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Breadth Checkup

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I’ve stated several times over the past year that breadth must deteriorate for the market to fall substantially. In mid July I pointed out the weakness in the ratio between the S&P 500 index (SPX) and SPX equal weighted (SPXEW). When it falls below its 20 week moving average it is often a sign of choppy markets to come. The market rallied after SPXEW’s initial failure, but during that rally SPXEW only made it back to the underside of its 20 week moving average then turned back over again taking the market with it. This is a great example of how tops are a process, not a single event. I’m not suggesting that we’ve seen the top, but wanted to point out how much time it takes for one indicator after another to weaken, then fail, before a top is actually in place. Tops usually take several months and are often fraught with whipsaws in our indicators (and portfolio allocations) before the weight of selling causes a severe down turn.

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Another Heads Up

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Our measures of trend have been bouncing back and forth across the zero line this week and are currently negative. If they are still negative on Friday we’ll be raising more cash and/or adding a larger hedge before the week ends. Here are some of the things I’m watching at the moment. The actively managed short ETF HDGE is currently rising even though a simple short of the S&P 500 Index (SH) is trending lower. This indicates that shorting selected stocks is starting to work. This often happens before the general market falls. In addition, mid term volatility (VXZ) is rising as well. This indicates that investors are getting nervous going into the end of the year. Small cap stocks (IWM) broke below the triangle I’ve been watching with an associated break in momentum from traders on Twitter. The negative gap in breadth between small and large cap stocks continues to grow. While everyone is watching small cap stocks I’m seeing deterioration in large caps under the cover of new

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Chinks in the Armor

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Although almost every indicator I follow is still positive I’m starting to see some chinks in the armor that suggest that a longer term top is in the making. Tops are a process and take a long time to form so there’s nothing to worry about yet, but here are some things to watch over the next several weeks. First is the ratio between the S&P 500 Index (SPX) and S&P 500 Equal Weight Index (SPXEW). We use the 20 week moving average as a bullish/bearish line. When the ratio is below the 20 week ma the market is often choppy as a result of reallocation rotation or the ratio falls as investors are rotating to safety. Recently it fell below the 20wma then retraced back to it and has turned down again. Investors are continuing to rotate to larger cap stocks which often precedes longer term tops. Next, the NYSE Advance Decline Line (NYAD) is reacting much more quickly to small price declines. This tells us that fewer stocks are

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Still On Track

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As I mentioned last Friday the S&P 500 Index should see some sideways action near the 2000 level. We’re now three days into sideways motion on relatively low volume. It’s the last week of the summer so we could continue to drift for the rest of the week. Once everyone gets back to work next week we should see some movement as people evaluate their portfolio performance and start to position themselves for the end of the year. Our indicators only have a few kinks that suggest we may be putting in a longer term top. The Russell 2000 (RUT) is still lagging the other indexes, but has been playing catch up this week. Junk bonds (JNK) have had a huge run, but haven’t recovered from the July damage. They’re telling us that investors are still positioning themselves away from risk. The ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX) is still below its 20 week moving average. This is a sign of rotation

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Breadth the Indicator to Watch

Published on August 3, 2014 by in Market Comments
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Over the course of this year I’ve been consistent in repeating that I didn’t think the market could suffer a correction unless breadth broke down. Even though many other indicators have warned on and off this year, breadth has held strong. This week the picture changed a bit. First let’s look at the breadth indicator that warned first. The ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 (SPX) warned in early July when it broke below its 20 week moving average. It turned back up this week but as a result of large caps selling faster than small caps. When a ratio turns up I like it to result from upturns in the numerator and denominator so this upturn isn’t exactly positive. The NYSE Advance/Decline line (NYAD) is currently experiencing its largest decline in a year. This indicator shows that since the first of July there has been broad based selling as more stocks are declining than advancing. Other declines in the market this year

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Divergences Continue

Published on July 26, 2014 by in Market Comments
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The trend that started two or three weeks ago where our core indicators moved up and ancillary indicators fell continues again this week.  Below are updates to some of the things I’m watching without much commentary. You can view this post for an explanation. I use the ratio between VIX and VXV to signal “all clear” when it falls back below .9 after a choppy of falling market. It couldn’t quite get there this week.   Large caps are still outperforming small caps…rotation to safety starting?   Junk bonds (JNK) are still under performing high quality bonds (LQD)…risk off.   The individual stocks I’ve been watching for clues to a direction are starting to diverge. Market participants are becoming more selective in the momentum names which caused a decline early in the year.  Here are some examples. Twitter (TWTR) is still in a holding pattern and hasn’t decided which way it wants to go.   Baidu (BIDU) is breaking higher.   3D Systems (DDD) looks like it’s breaking down.  

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Mid Week Update

Published on July 16, 2014 by in Market Comments
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Over the weekend I mentioned that our core indicators were positive but other indicators were falling. As the week progresses and the market climbs I’m seeing more of the same. Our core indicators are showing more strength and the things I saw showing weakness are mostly getting weaker. Our core measure of risk is diverging from price after falling from overbought territory. It isn’t recovering even as the market moves higher. This is a pattern that I’ve seen many times before that often precede corrections of 10%. It is a signal of some underlying weakness in the market structure and change of perception by investors. Next the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index is falling sharply after breaking below its 20 week moving average. More rotation to large caps (which often means safety). Today was a good up day in the market, but the momentum stocks didn’t participate. This is the most concerning thing on my radar at the moment. If these

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Tale of Two Markets

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Last week’s market action didn’t affect our core health indicators too much, but many of the ancillary indicators I watch suffered some damage. While the market looks healthy on the surface there are enough indicators warning to suggest the worst isn’t behind us yet. Currently we have a tale of two markets. Although our core health indicators are positive most of them have weak enough readings that they could turn negative over the next few weeks. However, this would be very unusual given the fact that many of them turned positive just last week. Generally, when all of them move above zero they stay there for at least two months. Weakness in these indicators will provide significant warning. Another indicator that is telling two stories is our core measure of risk. It is still showing low perceptions of risk, but just came out of an overbought condition. This often marks the beginning of corrections larger than 10%. Momentum stocks are also acting indecisive. Many of them have had good runs over

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Back to Normal

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In early May I mentioned that the  conditions of our indicators gave a 60% chance that the sideways consolidation in the S&P 500 Index (SPX) was “normal rotation and profit taking that will result in higher prices when it’s done”. They also gave a 40% chance that an intermediate term top was in the works. In that post I also mentioned that various measures of breadth and risk “will need to break down if the market is going to correct”. These measures held up and SPX moved on to new highs. It looks like the odds played out correctly this time and market internals are getting back to normal…although reluctantly. One thing many bears have been mentioning is the number of new highs on NYSE being very low during May even though SPX was within a few percentage points of all time highs. That condition resolved itself this week. The one sign of breadth that has shown the most weakness over the past month is the ratio between SPX equal weight

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S&P 500 Equal Weight Index Urging Caution

Published on May 21, 2014 by in Market Comments
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I’ve showed this chart either here or on Twitter and StockTwits over the past few weeks because it continues to weaken.  It is the ratio between the S&P 500 Equal Weight Index (SPXEW) and the S&P 500 Index (SPX). When it falls it signals that smaller stocks are under performing large cap stocks and can warn that market participants are rotating to safety. Today it fell below its 20 week moving average which usually results in a choppy period for the market in the following weeks. If it’s still there at the close on Friday it will be another warning. As a side note, this indicator is currently moving in the opposite direction of many of our core indicators. They are mostly rising sharply this week.

 
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