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Market Quality Goes Positive Again

My core measures of market quality have gone positive again. My measures of market trend and strength are lagging. As I mentioned a few weeks ago, this suggests a somewhat choppy market ahead (although I was completely wrong on the chop keeping us from new highs in the S&P 500 Index — so maybe the consolidation will happen just above new highs). With market quality going positive the portfolio allocations change as noted below. As always, use your own personal risk tolerance to structure your own portfolio. Volatility Hedged portfolio: 100% long (since 5/7/2018) 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 an ETF like SH)  

 
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Consolidation Likely

My market health indicators are signalling that some consolidation is likely. All of the core categories are negative with the exception of risk. When this happens it usually signals that investors are taking profits, rebalancing portfolios, and/or rotating between sectors. At this point, I don’t expect a large draw down. It’s more likely that we get some chop (maybe a month or so) before moving to new highs in the S&P 500 Index (SPX). The movement in my core indicators change the portfolio allocations as follows: Volatility Hedged portfolio: 100% long (since 5/7/2018) 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 an ETF like SH) As always, use your own risk tolerance to manage your portfolio.

 
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Market Quality Recovers

Over the past week, my measures of market quality recovered and are now back above zero. This changes the portfolio allocations as follows: Long / Cash portfolio: Long 60% cash 40% Long / Short Hedged portfolio: Long 80% high beta stocks Short 20% the S&P 500 Index (or use and ETF like SH) Volatility Hedged portfolio: 100% long (since 5/7/2018)

 
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Market Quality and Strength Falter

Over the past week my core measures of market quality and strength fell below zero. One thing of note is that perceptions of risk aren’t rising much (yet). So, we’re seeing core weakness without a lot of concern. We’ll just have to wait to see if the weakness turns to fear or if this is simply a whip saw. The weakness in market quality and strength changes the core portfolio allocations as noted below. As always, use your own personal risk tolerance to structure your own portfolio. Volatility Hedged portfolio: 100% Long (Since 5/7/2018) Long / Short Hedged portfolio: 70% long high beta stocks and 30% short the S&P 500 Index (or use an ETF like SH) Long / Cash portfolio: 40% long and 60% cash  

 
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Market Quality Goes Positive

Over the past week my measures of market quality have gone positive. This changes the portfolio allocations as follows: 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 use an ETF like SH) Volatility Hedged portfolio: 100% long (Since 5/7/2018)

 
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Strengthening Indicators

All of my market health indicators are strengthening. Most notably my measures of risk and strength have moved from negative to positive. This changes the portfolio allocations as follows: Long / Cash portfolio: 60% long and 40% cash Long / Short porfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or use an ETF like SH) Volatility Hedged portfolio: 100% long (since 5/7/2018)

 
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Risk Warning Cleared

On Friday my market risk indicator cleared its warning. The core market health indicators are usually much slower to clear so they’re still mostly negative. The majority of them look like they’ll take several weeks and maybe a month or two to clear. This indicates that we’re probably in for more sideways consolidation, but not likely to decline significantly from here. The new portfolio allocations are as follows: Long / Cash portfolio: Long 20% and Cash 80% Long / Short portfolio: Long 60% high beta stocks and short the S&P 500 Index (SPX) 40% (or use an ETF like SH) Volatility Hedged portfolio: Long 100% As always, use your own risk tolerance in structuring your portfolio.

 
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Here We Go Again

My market risk indicator is warning again this week. That means a mid term volatility hedge on all the portfolios or going to cash. Below are the current portfolio allocations. Long / Cash portfolio: 100% cash Long / Short Hedged portfolio: 50% long and 50% hedged with mid term volatility (an ETF/ETN like VXZ) Volatility Hedged portfolio: 50% long and 50% hedged with mid term volatility. My core market risk indicators are also dropping fairly quickly.

 
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Market Risk Warning Clears

My market risk indicator finally cleared its warning that was issued on 2/9/2018. We didn’t get the further downside that I expected (based on the odds), but our longs performed well enough that it blunted the loss from the volatility hedge (which held up relatively well due to a volatile month). My portfolio suffered a .6% loss. I feel it’s money well spent to sleep well at night when the market is in question. Most of my core market health indicators have strengthened since the last update. However, my core measures of risk still haven’t recovered. This measure is longer term in nature than my market risk indicator so it tends to take longer to clear. With everything added up the portfolio allocations are now 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 (or use an ETF like SH) Volatility Hedged portfolio: 100% long

 
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Warning Still in Effect

FYI, my market risk indicator is still warning. The bullish percent index is still below 60, but close enough that it could clear soon. The S&P 500 Index (SPX) is consolidating along its 50 day moving average. A significant move above it would almost certainly clear the market risk warning. Another way the warning could clear is a retracement that doesn’t break below the lows posted earlier this month, then a slow steady climb upward. The market is at an inflection point and the market risk indicator is waiting to see which way it breaks so until the warning is cleared the portfolios are in cash or hedged with midterm volatility.

 
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