There are no changes to the portfolio allocations this week. Enjoy ringing in the new year!
Over the past couple of weeks, my core market health indicator categories have started diverging. The market risk, economy, and strength categories are soaring higher, while the market quality and trend categories are lagging substantially. This is another sign that the market is due for some consolidation. Nevertheless, the market continues to move higher so we continue to watch and wait.
Last week, I mentioned that it might be time for some consolidation. This week, it appears more likely. My measures of market quality have dipped below zero and my measures of market trend are dropping pretty fast. This indicates that we should get some sideways to down movement over the next several weeks. I suspect that the market has at least one more good rally in it, but we’ll need a pause before it happens. The consolidation will most likely be due to rotation out of mega cap stocks into smaller stocks as a “sell the news” event when/if the tax plan passes. With market quality falling below zero the core portfolio allocations change as follows: Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short the S&P 500 index Volatility Hedged portfolio: 100% long (since 11/11/2016)
Several of my core market health indicators are sitting on the edge of going negative. One notable exception are my core measures of risk. That category has moved into overbought territory. Normally, this means several weeks of continued rally, however, I’m in a bit of doubt due to the weakness in all the other categories. This time it might mean it’s time for some consolidation. I expect we’ll get more clarity over the next few weeks.