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More of the Same

This week we saw more of the same. Our core indicators strengthened while ancillary indicators weakened. The only core indicator that got worse was our measures of risk. Early in the week they were showing more concern from market participants even as the market moved higher. Thursday did some serious damage to them and Friday only saw a partial recovery. So far they’re providing early warning, but no signals. It will most likely take another few weeks to shake out.

One thing I follow that suffered a lot of damage this week is the relationship between high quality bonds (LQD) and junk bonds (JNK). While LQD appears to be painting a bullish flag, JNK is falling sharply. This suggests that bond owners are shifting money from risk (JNK) to safety (LQD). The events in Ukraine and Gaza on Thursday had LQD rising while JNK fell. Watch this relationship going forward because a shift in bonds often occurs before a flight to safety in stocks.

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Speaking of stocks, the symbols I posted on Wednesday seem to be moving two different directions. FB and BIDU are examples of stocks that appear to be recovering. While CRM and LNKD are examples of stocks with more ominous chart patterns. This is warning that investors are separating the “good” from the “bad” and is another thing that often happens before a correction in the general market begins.

The one thing that continues to hold up well is breadth. Other than the obvious under performance from small cap stocks I’m still not seeing much deterioration in breadth. Until it falters I suspect we’ll continue to see new highs on the major indexes.

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Our Twitter Sentiment indicator for the S&P 500 index is still on a consolidation warning. Thursday’s events in¬†Ukraine and Gaza shook the confidence of market participants on Twitter. The daily indicator printed a -20. Friday’s recovery of price didn’t bring with it a strong recovery from sentiment. It printed a -13 that day. Smoothed sentiment turned back down this week and is still below zero and back at the low that created the consolidation warning.

This week was a good example of how events can impact investor sentiment. When an event occurs that shakes confidence in the market it often takes several days to repair. My observation has been that fear comes into the market quickly, but leaves it slowly. This puts bulls in a position that they need good news next  week because bad news will add injury to an already fragile mood.

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Support and resistance levels gleaned from the Twitter stream showed some optimism with new calls for 2000 on the S&P 500 Index (SPX). What has previously been a level with scattered calls is now looking more solid. This condition often acts as a magnet that the market is pulled toward. That level then acts as short term resistance. Support on Twitter has moved up to the 1945 to 1955 area.

Sector sentiment is also showing some positive action with the leading sectors showing the strongest support from the Twitter stream and the defensive sectors showing the weakest.

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Overall sentiment is showing the same thing as our other indicators where half seem to be strong and the other half showing weakness. Both daily and smoothed sentiment are warning of danger, while resistance levels and the sectors are projecting optimism. If the divergence continues it will most likely signal the beginning of a larger correction.

Conclusion

This week has been more of the same. Core indicators are strong and getting stronger while ancillary indicators are starting to warn. It’ll most likely take another few weeks to shake out. In the mean time we’ll follow the core indicators and stay 100% long in all portfolios.

 
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