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Rotation Without Fear

Over the past week the rotation out of the most loved and momentum stocks into value stocks continued. The rotation is causing internal damage to our core indicators, but our measures of risk aren’t showing any fear.  This paints a picture of market participants simply taking profit on the stocks in their portfolios that had the largest gains over the past year.  Any fear appears to be limited to the high flying stocks, not the market as a whole…yet.  I’m seeing a lot of warning signs which suggest caution, but not aggressive action.

The percent of stocks in the S&P 500 Index above their 200 day moving average has recovered from its early February dip and is holding steady near the 80% level.  However, a look at individual charts shows many stocks painting bearish flag patterns just above their 200 day moving average.  General Electric (GE) is a good example.

The number of new highs on NYSE diverging from the market shows that a significant number of individual stocks (like GE) are failing to recover after the February lows. If bearish flag patterns like GE start to break down it will have a substantial impact on the market.

In addition, the Bullish Percent Index (BPSPX) has not been able to recover during the February rally and March consolidation.  It has painted a significant negative divergence with the S&P 500 Index (SPX) and last week it turned down again. The rising number of broken chart patterns highlights the internal damage being done even though price is holding within a few percent of all time highs.

Our investor contentment index went below zero for the first time since early December. Meanwhile, our market stability indicator has recovered back to zero for the first time this year.  This suggests that longer term investors are losing interest, but aren’t easily excited by declines.  That’s probably to be expected after a month of sideways consolidation in the general market.

Our Twitter Sentiment Indicator for the S&P 500 Index (SPX) continues to paint lower highs on a daily basis.  Up days in the market aren’t generating high readings and are often associated with negative prints.  Friday’s strong morning rally wasn’t enough to encourage traders on the Twitter stream.  Tweets were littered with mentions of a topping process, short covering, an oversold bounce, or looking for a place to get short.  Many traders are simply playing the range which results in our indicator printing tepid readings on a daily basis.

Smoothed sentiment painted a negative divergence with price into the last two peaks in the market.  It is now confirming the current sideways to down movement with another lower high.  It is on the verge of a consolidation warning, but the daily prints have been so mild that a moderately positive reading (+10) on Monday will turn it back up. A negative print will most likely trigger a consolidation warning.

The consolidation warning from the StockTwits stream is still in effect after trying to break higher, but being pushed back at its downtrend line during the week.

Support and resistance levels generated from the Twitter stream stayed fairly consistent over the past week building a clear range between 1840 and 1885 on SPX.  Other levels of support are 1850, 1830, and 1800 .  Tweets above recent highs have virtually disappeared.  The lack of tweets for prices above the market and significant calls for prices below suggest a negative bias by traders.

Sector sentiment reflects the recent weakness in Technology, Financial, and Consumer Discretionary stocks.  The lack of interest in Consumer Staples suggests that rotation to utilities and health care may have more to do with interest rate speculation than a rotation to safety.

Sentiment from the Twitter stream continues to weaken by every measure as the market moves sideways.  Daily and smoothed sentiment are painting lower highs, we’re on the verge of a consolidation warning, traders are predicting lower prices rather than high, and leading sectors are being shunned.  All together this puts downward pressure on price.  A consolidation warning or lack thereof on Monday will most likely point the near term direction, while a break of the range between 1840 and 1885 on SPX should continue in the intermediate term.

Conclusion

Market internals are breaking down with rotation the cause.  The motivation of investors to sell the best performing stocks from last year remains unclear.  At the moment it appears to be simple profit taking and not due to fear of a market decline.  I suspect the market will continue to chop around until a catalyst, either positive or negative, appears. We’re still moderately hedged and waiting for more information before changing our core allocations.

 
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