Over the past week my core market health indicators bounced around, but were mostly down. None of them moved enough to change any portfolio allocations. Enjoy the holiday weekend everyone!
As most of you know, I believe the market is currently in a long term down trend. However, I’m starting to see things that put the bear market in doubt… which should be a really good sign that we’re still in a down trend — because bear market rallies create enough doubt to suck people in. Back to the point, take a look at the chart below. It is a point and figure chart of the S&P 500 Index (SPX). This chart shows an intermediate or short term up trend within the confines of a longer term downtrend. But a closer look at the short scale indicates a long term sideways range. It will take a break of the range to add clarity to the pattern. A daily chart of SPX has a fairly clear downtrend channel. This indicates a new bear market is underway. We have to consider the current rally as a bear market rally until the upper bound of the trend channel is broken. If that channel
All of my core market health indicators bounced around this week without much change. However, my core measures of risk moved enough to go positive. This changes the core portfolio allocations as follows: Long / Cash portfolio: 40% long and 60% cash Long / Short hedged portfolio: 70% long high beta stocks and 30% short the S&P 500 Index (or use SH) Volatility hedged portfolio: 100% long (since 3/4/16)
On Friday my market risk indicator cleared its warning. Does that mean the bear market is over? I doubt it. I’ll show you why in several charts below, but lets start with a longer view of market risk indicator warnings. Take a look at the chart below and you’ll see that the indicator is prone to whipsaws. As I’ve mentioned many times before, the indicator generally warns at inflection points — right before the market resumes its uptrend or accelerates to the downside. It also often clears just as the market is peaking. Especially, when the market is entering a more volatile phase like late 2007 thru early 2008, then again in the summer of 2011. I suspect that’s what we’re seeing now… but because I can’t see the future I set my bias aside and follow the signals. Who knows, this recent signal could be followed by a huge rally like the cleared warning in 2012. Long story even longer, the indicator has a lot of whipsaws, but the
My market risk indicator cleared its warning this week. As a result, the volatility hedge will go 100% long. In addition, the core portfolios will remove their aggressive hedge and replace it with a short of the S&P 500 Index (SPX). My core market health indicators all improved with the exception of market quality. My measures of the economy improved enough to go positive which will change the core portfolio allocations a follows. Long / Cash portfolio: 20% long and 80% cash Long / Short portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or use the ETF SH) Volatility Hedged portfolio: 100% long Below is a chart of recent market risk indicator signals. As I noted in January, the market risk indicator signals near inflection points where the market either turns back up quickly or accelerates to the downside. This signal has the same appearance as the 2012 and 2015 signals, where the market traded slightly lower after the signal, but the warning didn’t clear
Just a heads up. My market risk indicator cleared early this week and has remained that way. I suspect it will not be warning tomorrow unless we have a substantial drop. In addition, my core measures of the economy have gone positive. The only other category that has a chance at going positive is my core measures of risk, but this isn’t likely. As a result, it appears that I’ll be removing the volatility hedge from the core portfolios, and in addition, adding about 20% exposure to the market. I’ll do an official call about an hour before the market closes, but wanted to give you time to plan. As always, when making decisions about your portfolio allocations take your own risk tolerance into account.