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Weak Market Internals = A Deeper Decline

In our previous Feb 27th Stock Market Update, entitled “Corrective Bounce or Market Bottom?”, we said that the sharp bounce higher in the S&P 500 (SPX) from the Feb 24th low was probably just a minor corrective bounce that would likely give way to more weakness.  We said this because, despite that strong bounce, market internals remained weak.

The Asbury 6 Remains Negative

Table 1 below shows that, through Friday March 12th, all of our Asbury 6 risk management model‘s constituent metrics are still negative (red).   The model itself has been on a Negative status since January 14th and the S&P 500 has declined by as much as 12% since then.

Table 1

Editor’s Note: The Asbury 6 is our own quantitative risk management tool which is updated daily in our Research Center.   The “A6” is a combination of six diverse market metrics that we grouped together to look beyond the day-to-day, up-and-down noise of the stock market to determine its actual health — in much the same way that a doctor first checks the patient’s vital signs during an office visit.   Four or more metrics in one direction, either Positive (green) or Negative (red), indicate a Tactical market bias. The dates in each cell indicate when each individual constituent of the A6 turned either positive (green) or negative (red). When all Asbury 6 are positive, market internals are the most conducive to adding risk to portfolios. Each negative reading adds an additional element of risk to participating in current or new investment ideas.

Anyone that has been participating in the stock market for the past decade or more knows that the character of the market has significantly changed over the past several years.  In just the past week or so, the S&P 500 has been up 70 points one day, down 70 the next, and up 30 or 40 points the day after that.  This extremely choppy day-to-day activity is a relatively new market characteristic that we believe is largely attributable to the increasing influence of algorithmic (computer) trading, which now comprises 80% or more of daily market volume.  Just tracking the S&P 500 is not enough anymore.  So, a few years back, we built the Asbury 6 to act as a kind of lie detector for the market. 

Now, instead of focusing on the major index that we’re trading, which can be manipulated by the “algoes” on a very short term basis, we are focusing on secondary metrics like corporate bond spreads, ETF asset flows, and market breadth that can’t be manipulated.  The result is a much clearer day-to-day picture of the real internal health of the stock market, which keeps us from chasing the S&P 500’s knee-jerk movements that have no meaning or follow through.

The Major Trend Remains Down

Chart 1 below plots SPX daily over the past year with its 200- and 50-day moving averages, widely watched major and minor trend proxies.  The chart also identifies the key areas of support and resistance below and above the market.  Finally, the pink highlights show the Asbury 6’s move to Negative on Jan 14th, which has remained in place despite a lot of volatile day-to-day market behavior since then.

Chart 1

It would take a positive (bullish) shift in the Asbury 6 to help confirm that the current market decline is over and that a new, tangible advance is beginning.  Until then, we remain in a defensive posture and are positioning in alternative places including energy, gold, and steel while we wait for market internals in the stock market to turn positive again.

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This communication is for informational purposes only. It is not intended as investment advice, or as an offer or solicitation for the purchase or sale of any financial asset.  No inferences may be made and no guarantees of profitability are being stated by Asbury Research LLC.  The risk of loss trading in financial assets can be substantial. Therefore, you should carefully consider whether such trading is suitable for you in light of your financial condition.

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