During the week several of our core health indicators dipped into negative territory, but the rebound on Thursday and Friday repaired enough internal damage to keep our portfolio allocations the same as last week. The most notable weakness came from our core measures of risk and strength. They are both approaching the zero line and it won’t take much weakness in the market to take them lower. Our measures of market quality are holding up relatively better than the other indicators, but are also on a downward trajectory.

We’ve got a market that is on the edge of a serious warning that is currently bouncing. The nature of the bounce will tell us a lot about performance going into the end of the year. If the rally is accompanied with strengthening internals and improved market health we should see a rally back to or above the recent highs. Of course, a lack of confirmation from our indicators will cause concern of a draw down that carries to at least the 200 day moving average on the S&P 500 Index (SPX)…and likely further. It’s time to pay serious attention to market action.

Below is a chart with the current condition of our core market health categories.