Market Watch: Indecision Continues

The Nasdaq 100 Index (NDX) finally recovered with SPX, however it is still below the peak made last September so we consider it mixed. The Russell 2000 Index (RUT) regained its 50 day moving average, but has a very short term series of lower highs and lower lows. These conditions need to clear before we’ll believe higher prices in the broader market.

Measures of breadth like the percent of stocks above their 50 and 200 day moving averages continue to diverge from price. The bullish percent index and new highs are diverging as well. This market is moving higher on fewer and fewer issues.

Market Negatives

Our measures of the economy, market quality, trend, and strength are still very negative. A strong move in price didn’t bring with it substantial improvement in our core indicators. This suggests the market may be building a top.

We’re still seeing what looks like a broadening top (or megaphone) formation in SPX and NDX. This is a pattern that implies distribution and uncertainty by market participants, which is another sign that the market may be topping.

Both our investor contentment index and our market stability index stayed in negative territory this week. People are finally starting to consider risk and the building instability that comes with thinning markets.

Our Twitter sentiment indicator for the S&P 500 Index (SPX) is still on a consolidation warning. The previous warnings from this indicator have all resulted with SPX trading below the level of the warning even if sentiment diverged from price for several weeks. Of course, three instances don’t make a sample set, but it shows potential.

Sentiment on a daily basis continues to show lackluster prints whether the market is up or down. This is happening while the intensity of tweets is falling. Opinions are drying up which suggests that traders are waiting before taking any significant action.

Smoothed sentiment is still showing a negative divergence, but is somewhat mirroring price. It moved back above zero, but won’t clear its consolidation warning until it moves above the declining trend line. When sentiment follows price (rather than leading) it suggests that traders are simply reacting to the moves in the market rather than making trades based on their belief about future outcomes. This is a sign of indecision.

Twitter support and resistance coiled very tightly this week, however it has a slight downside bias. There are only a few tweets calling for anything above 1600 on SPX. The 1600 level is being mentioned four times more than any other price point which suggests traders will need to see prices above this level before getting aggressive. Below the market, 1575, 1550, and 1535 are the most tweeted levels signaling that traders believe another trip lower is possible. There are some scattered tweets well below current prices at 1475 and 1500 which shows growing anticipation from a few bears. Overall it appears that traders are simply trading against 1550 and 1600 until they get more clarity.

Twitter sector sentiment flipped quickly this week. Last week every sector had negative sentiment (something we hadn’t seen before). This week leading sectors gained support while defensive sectors lagged. Consumer discretionary stocks which have had strong gains this year are now showing the most negative sentiment. We thought last week’s across the board negative sentiment meant a flight to safety. It now appears that it may simply be profit taking in the highest performing sectors this year. Although sector rotation this week was positive, it is very uncommon to see money flowing out of defensive stocks and into leading stocks near market highs. It makes us somewhat uncomfortable to see money managers removing risk from their portfolios by selling defensive stocks. It begs the question, “Where will money go if this market starts to decline?”

From a sentiment perspective we’re seeing indecision with a negative bias for the market. Traders aren’t targeting prices above 1600 on SPX, but have several target levels below. Daily sentiment is moving in a tight range while smoothed sentiment chases price. Profit taking is occurring in defensive sectors near a market high which increases instability. All of the above are cause for concern.

Conclusion
We continue to see indecision in this market. Everyone is waiting for something to happen either good or bad before taking any action. SPX has moved back near all time highs, but market internals continue to diverge which tells us people are slowly raising cash. A rally above 1600 wouldn’t surprise us, but any move to those levels will need stronger internals or it will be further evidence of building instability. In short, we don’t like to participate in thinning markets. Our hedged portfolio is still slightly long, while our long/cash portfolios have very large amounts of cash. We’ll need to see market internals improve substantially before we’ll be able to add any more exposure to risk.