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False Alarm

On Tuesday we mentioned that our measures of trend were negative. That condition has resolved itself so it looks like we won’t be making any portfolio changes tomorrow. This is a good example of avoiding a whip saw by waiting for Friday’s data to make decisions. Our portfolios are designed to be long term in nature and have infrequent allocation changes. Since we use weekly data for all of the signals they tend to track the intermediate term trends. The sensitivity in our measures of trend show how long in the tooth the current long term trend is. Even with new highs our trend measures are barely positive so it won’t take much weakness to raise more cash. I’ll do an update of all of our core market health measures tomorrow.

 
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More Warning Signs

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It’s still early in the week, but I wanted to give you a heads up that our measures of trend are currently negative. We require a weekly close below zero before changing any portfolio allocations so this is simply early warning that we might be raising some cash and adding a larger hedge come Friday…but I’ll wait till Friday to make any changes in order to avoid whip saws. Our market risk indicator has two of its four components signalling, but the two positive components are a long way from a warning. What is interesting about their current condition is that the least sensitive components are warning while the most sensitive are a long way from a signal. This means there is some instability in the underlying market and that we’d quickly get a market risk signal if prices drop substantially. Our core measure of risk fell out of over bought readings in early July, moved back up to kiss overbought in August, and is now falling again. This is

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Chinks in the Armor

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Although almost every indicator I follow is still positive I’m starting to see some chinks in the armor that suggest that a longer term top is in the making. Tops are a process and take a long time to form so there’s nothing to worry about yet, but here are some things to watch over the next several weeks. First is the ratio between the S&P 500 Index (SPX) and S&P 500 Equal Weight Index (SPXEW). We use the 20 week moving average as a bullish/bearish line. When the ratio is below the 20 week ma the market is often choppy as a result of reallocation rotation or the ratio falls as investors are rotating to safety. Recently it fell below the 20wma then retraced back to it and has turned down again. Investors are continuing to rotate to larger cap stocks which often precedes longer term tops. Next, the NYSE Advance Decline Line (NYAD) is reacting much more quickly to small price declines. This tells us that fewer stocks are

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Discipline Amid Fear

140822markethealth

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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New Highs

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As I suspected last weekend, the market was poised to move to new highs. The S&P 500 Index (SPX) is there this morning. One of the charts we’ve been following is VIX vs. VXV. It has been below .9 most of the week and looks like it’ll give an official all clear signal tomorrow. I’ll do a full update of our core indicators tomorrow and highlight other general market indicators over the weekend.

 
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So Far So Good

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Last week I mentioned that the nature of the bounce would tell us if we’re headed to new highs or seeing a failed rally. As of this week we’re on track to see new highs…if Russia and Ukraine will just cooperate. The underlying indicators I watch are improving enough to support a move to new highs, but the fear of a larger war in Ukraine is putting a drag on the bounce. As a result, risk is the most important indicator to watch at the moment. Even with world tension our market risk indicator backed away from a warning last week. Now only one of its four components is warning (and it has turned back up). Our core measures of risk continue to signal all clear. Fear of risk is moving the right direction and should support the market in the absence of bad news. The ratio between VIX and VXV improved last week, but still couldn’t get back below .9 to signal the rally should continue. It was below

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Some Positive Signs

140813ElderImpulse

I’m starting to see some positive signs that the dip is behind us. First is Elder Impulse for the S&P 500 Index (SPX). It has a tiny blue bar for the week. If it can hold or move to green by Friday it will be a very good sign. Next is the ratio between VIX and VXV. If fell below .9 today. It needs to hold below that level for the rest of the week to signal the worst is behind us. The next two hurdles to cross are from price on SPX. The 50 day exponential moving average is where the market closed today and the 50 day simple moving average is near 1955. In addition, the most tweeted levels for the market are near the 1955 area. If those two levels are surpassed then the odds will favor an advance to the all time highs.

 
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Watch the Bounce

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It’s looking like the market is ready for a bounce. The nature of any bounce will tell us whether we should expect new highs or if the rally will fail. Here are some of the critical charts I’ll be watching over the next week or two. A chart I show often when the market is starting a move lower is the ratio between near term volatility (VIX) and mid term volatility (VXV). Spikes in this ratio show immediate fear is greater than longer term fear. They are usually associated with an event or a sudden recognition of danger by many market participants. When the market bounces out of a short term low this ratio can help us determine if near term fear is subsiding or lingering. Over the next few weeks we want to see it fall below .9 to give the all clear signal. If it can’t move below that level the odds favor more downside ahead. This indicator couldn’t clear the warning two weeks ago and signaled that

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How Low Will it Go?

Published on August 7, 2014 by in Market Comments
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It’s probably too early to break out this chart, but I thought I’d show it anyway. Usually when the market falls steeply over a few days then consolidates for several days it is only the half way point of the move. Today it looks like we fell out of the consolidation range. As a result, my back of the napkin math targets roughly 1860 on the S&P 500 Index (SPX) as the next stop for this move. You’ll note that during 2013 the pattern failed a couple of times. The failures are similar to many other indicators in 2013. Nothing that predicted lower prices worked. If the market is starting to turn over then I expect to see indicators like this pattern start working again.

 
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Breadth the Indicator to Watch

Published on August 3, 2014 by in Market Comments
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Over the course of this year I’ve been consistent in repeating that I didn’t think the market could suffer a correction unless breadth broke down. Even though many other indicators have warned on and off this year, breadth has held strong. This week the picture changed a bit. First let’s look at the breadth indicator that warned first. The ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX) warned in early July when it broke below its 20 week moving average. It turned back up this week but as a result of large caps selling faster than small caps. When a ratio turns up I like it to result from upturns in the numerator and denominator so this upturn isn’t exactly positive. The NYSE Advance/Decline line (NYAD) is currently experiencing its largest decline in a year. This indicator shows that since the first of July there has been broad based selling as more stocks are declining than advancing. Other declines in the market this year

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