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Tale of Two Indexes

Dow Theory non confirmation

Over the past week the non-confirmation in Dow Theory between the industrials (DJIA) and the transports (DJTA) widened. Both indexes have been painting a line for over two months. Now both indexes have broken out of their lines. The problem is DJIA broke upward and DJTA broke down. This creates a non-confirmation that warns of a possible long term trend change in the near future (next several months…remember Dow Theory is about the very long term trend). Until this non-confirmation clears with the transports moving to new highs (and of course the industrials too) investors should be cautious about adding new long positions. On the other hand, if DJIA breaks the lower boundary of its range along with the transports then it will add a larger warning that the long term trend might be changing. Any low created after a break lower from the range in both indexes will create a new secondary low that will be the trigger point of a change from a bullish trend to a bearish

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Still Healthy Intermediate Term

150508spxSR

Last week I mentioned that my intermediate term indicators strengthened while some short term indicators that I follow were showing weakness. This week I’m seeing the short term indicators right themselves and the intermediate term indicators continue to strengthen. This increases the odds that the market will finally break out of the current range to the upside. Of course, price is truth so 2120 on the S&P 500 index must be decisively broken to the upside (along with the current Dow Theory line breakouts) for confirmation that the next intermediate term trend is underway. One positive indicator comes from support and resistance levels generated from the Twitter stream. Traders are now tweeting higher price targets which indicates they’re putting on bullish trades. Another positive sign this week is NYSE new highs are rising and new lows are falling as the market gets close to new all time highs. We still want to see new highs break its recent down trend for confirmation that investors are willing to buy shares that

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Things to Watch

Published on May 6, 2015 by in Market Comments
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Here are a couple more things showing up that are small warning signs. First is the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX). It is close to breaking below its 20 week moving average. The S&P 500 index is weighted by market capitalization so the larger stocks have more influence on its movement. SPXEW is weighted equally so a ratio between SPXEW and SPX will show money moving between large cap and mega cap stocks (because SPX is made up of large and mega caps). When the ratio moves down it indicates money moving into mega caps. Possibly from a flight to safety, but is most likely market participants buying companies with global exposure in reaction to recent dollar weakness. A move below the 20 week moving average often results in a choppy market for a few weeks due to the rotation. Another thing that is a bit concerning is the NYSE Advance / Decline line (NYAD). Since the lows in October NYAD

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Monthly MACD Bearish Crossover

Published on May 4, 2015 by in Market Comments
150504spxMACD

At the end of April monthly MACD for the S&P 500 Index (SPX) created a bearish crossover. However, momentum is still fairly strong. As a result, I take the monthly MACD signal as notice to start paying closer attention to the market because it is starting to stall (but not a signal that a long term top is in). If momentum crosses below 100 it will increase the odds that a long term trend change has occurred. Of course I’ll want to see confirmation from all the other indicators I follow before making a call. Here’s a close up view of the MACD crossover.

 
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Intermediate Term Indicator Strengthen

150501markethealth

Over the past week all of my core market health indicators have strengthened except for market risk. My measures of the economy strengthened enough to move slightly above zero. This means we’ll be adding exposure to the core portfolios. The new allocations will be as follows: Volatility Hedged portfolio: 100% long (since 10/24/14) Long / Cash portfolios: 100% long Long / Short portfolio: 100 long Here’s a chart with changes to the core portfolios over the past 18 months. Green is adding long exposure, yellow raising cash or adding hedges, red represents an aggressive hedge using an instrument that benefits from rising volatility. One thing of note is that my core indicators (which are intermediate term in nature) are currently at odds with some of the short term indicators I watch. For example, Trade Followers momentum from Twitter is currently issuing a consolidation warning. This indicates that even though we’re adding exposure the market may chop around or dip before it can move higher. Another thing of concern is that

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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

150326spxMonthly

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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