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Lack of Belief

Over the past week the market rallied, but our core market health indicators didn’t participate. In fact, all of them except for our measures of risk turned down. As a result, we’re still 30% short in our hedged portfolio and only 40% long in the Long/Cash portfolios.

One thing of note this week is that our market risk indicator is diverging from our core measures of risk. Our core measures of risk have made it into over bought territory while our market risk indicator is well below that level. Historically, over bought readings have usually been followed by a dip of more than 10% within a month or two. Early 1999 and 2013 were exceptions. There were four over bought readings in 2013 and three in 1999 that did not result in a good dip. Between 2000 and 2012 there were three times our core measures of risk were over bought. They were January 2004, April 2010, January through April 2011. I’m not too concerned about this indicator at the moment, but if it starts to turn down as the market pushes higher I’ll get very concerned.

Breadth is still working in favor of the market and I’m of the opinion that absent an event breadth will need to show some weakness before the market can correct.

Our Twitter Sentiment indicator for the S&P 500 Index (SPX) spiked this week when the market first made new highs, but the subsequent days had tepid readings. ┬áThis is causing a negative divergence in smoothed sentiment that is now three weeks old. This suggests that market participants aren’t enthusiastic about the move above 1950 on SPX. Regardless of the divergence, smoothed sentiment is still above zero and a confirming trend line so the odds favor higher prices even if they’ll be slow in coming.

140622spx

Support and resistance levels gleaned from the Twitter stream continue the same pattern. Almost no calls for prices above the market and scattered tweets below. 1925 on SPX is the only real support and 2000 is resistance. However, there haven’t been significant tweets for the 2000 level for more than 2 weeks. This suggests that traders are simply watching the action rather than anticipating higher or lower prices.

Sector sentiment has had all positive readings for four weeks in a row. This is a very unusual circumstance and suggests that rotation to safety is ongoing. As I’ve mentioned before when all sectors have positive readings short term tops are near.

140622Sectors

Overall sentiment is a bit cautious with smoothed sentiment diverging from price, traders reluctant to target higher prices, and the sectors suggesting market participants are rotating to safety. The silver lining is that smoothed sentiment is still above zero and a confirming trend line. This suggests the market should move higher, but it has some headwinds.

 
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