. There were four over bought readings in 2013 and three in 1999 that did not result in a good dip. Between 2000 and 2012 there were three times our core measures of risk were over bought. They were January 2004, April 2010, January through April 2011. I’m not too concerned about this indicator at the

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Breadth From Social Media Continues to Diverge

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As the market moves to new highs breadth from the Twitter and StockTwits streams continues to paint a negative divergence. It is a sign that the momentum stocks of last year still aren’t back in favor.      

 
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