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Damage Done

Over the past week, quite a lot of damage was done to my core market health indicators. Two of the categories are at risk of going negative if the market can’t rally next week. Most significant is my core measures of risk. They fell substantially over the past two weeks. This means that risk from core market internals is rising. Meanwhile, the most sensitive components of my market risk indicator aren’t showing the same type of warning. They’re still in the very healthy range. This indicates that risk in the market at this moment is from core market internals and not investor perception of risk or an event. If my core market risk indicators warn without significant movement toward a warning from my market risk indicator, it will be an unusual occurrence for a longer term top. Other times where this condition has happened resulted in short to intermediate term dips during a longer term bull market. Here are some dates: Mid 2004, spring 2005, late 2005, and early 2006 thru August

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Continued Chop

Last week, I concluded: The market is trying to break out, but breadth isn’t improving. This condition often results in a choppy market. If the market can break out then bulls want to see breadth improve or we risk a good size decline when the rally ends. This week, it’s the same. Longer term indicators are trying to move into positive territory, but short term indicators and measures of breadth aren’t cooperating. My core indicators, which are intermediate term, chopped around a bit, but are still on a trajectory to go positive if the market can break decisively higher.   Another disconcerting breadth indicator is the percent of stocks in the S&P 500 Index that are below their 200 day moving average. This indicator is falling fast without much price damage, all while happening within a few percent of all time highs. If the market turns down from here I suspect the decline will be large. On the other hand, this is a condition that can lead to a buying surge if

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Ready for the Rally

Over the past few weeks, my core market health indicators improved significantly, with the exception of my measures of the economy. The strength seen suggests that the market wants to rally. Although my measures of trend and strength are still negative, they are on a trajectory to turn positive within a week or two.   One thing of note is that the current strength is coming from mega cap stocks. This isn’t a healthy condition. Normally, a healthy rally will have broad participation from the stocks in the S&P 500 Index (SPX). This isn’t happening. Look at the ratio between SPX equal weighted (SPXEW). It is still falling. Bulls want to see this ratio turn up if the market breaks higher.   Another sign of poor participation in the market comes from the percent of SPX stocks above their 200 day moving average. As SPX is approaching new highs, the percent of SPX stocks above their 200 dma is falling. This increases the risk that a breakout rally will be

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Market Health Bouncing Around

Over the past week, my core market health indicators bounced around, but didn’t move enough to make any changes to the core portfolios.   I’ve started to see a lot of chatter stating that this is the start of a larger top. So far, I’m not seeing the same evidence. There is a bit of deterioration in some of my measures of breadth, but nothing drastic for a small decline in the general market. The most significant change comes from the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). As I mentioned last month, when this ratio dips below its 20 week moving average we usually see some consolidation. The dip was delayed, but it seems that we’re now experiencing it.   Another measure of breadth is the percent of stocks above their 200 day moving average. Long time readers know that I don’t worry until it falls below 60%. As you can see, there are still a healthy number of stocks above

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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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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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Broad Participation

160819NYAD

It’s been a while since I highlighted some breadth indicators so here we go. First is the NYSE Advance / Decline line (NYAD). All I can say is Wow! NYAD is telling us that small cap stocks were the place to be coming out of the February low. Comparing the S&P 500 Equal Weight Index (SPXEW) against the S&P 500 (SPX) shows us how big cap stocks have performed against mega cap stocks. The move out of the February low showed widespread buying of big cap stocks, while mega caps lagged. This was a rotation out of the safety trade. Then we got a bit of consolidation in SPX as investors took some profit in big caps and re-allocated it to mega caps. Now it looks like the market is getting ready to run again, fueled by big caps. The percent of SPX stocks above their 200 day moving average (SPX200) shows the same picture as SPXEW. Widespread buying of big caps, followed by some consolidation, then renewed widespread buying.

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Chart Repair

160520spxbp

The rally out of the February lows has repaired a lot of charts. If you look at the bullish percent index (BPSPX) the last rally brought the percent of bullish point and figure charts in the S&P 500 Index (SPX) to nearly 80%. That level is higher than BPSPX achieved during all of 2015. This is an encouraging sign for the market as a whole because it gives BPSPX plenty of room to consolidate before getting below the 60% level. Long time readers know that I use readings below the 60% level to indicate increased risk (big market declines occur when breadth is already weak). So as long as BPSPX stays above 60% this indicator will remain bullish. Another indication of chart repair comes from the percent of stocks in SPX that are above their 200 day moving average. This indicator is back to the 2015 level again. It has also improved substantially from the levels of the August 2015 to November 2015 rally (which had price peaking above the

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Bottom Falling Out

Published on July 22, 2015 by in Market Comments
150722NyseHighsLows

I’m starting to see signs that market participants are abandoning their losers and pressing their shorts. When this occurs near all time highs it often means some pain is ahead for the major indexes. Here are some charts that serve as examples. First is NYSE New Highs / Lows. New lows have now risen above the point when the S&P 500 Index (SPX) was making lows in early July and last December. This indicates market participants aren’t bottom fishing. Instead, they’re abandoning positions that are causing too much pain. Another point of interest in this chart is that NYSE didn’t recover much from both June and July lows. This type of divergence from SPX is troubling. The Russell 2000 Index (RUT) and Dow Jones Industrial Index (DJIA) are also showing negative divergences from SPX. Next is a chart that compares a short of the S&P 500 Index (SH) and an actively managed bear fund (HDGE). SH has fallen to new lows while HDGE is holding up. This indicates that traders

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Thinning Market Trying to Recover

150717MarketHealth

Over the past week most of my core market health indicators improved. However, none of them moved enough to change the core portfolio allocations. This is a little discouraging given the fact that the S&P 500 Index (SPX) has rallied sharply. The overall picture I’m seeing is a thinning market that is trying to recover. Which is in line with a modest hedge or a moderate amount of cash for a cautious investor. Aggressive investors would be more comfortable riding out dips unless they are accompanied by high risk (Volatility Hedge). Below are the current allocations. Long / Cash portfolio: Long 60% – Cash 40% Long / Short portfolio: Long 80% – Short 20% Volatility Hedge: 100% Long The percent of stocks in SPX that are above their 200 day moving average has recovered from 50% back to 60%. This is a small positive sign that indicates some value buying is occurring (rather than dumping stocks as they break below their 200 dma). Unfortunately, the market has 15% fewer bullish

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