Blair Jensen | Apr 15, 2013 01:27AM ET
This past week the market proved itself once again by refusing to let bad news stick. Our price . Since the November low a 3.5% trailing stop would have been the only thing you would have needed to stay on the right side of the market.
Our measures of market risk have been a good guide as well, but we never feel comfortable relying solely on measures of risk. This is because risk almost always enters the market suddenly and often doesn’t warn until price has already fallen. It is for this reason that we rely on a variety of indicators to guide our general portfolio allocations. Some of the indicators lead and others lag which helps us add hedges or move to cash as the market is building a top, rather than simply reacting to price and risk alone.
Measures of breadth such as new highs, stocks above their 200 day moving average, and the bullish percent index are all showing strength. This tells us that there is interest in pushing a large number of stocks higher.
Our Twitter sentiment indicator for the S&P 500 Index (SPX) cleared its consolidation warning after just a few days of selling and the subsequent bounce. The break above 1575 on Wednesday brought with it enough bullish sentiment to generate a positive initiation thrust on the daily indicator. Bullish tweets were cheering the move to new all time highs and bears were conceding the point.
Smoothed sentiment now has a good confirming trend line that corresponds to the last two lows in price. It is above zero and has cleared its consolidation warning by moving back above the negatively diverging down trend line. There is still a good amount of bearish sentiment in the Twitter stream, but the bulls are overwhelming it. This shows our sentiment indicator confirming the up trend. We find it interesting to note that Jason Goepfert of SentimenTrader pointed out this week that “The percentage of bulls among individual investors has dropped to the lowest level since March 2009.”. This highlights the difference between Twitter sentiment and survey sentiment. Survey sentiment acts as a contrary indicator while Twitter sentiment confirms the trend and can warn of consolidation or changes in trend.
Twitter support and resistance tightened significantly this week. Once SPX cleared 1575, the tweets for anything below that general area stopped. Even Friday’s downside action didn’t generate predictions for prices below 1570. Above the market there are just a few calls scattered at 1610, 1657, and 1700, but there are many more tweets mentioning 1600. We suspect that traders want to see a few more companies report earnings before making predictions or placing anything but obvious trades like selling 1600 and buying 1575.
Sentiment for the market’s major sectors saw financials move into positive territory while industrials and consumer staples fell. This is an encouraging sign that the flight to quality is starting to ease.
Mixed Signals
As we mentioned above, our core market health indicators generally improved. However, they didn’t rise as fast as we would expect given the fact that the market is making new all time highs. This gives us cause for concern and sends a mixed signal. We can’t tell if the market is rounding out a top and our indicators are leading or if they’re misfiring (as occasionally happens). We’re seeing many other market technicians making the observation that their favorite indicators aren’t working so we have to consider that ours may not be working either.
Our investor contentment indicator has spent the last several weeks in positive territory, but is now falling. It is currently sitting just above the zero line. Our market stability index dipped into negative territory two weeks ago, but recovered back to neutral this past week.
Market Negatives
Our measures of the economy, market quality, trend, and strength are still negative. Once again, we would expect them to be more favorable considering the fact that the market is hitting all time highs. These are keeping our long / cash portfolios with a lot more cash than we normally have. Our hedged portfolio is more constructively positioned. Only time will tell if our health indicators are right or wrong in this particular instance so we continue to discipline ourselves and follow our methodology.
Conclusion
We’ve got a Teflon market that is shaking off bad news, but our core market health indicators aren’t acting like they should at all time highs. Our Twitter sentiment indicator is telling us the market wants to go higher, but needs a catalyst. We suspect that earnings season will either provide that catalyst or make the bulls rethink their positions. This is a good time to watch the market carefully and stay open to more than one outcome. We’re comfortable being modestly long and hedged.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.