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Which Way?

Our market risk indicator closed today on a warning signal again.  However, as most of you know we require a weekly close before changing portfolio allocations.  The market is still at a point where it could recover from the recent weakness and resume its uptrend or at the least bounce from oversold conditions.  As a result, we’re willing to give the market the rest of the week to show its hand…even though we really don’t like it.  Bottom line, we’re reluctant to make changes ahead of a weekly close especially since the market is so oversold.  We’d much rather hedge our portfolios or raise cash after a bounce that fails. Of course, the market never seems to grant our wishes so we’ll simply follow our indicators. For personal portfolios there is nothing wrong with doing some house cleaning and removing (or hedging) positions that make you lose sleep at night.  At the very least start building a list of positions that you’d want to trim if the market accelerates lower.

As a side note, our smoothed Twitter sentiment indicator for the S&P 500 Index (SPX) is still wedged between ascending and descending trend lines.  It is currently painting a positive divergence, however, it will need some readings near or above the +10 level over the next few days to keep it positive.  At the moment it appears that we read it incorrectly and should have seen the negative divergence from the first of May then subsequent break of a short term up trend line and zero as a consolidation warning.  I’ve put the missed uptrend line along with a signal line that would have been a consolidation warning in black on the chart.  However, it wouldn’t have made much difference because the break higher (where I’ve annotated with a green vertical line) would have cleared the consolidation warning and we’d have expected a resumption of the uptrend in price anyway.  Long story short, the last signal was clearly a failure.

From here all we can do is watch the two converging trend lines in smoothed sentiment and see which one is broken first.  We could see it reasonable that market makes one more push lower to somewhere in the 1525 to 1540 area on SPX before garnering enough support to rally.  1535 and 1550 are currently the most tweeted levels, but 1525 is near the 200 day moving average which may cause the slide to overshoot the projections on Twitter.  For a bullish resolution we’d love to see a big down day that reaches into the target area and is bought aggressively. But once again, we’re asking for a wish that markets don’t often grant.  We’ll post another general market update if anything significant occurs.

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