Just a quick update this week. Nothing significant has changed in my market health indicators. As a result, there are no changes to the core portfolio allocations. Enjoy the holiday weekend.
I’m seeing several signs that suggest the market is getting ready to make a breakout to new all time highs. Over the past few weeks my core indicators didn’t deteriorate much as the market consolidated. This week they all strengthened with the exception of the economy category. Most notable is that my measures of market quality moved back above zero again. That changes the core portfolio allocations. The current allocations are below: Long / Cash portfolio: 80% long and 20% cash Long / Short Hedged portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or the ETF SH) Volatility Hedged portfolio: 100% long (since 10/9/15) One thing I’m seeing that suggests we’re headed to new highs is the Trade Followers sentiment indicator which is calculated from the text of tweets about the S&P 500 Index. 7 day momentum is turning up from a level that has historically been an oversold level during bullish trends. These upturns are generally associated with a resumption of the uptrend in
Just a quick heads up. My measures of market quality are back above zero and will likely stay positive into tomorrow’s close. As a result, the core portfolios will be adding exposure. I’ll post sometime before the close with an official call and the new allocations.
Over the past week all of my core market health indicators fell. However, they’re holding up relatively well considering the price destruction in the S&P 500 Index (SPX). Even the sharp decline of the past two days isn’t doing serious damage. As a result, this looks like consolidation of the steep rally that started in late September rather than the start of a new down trend. Things can change, but for now it looks like normal profit taking after a strong rally. Two of four components of my market risk indicator are currently warning, but the other two are quite far away from a warning. This is in contrast to the panic that occurred the last time SPX fell below 2040. Currently, I judge market risk as moderate. The core portfolio allocations remain unchanged this week. They have a small hedge or 40% cash. The volatility hedged portfolio is still 100% long.
Over the past week my core measures of market quality, trend, and strength all rose significantly. Market trend and strength moved above zero which results in changes to the core portfolio allocations. Market quality is just barely below zero and will almost certainly go positive next week (even with some consolidation in the market). Here are the new allocations: Long / Cash portfolio: 60% long and 40% cash Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or use the ETF SH) Volatility Hedged portfolio: 100% long (since 10/9/15) As always make your own decisions about your own portfolio allocations based on your personal risk tolerance. Enjoy the weekend everyone!
Just a heads up about likely portfolio allocation changes tomorrow. My core measures of trend and strength are currently positive. If they hold their readings into the close tomorrow then the new core allocations will be as follows. Long / Cash portfolio: 60% long and 40% cash Long / Short Hedged portfolio: 80% long and 20% short The Volatility Hedged portfolio will remain 100% long (since 10/9/15). If the selling today continues into tomorrow the measures of trend may stay negative, but I expect strength to hold up barring a catastrophic down day. I’ll do a post with an official call before the last hour of the market tomorrow.
Over the past week all of my core measures of market health rose with the exception of the economy, which held steady. As price for the S&P 500 Index (SPX) rises, the internal indicators continue to improve. There are some short term divergences that may cause some consolidation in the near term, but overall the direction of the majority of indicators support a break to new highs. Although there was good improvement in the majority of the health categories, none of the negative ones rose enough to get above zero. I expect that both strength and trend may go positive by next week even if we get some small consolidation. A rally may drag market quality above zero as well. With the current readings the core portfolio allocations remain the same. The volatility hedge is still 100% long (from 10/9/15).
Over the past week most of my core measures of market health improved. Most notably is that my measures of risk went positive. This changes the portfolio allocations as follows: Long / Cash portfolio: 20% long and 80% cash Long / Short Hedged portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or the ETF SH) Volatility Hedged portfolio: 100% long (from 10/9/15) Another thing of note this week is that the Bullish Percent Index (BPSPX) is back above 60%. This reduces the risk of a steep or waterfall type decline. Here’s a post that explains the risk associated with poor breadth in the market.
Just a quick note. My measures of core risk are falling. With an inverted scale this is making the core risk category go positive. None of the other measures of market health are positive yet. So if the measures of risk stay positive into the close tomorrow (Friday) the core portfolios will be adding some exposure as follows. Long / Cash portfolio: 20% long and 80% cash Long / Short Hedged portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or use the ETF SH) I’ll make a post with a final call an hour before the market closes tomorrow, but wanted to give you a heads up so you can plan on what longs you’d like to hold.
On August first I warned that the meme of poor breadth would likely cause a “substantial disruption in the markets“. This week a new meme is emerging that the all time highs in the CBOE SKEW Index indicates everyone is afraid of a black swan event and thus the market is due to crash. There has been a spike in searches on Google for “skew index” confirming the frenzy. So, is the market going to fall due to an all time high in SKEW? I’m sorry, but I just don’t buy it. Why? Because the SKEW data doesn’t correspond to market tops. Take a look at the chart below and you’ll notice that SKEW doesn’t have a good track record of predicting declines. It has a plethora of false signals and just a few correct signals. What do you think would have happened to your portfolio if you had gone to cash or added a hedge every time SKEW spiked above 135? Side note: I pulled 135 as a signal