Happy New Year!
Children stop being children, but parents never stop being parents. That’s the tragedy of it. Len Deighton Goodbye Mickey Mouse
This is one of the times when I really wish I could see the future. We have a market that is coiled like a spring, with conflicting signals as to which way it’s going to move. But when it does move it will be so fast that most market participants will end up chasing price…and losing money in the process. Since we can’t see the future, but we know that risk is high, we feel it prudent to position our portfolios for multiple outcomes. In short, hedge them. We’ve been comfortably hedged or 100% cash since October 19th in our portfolios that use our market risk indicator. We took a small profit on our longs and tightened our hedges again on December 19th. Our hedged portfolio currently has a slight bias to the downside. We’re still holding most of our longs, but are hedged in a way that we’ll lose money if the market goes up (or sideways) and make money if the market goes down. However, the gains or
Enough of our core market indicators strengthened today to add more long exposure to our core Long/Cash portfolio. The core portfolio is now 60% long and 40% cash. Our other portfolios are still 100% cash or aggressively hedged since 10/19/2012. One thing of note is that our core market health indicators are reflecting the uncertainty in the market. Since the beginning of August they have had eight major signals. All of them have been between 1395 and 1430 on the S&P 500 Index (SPX). We’ve basically put on some longs then raised cash at almost the same level over the past five months. Now we’re adding exposure again…in the same range. The discrepancy between our Core portfolio and our other portfolios gives us concern. Usually we see our Market Risk Indicator looking better when we add exposure to the Core portfolio. Right now we’re seeing risk rising at the same time as the underlying market is getting healthy. This is one more sign about the huge uncertainty in the market…and
We’re seeing the first cracks in Twitter sentiment for the S&P 500 Index (SPX). Today smoothed sentiment broke below its up trend line. This is after painting a negative divergence with price during the recent high. It is still above zero so the market has some room to consolidate without doing serious damage to sentiment, but this is a time to be on the look out for a rally that doesn’t bring with it confirmation by Twitter sentiment. The highs in September and October had some of the same characteristics, however, they took sentiment below zero. If we get a large negative print in daily sentiment tomorrow (Friday) it will be enough to push smoothed sentiment to a point that signals traders have switched from bullish to bearish. 1400 on SPX still has very strong support with the majority of tweets picking it as a line in the sand. Just below near 1390, the 200 day moving average, is another cluster of support but it is much smaller. We are
Merry Christmas! Posts to Downside Hedge will be light this week due to the holidays. We’ll be spending time with family and friends…and trying not to think about the market. We’ll be sure to post updates to the site if there are any changes to our portfolios or something dramatic happens with our Twitter indicators.
Just a quick holiday update this week. Over the last week our core market health indicators were mixed. Our measures of trend have turned up sharply, but are still negative according to our readings. Our measures of strength are still positive, but deteriorating. Our measures of quality continue to trade sideways below the zero line. They went negative in October, but they haven’t turned down sharply. This tells us that market participants still see opportunity in individual stocks. Our measures of the economy turned down again and continue to fall further below zero. Our measures of risk have turned down once again. This leaves us in the same situation as we tweeted @DownsideHedge last week, that our core health indicators want to participate in the market, but our risk indicators refuse. Accordingly, we are aggressively hedged in our Long / Short portfolio. In fact, we tightened our hedges on Wednesday due to strength in our longs and weakness in our hedges over the past several weeks…which made Friday’s action a
A pattern we see now and again in our Twitter Sentiment indicator for individual stocks is where smoothed sentiment mirrors price without a clear trend. We interpret this type of action as traders chasing price. We’ll use the chart of Apple (AAPL) below to contrast “rational” trading with “emotional” trading or chasing. When traders are using technical and fundamental analysis to look forward for the prospects on a stock (rational trading) our smoothed Twitter sentiment indicator trends for several weeks or months at a time. This happens when many market participants tweet their belief about the current trend and future prices. We score each tweet and aggregate them into an indicator that shows the bias of the majority of traders. For example, during the rally out of the late July lows the traders that believed AAPL would go higher substantially outweighed the people tweeting that AAPL would decline. This caused our smoothed sentiment indicator to rise quickly. As the rally progressed into late August, many market participants started to believe
We tightened our hedges in our Long / Short hedged portfolio today. Some of our longs were getting away from their hedge so we brought them closer together. As I’ve noted on Twitter @DownsideHedge, our core market health indicators are strengthening this week, but our market risk indicator refuses to come in line. That leaves us aggressively hedged even though we’re seeing underlying health in the market. A further rally (and resolution of the budget negotiations in Washington) will most likely improve both our core health indicators and our market risk indicator. As a result, good news that is accompanied by a rally will most likely move us from aggressively hedged to a large long exposure all at the same time. Nevertheless, we’ll continue to follow our discipline and wait for a signal before making any portfolio adjustments.
Keep an eye on the Dow Jones Transportation index (DJTA) and the Dow Jones Industrial index (DJIA) over the next few weeks. Both of them have now recovered to the top of the Dow Theory Line that they painted at the first of the year. The decline below the line in mid May created a secondary low point (in early June). This gives a line in the sand on the down side that both indexes must hold. Any failure would create what many technicians call a Dow Theory Sell Signal, but in true Dow Theory it will merely represent confirmation that the primary trend has changed from bullish to bearish. With both indexes close to the top of the line we’re at a point that a small move higher will serve as confirmation that the trend is still up. The transports need to clear 5370 on a closing basis, while the industrials need to close above 13610. There is a very long term non confirmation between the industrials and the