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Adding Exposure Amid Weak Breadth

161202MarketHealth

Over the past week, my core market health indicators continued to bounce around with some moving up and others falling. Most notably, my core measures of risk moved above zero. This changes the core portfolio allocations as follows: Long / Short Hedged portfolio: 100% long high beta stocks Long / Cash portfolio: 100% long Volatility Hedged portfolio: 100% Long (since 11/11/2016) Another thing of note this week is that my measures of trend are now in overbought territory. This occurred as my measures of market quality fell. It’s not a situation I like to see happen. This adds some doubt to the current market, but some of the other measures I watch are simply showing normal bullish rotation. So the question is, bullish rotation or the start of a larger decline? We’ll have to wait and see. Another thing that is somewhat concerning is that measures of breadth suffered more than expected this week. Take a look at the percent of stocks in the S&P 500 Index above their 200

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Bouncing Around

161118MarketHealth

As the market rallied this past week, my core market health indicators bounced around a bit. Most notably, my measures of trend surged to nearly over bought conditions. Core measures of risk continue to lag the market and look like they’ll need another week or two of sideways or upward movement (probably some backing and filling near new highs) in the S&P 500 Index (SPX) to go positive. One sign that the market is recovering from a breadth perspective comes from the Bullish Percent Index (BPSPX). The damage done to point and figure charts is being repaired and has brought BPSPX back above 60%. That takes a lot of pressure off from a risk perspective. Conclusion Market internals are repairing themselves in anticipation of a rally to new highs, however, we may need a bit of backing a filling before moving higher.

 
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Market Risk Warning

161104BPSPX

As I noted yesterday, my Market Risk Indicator is issuing a warning. As a result, the portfolio allocations change as follows. Long / Short portfolio: 50% long high beta stocks and 50% hedged with mid term volatility (VXZ) Long / Cash portfolio: 100% cash Volatility Hedged portfolio: 50% long and 50% hedged with mid term volatility (VXZ) As I mentioned last week, the bullish percent index is below 60% which significantly increases the risk of another 10% decline from the current level. My core measures of market health had the economy improving and moving above zero this week, while the core measures of risk fell below zero. Conclusion We have a market risk warning in place. It’s time to aggressively hedge until the current storm passes.

 
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Danger Signs

161028MarketHealth

Over the past week, my core market health indicators collapsed. They are all moving quickly toward zero. Most notably, is my core measures of risk. They are very close to going negative. In addition to my core measures, breadth measures are starting to warn as well. The bullish percent index (BPSPX), which tracks the percent of stocks in the S&P 500 Index (SPX) that have bullish point and figure charts, has fallen below 60%. When this occurs the odds of a 10% decline (from current levels) increases substantially. Especially if my market risk indicator signals. Currently, two of four components of that indicator are warning. However, the other two are a long way away from a signal. I suspect it would take a quick fall through 2100 on SPX to create a warning. Another breadth indicator that is warning is the percent of stocks in SPX that are below their 200 day moving average. It is also below 60%. I’m sure you’ve all noticed that small cap stocks have broken

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Continued Strength

161021MarketHealth

Over the past week, my core market health indicators mostly strengthened as the market bounced around. It continues to look like the market wants to go higher, it just needs a reason. The bullish percent index (BPSPX) is still holding above 60%. As long as it stays that way the odds favor a mild decline over a 10% or more from here. If BPSPX falls below 60%, I suspect it will be as the S&P 500 Index (SPX) falls below 2100, which is a major support level.   Conclusion Waiting and watching as core indicators strengthen. It looks like the market wants to go higher. But, the range between 2100 and 2200 on SPX represents significant support and resistance so a break should point the next intermediate term direction.  

 
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Make or Break Time… Kinda

161014BPSPX

It’s looking like make or break time for the market. So far, it looks like we’re seeing normal consolidation with healthy market internals. But, we’re getting close to a point where the risk of a 10% correction rises substantially. Long time readers know that when the bullish percent index (BPSPX) gets below 60% the odds of a large decline rises. We’re getting close to that warning level. Looking at a daily closing price chart of the S&P 500 Index (SPX) it appears that we’re painting a bull flag. Once the consolidation is over, this pattern should resolve upward. One positive thing that indicates we may have seen the worst comes from support and resistance levels tweeted by traders on Twitter (from Trade Followers). Yesterday, SPX caught at the first support level near 2120 then rallied sharply. This goes into the plus column, but SPX is still pretty far above its 200 day moving average. I wouldn’t be surprised if the current rally fizzles and takes the market down to the

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Setting Up for Year End Rally

161007MarketHealth

Over the past week, my core measures of market quality moved back above zero. During the same period my measures of market trend and strength surged higher as well. The strength in these indicators suggest that the market will rally into year end. Earning season could change the market’s opinion, but without major problems during the first few weeks I suspect we’ll be off to the races. The move in market quality changes the current core portfolio allocations as follows: Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or use the ETF SH) Volatility Hedged portfolio: 100% long (since 7/5/2016) Here is a chart that shows the core portfolio allocations over the past year. Green lines represent adding long exposure. Yellow is raising cash or adding hedges. Red is an aggressive hedge using mid term volatility. Another sign that market participants are expecting a year end rally comes from the ratio between the

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Here We Go

160930MarketHealth

Over the past week, all of my core market health indicator strengthened. Most notably, my measures of the economy and market quality, which had been laggards, rebounded sharply. Their current trajectory will likely see one or both of those categories go positive next week if the market continues to show underlying strength. It’s looking like the consolidation we’ve seen for the past two months is about to end. Another indication that the consolidation is about to end comes from Trade Followers. Their measure of sentiment for the S&P 500 Index (SPX) is calculated from investor and traders live comments on the Twitter stream. When the trend of sentiment changes it often leads the market. Earlier this week this indicator broke a downtrend line that had been in place for almost three months.This indicates investors are getting comfortable with the market moving higher and should provide fuel for a run at new highs. You can see a current chart of Twitter sentiment for the stock market here. The site also has

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Core Portfolios Reducing Exposure

160902MarketHealth

Over the past week, my core market health indicators bounced around a bit. Most notably is that my core measures of the economy fell below zero. This results in a change in the core portfolio allocations as follows: Long / Cash portfolio: 60% long and 40% cash Long / Short portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or an ETF like SH) The Volatility hedged portfolio is not impacted by the core indicators so it is still 100% long (since 7/1/16) One other notable thing this week is my core measures of risk are still close to signaling a very bullish condition for the market. They aren’t being impacted by the small dip that started a couple of weeks ago which is a positive sign, but they haven’t moved into the “very bullish” territory yet either. This is the thing I’m watching most closely for signs of a strong rally into the end of the year.

 
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Holdouts

160826spx

In mid July, the major indexes started making new highs. The Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) broke higher first, followed by the NASDAQ 100 (NDX) then the NASDAQ Composite. The pattern on a weekly chart of SPX shows a long consolidation followed by a breakout, retest, and subsequent rally. This suggests that the market should continue to move higher in the intermediate term. Although most of the major indexes have reached new highs there are still a few holdouts. The most significant holdout is the Dow Jones Transportation Average (DJTA). It is still 17% below the December 2014 high. From a Dow Theory perspective, DJTA is still about 3.5% away from signaling a bull market (needs a move above its last secondary high). The industrials however, are above their last secondary high so a Dow Theory non-confirmation is currently in place. With the SPX showing a strong bullish chart pattern I suspect DJTA should signal a bull market in the coming weeks/months. Nevertheless, keep

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