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Back to Normal

In early May I mentioned that the  conditions of our indicators gave a 60% chance that the sideways consolidation in the S&P 500 Index (SPX) was “normal rotation and profit taking that will result in higher prices when it’s done”. They also gave a 40% chance that an intermediate term top was in the works. In that post I also mentioned that various measures of breadth and risk “will need to break down if the market is going to correct”. These measures held up and SPX moved on to new highs. It looks like the odds played out correctly this time and market internals are getting back to normal…although reluctantly.

One thing many bears have been mentioning is the number of new highs on NYSE being very low during May even though SPX was within a few percentage points of all time highs. That condition resolved itself this week.

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The one sign of breadth that has shown the most weakness over the past month is the ratio between SPX equal weight and SPX. It looks like a whip saw and is now turning positive.

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Our core market health indicators turned up sharply near the May lows in the Russell 2000 Index (RUT) and should start turning positive as early as next week. The general message I’m getting from all of the indicators I watch is that the market is getting back to normal.

Our Twitter sentiment indicator for the S&P 500 Index (SPX) is showing some reluctance during the last week. As the market moved solidly higher the daily indicator had mostly tepid readings (below +5). The jobs report on Friday broke the malaise giving the indicator a strong positive reading of +18.  Up until that point the bears were getting more vocal while the bulls held steady.

Weakness in the daily indicator is causing smoothed sentiment to diverge with price, but it is well above zero and a confirming uptrend line. This suggests the market will move higher. One thing to note is that the last peak in smoothed sentiment was at a fairly high level. Only the strong rally out of the June 2013 lows and euphoria at the end of 2013 had significantly higher readings.

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Support and resistance levels for SPX are virtually non-existent. There are very few tweets for any price targets except for the current level. This has been a pattern during 2014 and has resulted in marginal new highs followed by choppiness. The few tweets above the market come from the round numbers crowd calling for 2000. Below the market is the last break out point at 1930.

For the second week in a row all sectors have a positive bias. Last week was the first time in two years that this condition didn’t result in a short term top. I take it as warning that people are still diversifying to safety even as SPX makes all time highs.

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Overall sentiment suggests the path of least resistance is up. However, sector sentiment and a lack of tweets for higher prices are warning that the market may need to pause before pushing higher.

Conclusion

Market internals are returning to normal after several months of mixed signals. If the trend continues we’ll most likely be adding exposure to our portfolios as early as next week.

 
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