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There is a slight, but potentially growing, disconnect between the S&P 500 Index and the Asian stock markets (specifically the Hang Seng).

On Friday the Hang Seng lost 1%. Moreover, looking at the recent price performance action … on a 20 day basis, the Hang Seng acting very different than other world markets.

Signal Financial Group just updated their seasonal chart series for the Hang Seng Index.  It indicates that we could be at a turning point, with little upside expected based on historical patterns.

A Little Risk/Reward Exercise in Portfolio Diversification.

If the S&P continues to the upside … the Hang Seng may not follow.  Thus, over the next few weeks, some traders may look at a potential Long S&P and Short Hang Seng play.

Just as an example, here is a quick look at a portfolio study covering 6 weeks, comparing the performance of a portfolio based solely on the S&P 500 Index versus a portfolio that is long the S&P (using 90% of capital) and short the Hang Seng (with 10% of capital).  

Portfolio Allocation:

The chart below provides a basic analysis, identifying the differences between the two portfolios. The chart is divided into three sections: return comparison, risk comparison and portfolio change. The first section shows the percent return figures for the portfolios over a recent six week period. The second section focuses on risk, which is defined as standard deviation of return, over the same six week time period. The final section shows the net percentage change to the portfolio's performance based on the small 10% allocation to Hang Seng.

The diversification helps the risk/reward ratio in the study.  That looks like something to watch for in the coming weeks.  Hope it helps.

Fear is not logical.

Nonetheless, you can often use logic to predict human response to certain emotions and stimuli.

For example, let's look at the clear shift in investor sentiment over the last few weeks.

Click here for a live version of this chart.

In short, the money flows show a re-pricing of risk. Stocks and commodities, which are viewed as riskier assets, declined over the last two weeks. Bonds and gold, which are viewed as safe-havens, advanced as alternatives. The Dollar, which is somewhere in the middle is virtually unchanged.

There Are Other Ways to Measure Fear.

The sell-off of the past few weeks triggered a number of extreme measures. Whether you look at volatility, price action, breadth, or volume, recent readings were off-the-charts. The table below is from Quantifiable Edges. It highlights some of those extremes.

However, every action brings a reaction … what can we expect next?

What Does the Volatility Bring?

We just saw four straight days with moves of 400 points or more in the Dow Jones Industrial Average … a first in its history. Is that just a meaningless market statistic?

Perhaps, instead, it is another indicator that we're at a significant extreme?  If so, periods of great volatility are often followed by periods of relative calm.  The logic is that bulls and bears fight until one side gives up (for a while); and the market pushes forward in the direction of the winner.

Looking For a Positive Sign?  Here's a Promising Trading Signal.

Mark Hulbert says market indicator with perfect record just signaled 'buy'. 

Last week, we got to a point where less than ten percent of NYSE stocks traded above their 200-day average. When the number of stocks that manage to stay above this moving average — a common measure of momentum — make a nasty two standard deviation move to the downside from the norm, it usually means an oversold market and a good time to buy.

The last — and most extreme — oversold position was on March 2, 2009, about around the start of the bull market. Click here for more on this type of chart.

You don't have to like the economy or the markets to trade them.

Fear is not logical.

Nonetheless, you can often use logic to predict human response to certain emotions and stimuli.

For example, let's look at the clear shift in investor sentiment over the last few weeks.

Click here for a live version of this chart.

In short, the money flows show a re-pricing of risk. Stocks and commodities, which are viewed as riskier assets, declined over the last two weeks. Bonds and gold, which are viewed as safe-havens, advanced as alternatives. The Dollar, which is somewhere in the middle is virtually unchanged.

There Are Other Ways to Measure Fear.

The sell-off of the past few weeks triggered a number of extreme measures. Whether you look at volatility, price action, breadth, or volume, recent readings were off-the-charts. The table below is from Quantifiable Edges. It highlights some of those extremes.

However, every action brings a reaction … what can we expect next?

What Does the Volatility Bring?

We just saw four straight days with moves of 400 points or more in the Dow Jones Industrial Average … a first in its history. Is that just a meaningless market statistic?

Perhaps, instead, it is another indicator that we're at a significant extreme?  If so, periods of great volatility are often followed by periods of relative calm.  The logic is that bulls and bears fight until one side gives up (for a while); and the market pushes forward in the direction of the winner.

Looking For a Positive Sign?  Here's a Promising Trading Signal.

Mark Hulbert says market indicator with perfect record just signaled 'buy'. 

Last week, we got to a point where less than ten percent of NYSE stocks traded above their 200-day average. When the number of stocks that manage to stay above this moving average — a common measure of momentum — make a nasty two standard deviation move to the downside from the norm, it usually means an oversold market and a good time to buy.

The last — and most extreme — oversold position was on March 2, 2009, about around the start of the bull market. Click here for more on this type of chart.

You don't have to like the economy or the markets to trade them.