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SPX Breaks Twitter Primary Support Level

The S&P 500 Index (SPX) broke below our primary support level of 1450 today.  Along with that break we’ve seen two days of fairly negative sentiment.  Today’s sharp move lower with a substantial move down in our daily Twitter Sentiment Indicator could prove to be an initiation thrust to the down side.  This isn’t a good short term sign.  As we mentioned in our weekly update, a break of 1450 could take us down to the 1422 level or even our major support level of 1400.  We don’t consider 1440 to be anything more than minor support (see the weekly update for an explanation), so the market must catch and rebound at 1440 in the next few days or we’ll be headed for at least a 3% to 5% correction. On the positive side, even though support has been broken and we’re seeing a substantial move lower in daily sentiment, our smoothed sentiment indicator is still above a rising trend line.  We don’t like to see it go below zero

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Market Overview 9/22/2012 – Ready for a Move

Over the course of last week most of our market health indicators showed consolidation in line with the S&P 500 Index (SPX).  Some of the indicators were up slightly and others were slightly down.  All in all, a normal response to consolidation.  Our Market Strength indicator rose into overbought territory during the week.  Our measures of risk and quality showed continued strength.  Our measures of trend stalled as would be expected during a consolidation of market gains.  Our measures of the economy showed the most weakness of all our indicators, but is still clearly positive.  The continued strength in the health of the market is keeping our current allocation in our hedging strategies at 100% long. Market Positives The S&P 500 Index showed surprising strength last week considering the quick move from 1440 to 1475 in the prior week.  Generally a move of that nature needs a fairly significant consolidation (often back down to the break out point).  Instead, we saw buying on every small move lower.  Even the intra-day

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Consolidation Needed

We’re seeing some much needed consolidation after the big run from 1400 on SPX.  The move was almost straight up causing price to move above the top of its Bollinger band.  A few days to a week of sideways to down action will be very healthy for the market.  We’d like to see price get inside the Bollinger band, then crawl along the top side of it as the next phase of this run.  As you can see from the chart, hitting the top of the band is not a problem in a strong market as price can move for a long time along the top.  We’ll be watching for the bands to narrow because that’s when direction changes occur. On a side note, our Twitter Sentiment indicator is still providing readings above or barely below zero on a daily basis.  This is keeping our smoothed sentiment indicator above zero even as the market is consolidating.  So far the action looks like a much needed rest.  It doesn’t look like

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Market Overview 9/15/2012 – Short Covering Over

During the first part of last week the market consolidated just below 1440 on the S&P 500 Index, then broke out above minor resistance on Thursday and Friday.  This move higher brought with it a sharp rise in all of our market health indicator categories (quality, trend, strength, economy, and risk).  Even our measures of the economy accelerated sharply to the upside.  Even more encouraging is that we’re seeing what appears to be the start of a larger rotation towards risk.  Enough of our indicators are positive to leave us in a 100% long position in our hedging strategies. Market Positives Our Twitter Sentiment Indicator strengthened early last week while the market was waiting for news out of Europe and the US Federal Reserve.  This occurred even as the S&P 500 Index moved sideways.  When SPX broke through minor resistance at 1440 it was accompanied by a sharp move up in our smoothed sentiment indicator.  This move confirmed the rally as it also broke the trend of lower highs that

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What the Market Wants

With the announcement today from the Federal Reserve to purchase agency mortgage-backed securities and continue their current low interest rate policies (ZIRP) the S&P 500 Index gained over 1.6%.  This move pushed the SPX through the major resistance level of 1440.  This was a level where we saw a lot of tweets aggressively shorting.  In fact, 1440 has been mentioned so much over the last couple of weeks that we believe we’ll see a sizable short covering rally in the next few days or early next week.       If you were caught short today it’s important to remember that your beliefs aren’t as important as the market’s reaction. What you want isn’t important.  What the market wants is. Blair Jensen Nothing is more frustrating than building a market thesis, checking it against history and current market internals, placing your trade only to see it stopped out within a few days.  One thing I’ve learned from painful experience is that I can’t bend the market to my will.  So

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S&P 500 Stocks Above 200 DMA Promising

One of the things we look for in a healthy market is broad participation by many stocks.  Gauges like the Bullish Percent Index, the number of stocks making new 52 week highs, and the percentage of stocks above their 200 day moving average are all good indicators of market breadth. Recently the number of S&P 500 stocks above their 200 day moving average showed some promising signs.  In the chart above, notice that stock above their 200 DMA did not confirm the move higher in the S&P 500 Index coming out of the June lows.  From mid June till early August the chart traded sideways even though SPX was trending strongly upwards.  The early move in price was against a wall of worry where many stocks lagged the market as a whole.   The sideways movement in the number of stocks participating strongly in the rally stayed low as market participants bought quality or safe stocks rather than a broad number of securities.  It showed that people were still worried

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Market Overview 9/8/2012 – Cautiously Optimistic

Over the past week we saw improvement in almost all of the market health indicators that we track allowing us to move to a 100% long position in our hedging strategies.  Our measures of market quality improved slightly, market strength improved substantially, and our trend indicators finally confirmed.  Our measures of the economy turned positive, but are still on the weak side causing concern that the positive signal may not last long.  Our measures of risk remained positive, but flat, even as the market moved higher.       Positive Our Twitter sentiment indicator for the S&P 500 Index turned positive on a short term basis.  In fact, it had the highest reading to date on a daily basis.  This reading signified confirmation of the close on SPX above 1422.  Our smoothed sentiment indicator has strengthened over the past three weeks, but is still painting a series of lower highs for the entire rally out of the June lows. This comes as a result of many market participants tweeting over

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Double Top Broken

Three weeks ago amid the frenzy surrounding the bearish implications of the newly formed double top we posted that double tops are meaningless to intermediate term investors.  Our point was that trends tend to continue so a double top in an uptrend is broken to the up side much more often than price reversing and starting a new trend.  Price often stalls at previous price points and create opportunities for short term trades, but an intermediate or long term investor should use those dips to accumulate more shares. The price action today signaled a shift in expectations among market participants.  While most people were uncertain over the past month as evidenced by the sideways action in SPX, today showed some conviction buying.  This action in SPX and Nasdaq is encouraging for the bulls.  We still don’t have confirmation from DJIA or RUT but it should follow shortly if the market continues upward. We want to see the Russell 2000 confirm, but aren’t too concerned about the Dow Industrials.  The lag

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Value Stocks Serve as a Warning

A few weeks ago we highlighted Nasdaq new highs as one of the things that had us concerned that this up trend is in the late stages (rather than a new long term up trend off the June lows).  We like to watch several measures of market health to get a feel for where the S&P 500 Index or Nasdaq is headed next.  Another sign that we could be near the end of this up trend is the rotation to value stocks that started in April of this year. In the chart below we show Berkshire Hathaway (BRKB) as a proxy for value stocks compared to the S&P 500 Index (SPX).  Notice that the small sell off in April and the subsequent rally in May created a divergence between BRKB and SPX.  BRKB made new highs and SPX didn’t confirm.  The next leg down in SPX created a decent size correction, however, BRKB diverged again by not making a lower low.  This action showed money moving out of stocks in

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Market Overview 9/1/2012 – Wait and See

During the last few weeks while price on the S&P 500 Index consolidated we saw improvements in all of our indicators except for our Market Risk Indicator.  None of our indicators improved enough to change the position in our portfolio, leaving us at 60% net long. Positive Our economic indicators strengthened slightly this week.   They are still trying to create a bottom.  As we mentioned last week, previous attempts over the last 18 months have failed so we’re crossing our fingers that this time will be different. Measures of market quality are still positive and moving up a small amount.  Most of our market strength indicators are positive and improving significantly.  This makes us feel comfortable with our current positions going into September.   Mixed Our Twitter Sentiment indicator for the S&P 500 Index drifted lower all week as the market consolidated.  We prefer to see it strengthen during consolidations, but are encouraged that it isn’t deteriorating rapidly.  Our smoothed sentiment indicator still has a pattern of declining tops over

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