No changes to the portfolio allocations this week. Enjoy the holiday weekend!
As the market rallied this past week, my core market health indicators bounced around a bit. Most notably, my measures of trend surged to nearly over bought conditions. Core measures of risk continue to lag the market and look like they’ll need another week or two of sideways or upward movement (probably some backing and filling near new highs) in the S&P 500 Index (SPX) to go positive. One sign that the market is recovering from a breadth perspective comes from the Bullish Percent Index (BPSPX). The damage done to point and figure charts is being repaired and has brought BPSPX back above 60%. That takes a lot of pressure off from a risk perspective. Conclusion Market internals are repairing themselves in anticipation of a rally to new highs, however, we may need a bit of backing a filling before moving higher.
The strong rally this week cleared the warning from my market risk indicator. In addition, my core measures of market health shot strongly upward. The fear evidenced last week has been replaced by expectations of new highs going into the end of the year. One item of note is that my core measures of market risk are still negative. They will probably take another week or two to clear. That puts the new portfolio allocations as follows: Volatility Hedged portfolio: 100% long Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or use the ETF with symbol SH) Conclusion Nervousness ahead of the election caused enough fear in the market that my market risk indicator warned last week. We hedged with that fear against the chance that it turned to panic. The panic didn’t materialize and now the market is trying to normalize itself. As a result, we go back to normal portfolio allocations
As I noted yesterday, my Market Risk Indicator is issuing a warning. As a result, the portfolio allocations change as follows. Long / Short portfolio: 50% long high beta stocks and 50% hedged with mid term volatility (VXZ) Long / Cash portfolio: 100% cash Volatility Hedged portfolio: 50% long and 50% hedged with mid term volatility (VXZ) As I mentioned last week, the bullish percent index is below 60% which significantly increases the risk of another 10% decline from the current level. My core measures of market health had the economy improving and moving above zero this week, while the core measures of risk fell below zero. Conclusion We have a market risk warning in place. It’s time to aggressively hedge until the current storm passes.
Just a heads up. My core measures of risk have gone negative and my Market Risk Indicator is warning. If this condition persists into Friday afternoon then we’ll be adding an aggressive hedge to the Volatility Hedged portfolio and the Long/Short portfolio (using mid term volatility). The Long/Cash portfolio allocation will go to 100% cash. I’ll do a full post tomorrow before the close.