Happy August and Happy Friday! All major averages ended up mostly with 1%+ gains today, and the S&P 500 gained ever-so-slightly on the week, up .3%. You should have received our update/alert last week; this should serve as a compliment and follow up from our partners are Dorsey Wright & Associates (www.dorseywright.com):
This from our Dorsey Wright & Associates (edited by Alphavest), today; (this may get a bit more technical, but take it all in and let us know where you may need clarification…the general message is pretty clear)
The NYSE Bullish Percent, as well as the other Bullish Percents, reversed down into a column Os last week, effectively moving them back into defensive postures. Recall that the NYSE Bullish Percent is simply a reflection of “what is” within the US market. It is neither a predictor nor a “validator”, but a measure of risk.
Yes, more stocks have moved to sell signals, but the overall trend of the equity indices remain intact and the leadership qualities of US Equities have yet to receive any major blemishes at this point in the year.
In terms of what has changed, the answer is, “not much so far.” The short and intermediate indicators are in Os, but the long term indicators, such as the PT charts, remain in Xs. While sector leadership has narrowed, there are still sectors moving to new all time highs with the market (See: Participation Rates Among US Sectors).
Commodities have risen to the 5th spot in the Asset Scale, but not at the expense of US Equities, which are in first place with 32% of the total number of buy signals. In addition, while the market has pulled back a bit in recent weeks, many of the major US indices have yet to even move to near term sell signals.
As well, the overall volatility in the market, as defined by the CBOE SPX Volatility Index [VIX], has just managed to move up to its April 2014 high, so even with this uptick in volatility, we have yet to see the implied volatility of the market come close to seriously testing their 2014 highs.
Finally, to put the recent down stretch in the market in perspective, we looked at the S&P 500 [SPX], going back to March 2003, and plotted SPX’s drawdowns during the eleven year period. The transparent light blue line represents drawdowns on a rolling three month basis of the SPX, comparing the intraday high and low prices.The orange line plots the growth of the SPX since March 2003, using the intraday lows, while the darker blue line just slightly above, plots the growth of the SPX since March 2003 using intraday highs. As you can see in the chart, from March 2003 until mid-2007, the SPX never experienced a drawdown of 10% or more.Through June 2007 until June 2012, the SPX repeatedly experienced drawdowns of 10% or more. In fact, it hasn’t been until just the last two years where a 10% correction is no longer commonplace. With that in mind, the most recent market pullback from the SPX top has led to a drawdown of just -3.89% as of now.
That means, we have not yet so much as entered the -5% realm. Does this mean we are due for a 10% correction or more? That it is inevitable? Well, we don’t have a crystal ball, but from the evidence we do have of the early part of the last decade, it would not be unprecedented to continue without a 10% correction for a few more years.
Finally, while some of the indicators have turned bearish, there are still more positives than negatives in terms of the “weight of the evidence.” If the current pullback turns into something worse, and evidence emerges that US Equities have rotated out of its leadership position, we at Dorsey Wirght and Alphavest have the tools and resources to help you change the course and adapt.
As we manage this change of Bull Market Offense to Bull Market Defense, just remember: We have you MANAGED! Did you find this too technical? Let me know what you want to hear about next Qtr!
I realize this piece was a bit more technical, but the general message is clear; we are on Defense, and short term indicators confirm this, but long term indicators and the Relative Strength Markets point to “this isnt so bad.” Hold tight for confirmation of something different, and if that happens, know: We’ve Got You Managed.
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