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It’s All About the Range

150424spxSR

Another week gone and the market is still in a range. The S&P 500 index (SPX) has climbed back to the top of the range at 2120, while the Dow Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA) are lagging a bit. As I mentioned last week the direction of the break in SPX, DJIA, and DJTA will point the direction of the next intermediate term trend. So we’re left waiting again this week for confirmation of the uptrend or a rejection at the current level which will result in more time waiting. On thing I’m watching on a longer term scale is the continued negative divergence from several indicators. Negative divergences aren’t good timing devices for the simple fact that they can last for month or years, but they do provide important information if price declines. The percent of stocks above their 200 day moving average has been diverging from price for over two years (although from abnormally high levels). This indicates that market participants are getting

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More Evidence of Accumulation vs Distribution

Dow Theory Line

Earlier in the month I highlighted some technical analysis indicators that showed a battle between accumulation and distribution. As of Friday we have more evidence of a battle between people accumulating stock and distributing it. This evidence comes from Dow Theory. Friday’s decline in the Dow Jones Industrial Average (DJIA) created a Dow Theory line. Both averages are now showing a pattern that indicates either accumulation or distribution is underway, but we’ll have to wait and see how these patterns resolve to know which will win. William Peter Hamilton stated: When a ‘line’ is in process it is the hardest thing in the world to tell either the nature of the selling or that of the buying. Both accumulation and distribution are at work, and no one can say which will ultimately exercise the greatest pressure. When the pattern is broken we’ll have an answer that will have a significant impact on the market. Hamilton said that the break of a line will indicate a change in general market direction

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Accumulation vs. Distribution Battle

Published on April 9, 2015 by in Market Comments
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Over the past six months there has been distribution occurring in the market. However, the market has been able to move higher due to bottom fishing and value buying. So far the choppy market we’ve seen since the first of the year has been a result of profit taking (distribution) in stocks that had been making new highs with the money raised being put to work (accumulation) in stocks that have been beaten down enough that they were making new lows at the end of last year. When the S&P 500 index (SPX) broke higher in March the number of new highs jumped to healthy levels. Currently, SPX is within 2% of those highs, but NYSE new highs aren’t rising rapidly. This is a bit of a concern and suggests that distribution is still occurring, but nothing to worry about yet. Another sign of the battle between the accumulators and distributors comes from Trade Followers breadth. It is holding up at healthy levels with the same condition as NYSE new

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The Long View

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As long time readers know, I usually focus on intermediate term indicators because our core portfolios attempt to catch intermediate term up trends (and avoid large draw downs). I don’t often focus on long term indicators so I thought it would be good to step back a bit and see what the very long term indicators are telling us. For the most part they are still showing healthy readings that indicate a long term bull market, but they’re starting to stall. Over the past month the monthly MACD for the S&P 500 Index (SPX) has be crossing back and forth between a bullish and bearish cross. Momentum for SPX is diverging from price as well. As you can see from the chart below, these two indicators have been losing strength for well over a year. For that reason, they aren’t very timely so instead of using them to indicate portfolio allocation changes I use them as warning to watch intermediate term indicators more closely. Looking at SPX on a weekly

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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

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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

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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

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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

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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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