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Uptrend Resumes

Our core market health indicators didn’t change much this week so we made no changes to our core portfolios.

Market Positives

Our market risk indicator started showing concern during the selling on Thursday, but recovered substantially after the market bounced.  This is the indicator we feel is most important to watch in the current environment.  Higher concern about the Fed tapering QE or Japan’s woes will almost certainly show up in market risk before we see it in any of our other indicators.

As we mentioned on Monday we felt like the S&P 500 Index (SPX) should catch at 1600 due to multiple forms of support converging.  The two strong days that have followed indicate there were buyers waiting for that level which creates a good line in the sand.

Our measures of market quality, trend, and strength are all positive.  The selling last week didn’t do any substantial damage which indicates strength in the internal structure of the market.  In addition, our market stability indicator held up fairly well as the market fell. This indicates that traders might be getting comfortable with the problems in Japan.

Our Twitter Sentiment indicator for the S&P 500 Index (SPX) closed Friday with a reading of +19.4. We consider a print of +20 near a market low as an initiation thrust that often signals a resumption of an uptrend.  Friday’s reading indicates the market should continue to move higher in the near term.

Smoothed sentiment held up fairly well considering the 5% sell off over the past few weeks.  It barely fell below the zero line which reflects the large volume of tweets we saw calling for a bounce near 1600 on SPX. We feel fairly confident that there is a triangle pattern in smoothed sentiment that is created from a longer term uptrend and a short term down trend. If smoothed sentiment can break above its down trend line it would create a buy signal based on one of our criteria for trading individual stocks.  The long term trend line holding in sentiment with the 50 day moving average holding in price creates a possible setup. An initiation thrust followed by a break higher in smoothed sentiment creates the buy signal.  We’ll post an updated chart on Downside Hedge and on Twitter @DownsideHedge if we get a signal.

We’re seeing an interesting shift in sentiment from the small consolidations in February through April. Those smaller price moves brought with them much more fear on the daily indicator and substantial dips below the zero line on smoothed sentiment. More traders then believed that the market was putting in an intermediate term top.  During that time period we observed a lot of tweets mentioning underlying technical indicators pointing to lower prices.  We are not seeing that today.  Instead, most traders are focused simply on the need of a short term consolidation or correction before moving higher.

Support and resistance levels generated from the Twitter stream stayed mostly the same this week. There is major support below the market at 1600 and 1585 on SPX. Above the market traders are now targeting 1650, 1680, and 1700.

The sell off last week did some damage to Twitter sentiment for leading sectors. Only energy and financials held above the zero line.  Sentiment for utilities moved back to positive territory suggesting that traders believe the recent correction in that sector is a bit over done.

It appears that the market is poised to move higher over the near term. The important support level of 1600 on SPX held, we almost got an initiation thrust, the tone of tweets is constructive, and smoothed sentiment looks like it will flash a buy signal. A failure in smoothed sentiment at its down trend line and a break below its uptrend line will cause us to change our opinion to a resumption of the down trend.

Mixed Signals

Our measures of the economy are still negative, but slowly moving higher.  The measures of breadth that we follow are trying to recover, but still lagging a bit.  We’ll want to see them improve as the market moves higher or it will be warning that the rally may fail to reach new highs.

Market Negatives

The selling last week scared longer term investors which pushed our investor contentment index lower.

Conclusion

Conditions are in place for the market to move higher. We believe the uptrend has resumed on a healthy footing.

 
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