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Risk Analysis for the Current Market

Below are a few graphs from our PM series of indicators based on individual stock moves meeting specific criteria. The purpose of displaying these is to give some insight into the current status of our uptrend, and adjust our risk parameters around this status.

As can be seen from this indicator, the current trend is positive, and has been so for quite some time. The alert trend has topped for a second time with lower lows. We can also see that this second top has occurred while the primary trend has been up for an extended period of time. As time goes on, the risk of the rally ending increases. Because of this, we are expecting a pullback to occur soon.

Our breadth is positive and so we are not calling an end to the trend. The current Breadth Ratio has found support twice now on the 1 line, and until we see this breakdown, we will assume a continued uptrend.

We see that the market itself has been quiet lately, and just as we expect a contraction after volatility, we expect volatility after a consolidation. The quiet nature of the market (shown by a lack of a level 2 or 3 thrust in over 20 trading days) leads us to expect a volatility expansion soon in the market. If a pullback does occur, it may start with an explosive thrust. However, we never anticipate the market, only trade with it. Therefore, keep in mind that the expansion could up upwards. The market can remain overbought longer than you can remain solvent.

This graph shows the individual components of the primary trend indicator shown up above. When the number of bearish stocks wains, we can see that there are no more stocks to become bullish to sustain the trend. That is in essence what we see here. We see a market where the number of bearish stocks (red) has been at a low for some time now, and we question how much more buying power the market has.

In light of this quick review of the current trend and its risks, we are not initiating any new longs (except on neutral strategies, in which case we are lowering position size) and we are tightening stops. In my opinion, proper money management is the holy grail of investing and trading, not indicators. Multiple analysis techniques are pointing to a bullish market which is overbought. In light of that I am still bullish, but will take into consideration the current risk in the rally. Remember, never anticipate a reversal, but be ready for it. Lock in gains should the market reverse, and don't expose your whole account to a teetering market, that is very short-term thinking.

Positions: None