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Market Overview 3/23/13 – Caution Warranted

Over the past week all of our core market health indicators deteriorated with only our measures of risk staying above zero.  This caused us to raise cash or add shorts to our portfolios as a hedge.  You can see details of our market health indicators and portfolio allocation here.

Market Positives

Once again the market’s most constructive feature is its resiliency in the face of bad news.  It appears that market participants firmly believe that nothing can seriously damage price. This is also reflected in our measures of market risk which are firmly positive and our investor contentment index that moved back above zero this past week.

Measures of breadth like the percent of stocks above their 200 day moving average and the bullish percent index are confirming the move out of the February lows.  The percent of stocks above their 50 day moving average have been diverging from price since mid January.  New highs confirmed the break above 1530 on the S&P 500 Index (SPX), but have not gained much headway since. This tells us that stocks are not breaking down hard, but haven’t decided to move decisively higher. It suggests that we may see choppy or sideways movement in price.

Mixed Signals

Our Twitter sentiment indicator for the S&P 500 Index (SPX) is showing indecision with most of the readings on the daily indicator in the +5 to -5 area. Neither the up or down days in price can move sentiment far away from zero.  Friday’s positive price action was met with negative sentiment suggesting that traders are shorting these levels and don’t believe price can move substantially higher. The daily indicator is starting to paint a pattern similar to mid February just before the market fell sharply for a few days.

Twitter Sentiment for SP500

Smoothed sentiment has fallen back to the zero line as price has drifted sideways.  During this time the intensity of tweets has fallen off slowly. This is another sign of indecision by market participants as they are tweeting less and giving fewer reasons for their bias.

Twitter support and resistance levels compressed this week with the calls for both 1500 and 1600 on SPX drying up.  Instead, the majority of tweets targeted 1530, 1540, 1550, and 1576.  This tight range suggests that a break of the recent lows in the 1545 area could bring on some swift selling down to 1530.  While a move above 1576 should carry to 1600.  A tight range of support and resistance is another sign of indecision by traders.  They are waiting for a break in the range before committing themselves.

Twitter sector sentiment has basic materials, energy, and technology with negative readings.  Financials are showing weakening sentiment with consumer staples, utilities, and health care showing strength. This gives a minor warning that market participants are shifting their portfolios to defensive stocks.

Twitter Sector Sentiment

Twitter sentiment, sectors, support, and resistance are suggesting caution.  Market participants are showing indecision in sentiment, rotation to defensive sectors, and a tight range in support and resistance.  This highlights a lack of enthusiasm for higher prices and a mildly bearish overall bias. We’ll be watching sentiment closely this next week as it should lead price either higher or lower.  If we get a break of the current range with confirmation from sentiment it should give the market a direction for the next few weeks.

Our market stability index is falling, but still above zero.  In a healthy market we like to see this indicator trade sideways above the zero line.

Market Negatives

Our measures of the economy, market quality, trend, and strength are all now below zero.  When we get this many indicators below zero the market has a very hard time moving up.

Conclusion

This is a time to be cautious. Our core market health indicators don’t like this market and sentiment on Twitter has a bearish bias.  That gives us both intermediate (market health) and short term (Twitter sentiment) warnings.  The odds favor at least some sideways consolidation of price with a growing chance of a larger sell off.  We’ve positioned our portfolios in wait and see mode where very little money is at risk.  The market must prove itself before we’ll become more constructive.

 
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