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Teflon Market

This past week the market proved itself once again by refusing to let bad news stick. Our core market health indicators were mixed, but generally improved.  This leaves our portfolio allocations the same.

Market Positives

Once again the most positive thing in the market is price. Every one percent dip seems to be met with buyers.  Bad news continues to be seen as a buying opportunity and market participants don’t believe there is substantial risk to the downside. Ironically, the the technical indicator that is working best is price. Since the November low a 3.5% trailing stop would have been the only thing you would have needed to stay on the right side of the market.

Our measures of market risk have been a good guide as well, but we never feel comfortable relying solely on measures of risk. This is because risk almost always enters the market suddenly and often doesn’t warn until price has already fallen.  It is for this reason that we rely on a variety of indicators to guide our general portfolio allocations.  Some of the indicators lead and others lag which helps us add hedges or move to cash as the market is building a top, rather than simply reacting to price and risk alone.

Measures of breadth such as new highs, stocks above their 200 day moving average, and the bullish percent index are all showing strength.  This tells us that there is interest in pushing a large number of stocks higher.

Our Twitter sentiment indicator for the S&P 500 Index (SPX) cleared its consolidation warning after just a few days of selling and the subsequent bounce.  The break above 1575 on Wednesday brought with it enough bullish sentiment to generate a positive initiation thrust on the daily indicator.  Bullish tweets were cheering the move to new all time highs and bears were conceding the point.

Twitter sentiment support and resistance for the stock market

Wednesday’s break higher brought with it a high volume and intensity which is a change from the recent pattern where down days have generated high intensity and up days were quiet. Now that bullish days are showing some intensity we may have an indication that the bears have finally thrown in the towel. If the market continues to show this pattern we believe it will be positive.

Smoothed sentiment now has a good confirming trend line that corresponds to the last two lows in price. It is above zero and has cleared its consolidation warning by moving back above the negatively diverging down trend line.  There is still a good amount of bearish sentiment in the Twitter stream, but the bulls are overwhelming it. This shows our sentiment indicator confirming the up trend. We find it interesting to note that Jason Goepfert of SentimenTrader pointed out this week that “The percentage of bulls among individual investors has dropped to the lowest level since March 2009.”.  This highlights the difference between Twitter sentiment and survey sentiment.  Survey sentiment acts as a contrary indicator while Twitter sentiment confirms the trend and can warn of consolidation or changes in trend.

Twitter support and resistance tightened significantly this week. Once SPX cleared 1575 the tweets for anything below that general area stopped. Even Friday’s downside action didn’t generate predictions for prices below 1570. Above the market there are just a few calls scattered at 1610, 1657, and 1700, but there are many more tweets mentioning 1600. We suspect that traders want to see a few more companies report earnings before making predictions or placing anything but obvious trades like selling 1600 and buying 1575.

Sentiment for the market’s major sectors saw financials move into positive territory while industrials and consumer staples fell. This is an encouraging sign that the flight to quality is starting to ease.

Stock market sector sentiment from Twitter

When we put all of our sentiment indicators together we get the impression that the bulls are on the verge of a major victory. Their ability to push SPX to all time highs with a positive initiation thrust and confirmation from smoothed sentiment is a good setup for higher prices. The only thing standing in the way of the bulls is their lack of tweets for those higher prices. The tight range of support and resistance tells us that the bulls are waiting for permission to move above 1600.  Twitter sentiment suggests that the market is poised to move higher over the next week, but will probably need some good earnings reports to give the bulls confidence to bid prices up.

Mixed Signals

As we mentioned above, our core market health indicators generally improved. However, they didn’t rise as fast as we would expect given the fact that the market is making new all time highs.  This gives us cause for concern and sends a mixed signal.  We can’t tell if the market is rounding out a top and our indicators are leading or if they’re misfiring (as occasionally happens).  We’re seeing many other market technicians making the observation that their favorite indicators aren’t working so we have to consider that ours may not be working either.

Our investor contentment indicator has spent the last several weeks in positive territory, but is now falling.  It is currently sitting just above the zero line. Our market stability index dipped into negative territory two weeks ago, but recovered back to neutral this past week.

Market Negatives

Our measures of the economy, market quality, trend, and strength are still negative.  Once again, we would expect them to be more favorable considering the fact that the market is hitting all time highs.  These are keeping our long / cash portfolios with a lot more cash than we normally have.  Our hedged portfolio is more constructively positioned.  Only time will tell if our health indicators are right or wrong in this particular instance so we continue to discipline ourselves and follow our methodology.

Conclusion

We’ve got a Teflon market that is shaking off bad news, but our core market health indicators aren’t acting like they should at all time highs.  Our Twitter sentiment indicator is telling us the market wants to go higher, but needs a catalyst. We suspect that earnings season will either provide that catalyst or make the bulls rethink their positions. This is a good time to watch the market carefully and stay open to more than one outcome. We’re comfortable being modestly long and hedged.

 

 
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