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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 sell off on Thursday rebounded into the close.  This indicates that buyers are stepping in to purchase stocks on any weakness.

Our market risk indicator is still positive and the fact that it is not deteriorating is a signal that traders want to be long the market.  Another encouraging sign is the S&P 500 index moved back inside the top of its bollinger band reliving the overbought condition.

Our Twitter Sentiment Indicator stayed strong as almost all of the tweets last week called for higher prices or talked about the market holding support.  Smoothed sentiment stayed above zero showing strength over several days even as the market consolidated.  Of note is Friday’s high reading on daily sentiment.  The markets closed mixed, but daily sentiment recorded our second highest reading ever.  Usually we only see high readings on significant price movement to the upside.  A high reading on a flat day near market highs is in response to people tweeting their anticipation of a move higher (rather than calling a top).

Twitter Support and Resistance levels on the S&P 500 Index tightened substantially last week with most tweets calling for 1450 as a bottom and 1500 as a top.  We see these levels as primary support and resistance with 1400 as the next major support level.  We still have 1440 and 1422 on our radar, but consider them now to be minor support.  This change is due to the large volume of tweets that consider 1450 as critical (rather than the previous break out point of 1440).

1475 on SPX is becoming minor resistance as people point to the most recent high as a level that needs to be overcome.  However, 1500 remains major resistance as it is mentioned in a large volume of tweets over a two month period.  The outliers on the high side from two weeks ago were not reiterated last week so it appears that the current consolidation is dampening the enthusiasm seen on the break above 1440.

We’re watching for a break above 1475 on SPX or below 1450 for the next directional move.  A break out above 1475 should carry the market to 1500.  A break down below 1450 could bring a correction that falls to minor support at 1422 or even major support at 1400.

Mixed Signals

As we mentioned above, our market strength indicator showed an overbought reading during the week.  This is not troubling in itself as it can (and usually) stays overbought for a few months at a time.  This usually brings a good rally as a result.  However, it also tends to signals the last leg up in an intermediate term move.  We’ll be watching for any weakness in this indicator for a sign that the rally is over.

Money is once again flowing into big cap stocks.  We don’t want to see this continue as it’s another sign of a tired rally.

This past week was a quadruple witching week in the options and futures markets.  These tend to add confusion to the tape as positions are unwound or rolled forward.  This takes away some of our optimism mentioned above about price holding up after a substantial break out.  We can rely more on price movements as an indicator now that options expiration is behind us.

Market Negatives

Our market Stability indicator is still reading below zero, not significantly, but enough to serve as warning that the character of the market could change quickly.  We’ll continue to monitor it on a daily basis as it is a sub component of our Market Risk Indicator and substantial weakness could move us to a fully hedged condition.

Another negative sign is the Dow Jones Transportation average (DJTA) closed below our first support level of 4935.  This gives us concern that the economy is weaker than our other measures of the economy indicate.  If DJTA closes below our next level of 4847 it could very well drag the market down with it.  At the least, it is signalling that the current rally is getting long  in the tooth.

Conclusion

Our indicators are telling us that the market is preparing for a move most likely to the upside.  It may take another week or so of consolidation, but that would be healthy for the market.

 
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