Over the past week, quite a lot of damage was done to my core market health indicators. Two of the categories are at risk of going negative if the market can’t rally next week. Most significant is my core measures of risk. They fell substantially over the past two weeks. This means that risk from core market internals is rising. Meanwhile, the most sensitive components of my market risk indicator aren’t showing the same type of warning. They’re still in the very healthy range. This indicates that risk in the market at this moment is from core market internals and not investor perception of risk or an event.

If my core market risk indicators warn without significant movement toward a warning from my market risk indicator, it will be an unusual occurrence for a longer term top. Other times where this condition has happened resulted in short to intermediate term dips during a longer term bull market. Here are some dates: Mid 2004, spring 2005, late 2005, and early 2006 thru August 2006.

I’m still watching the Bullish Percent Index (BPSPX) and the percent of stocks in the S&P 500 Index above their 200 day moving average (SPX200). Both of them have suffered some damage as well. The bulls want these to stay above 60%. If they fall below 60% and then my market risk indicator signals the market will likely be in trouble because the risk of a 10% or larger decline increases significantly.

(Click on image to enlarge)

(Click on image to enlarge)

Conclusion

A lot of damage has been done to my core market indicators. My core measures of risk are at odds with my market risk indicator so this looks more like a temporary dip rather than a long term top. If my market risk indicator starts moving aggressively towards a signal then I’ll get concerned about the longer term, but for now, I’m still in wait and see mode.