Over the past week all of our core market health indicators fell. Most notable is our measures of risk. Our core measures of risk fell from moderate levels to almost warning. It will take a large sell off in the last hour to take this category below zero and have us increase our hedges and/or raise cash.

Our market risk indicator has three of its four components warning. This is very unusual given the fact that the market is only down about 3% from all time highs. This tells me that market participants are skittish…which increases the risk of a sharp sell off. If this indicator signals we’ll be changing the hedge to an instrument that benefits from higher volatility. I don’t expect it to signal today, but if it does I’ll update this post before the market closes.

Another sign of rising risk is the performance of Junk Bonds (JNK) compared to High Quality Bonds (LQD). LQD is rising while JNK is falling. This tells us that bond holders are becoming risk averse. When this occurred in October the S&P 500 Index (SPX) quickly followed junk bonds lower.

One thing that suggests that this is the beginning of a sell off rather than the end of one is a weekly chart of SPX with Elder Impulse bars. It has painted a blue bar. As you can see below, blue bars often precede short term dips.

I mentioned on Monday that Trade Followers issued market consolidation warnings for several indexes. The one index that still hasn’t signaled is the Russell 2000 (RUT or IWM). This chart gives some hope for the bulls because IWM has been holding up relatively well this week. In addition, momentum from the Twitter stream is trying to break higher while IWM is painting a bullish consolidation pattern. If momentum and price can break above their current patterns then the odds will favor higher prices into the end of the year.

Conclusion

Bottom line, I’m seeing signs of risk rising, but there isn’t an official warning yet. As a result, we’re still slightly long and waiting for the market to clear the weakness in our core indicators.