Here’s a quick update on my core market health indicators. The past month of price decline in the market has taken its toll on most of the core indicator categories. However, my market risk indicator isn’t reacting much at the moment. Earlier in the month it had a small panic on the China tariff news, but it backed off in just a few days. It is now acting like we’re seeing a normal retracement of a strong rally without much fear of it escalating.
On April 19th, the Dow Jones Transportation Average (DJTA) broke above its last secondary high. This suggests the bear market is in further doubt. Heh. “What bear market?” You ask. “The one Dow Theory says we’re still in.” I answer. You’re seeing the biggest problem with Dow Theory in action. It lags the market drastically. However, this lag is counter balanced with very long bull market trends where the money is made. For example, the previous bull trend lasted from October 5th, 2016 to December 21st, 2018. This was a very good time to be in the market. After the last bear signal on 12/21/18 there was only a bit of further downside damage. Then the market swiftly recovered. By the end of January this year, Dow Theory was suggesting that the market was likely to continue to favor the bulls. Now with the transports breaking above the last secondary high we’ve got one more signal that the bear trend is over (or didn’t start in the first place because the bear trend call was
Last Friday, my market strength indicator went positive. All of my core market indicator categories are now positive. This puts the long / cash portfolio and the long / short hedged portfolio 100% long high beta stocks. Note: I’m not going to report portfolio allocations for the long / cash portfolio and the long / short hedged portfolio going forward. However, I’ll continue to post my core market health indicator categories as they change. As always, structure your own portfolios based on your own risk tolerance.
Over the past week, my market risk indicator finally cleared. In addition, my core market health indicators have strengthened. This changes the core portfolio allocations as follows: Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% cash Volatility Hedged portfolio: 100% long (using high beta stocks or an ETF like SPX or QQQ) As always, use your own risk tolerance to construct your portfolio.
Over the last few weeks, several of my core market health indicator categories have turned positive. However, they’re barely moving above zero and have turned down early this week. In addition, my market risk indicator isn’t showing any signs of wanting to clear. Its core indicators are showing strength, but have turned back down. The downturn is happening at both a normal resistance point to consolidate the recent rally and where it should if we’re in a bear market. This, along with my core indicators compressing near zero, is creating an inflection point that could resolve either higher or lower. This will make the next few weeks very important for the market. So far, price is merely consolidating the rally out of the December 24th lows. As long as the S&P 500 Index (SPX) can say above or near its 50 day moving average I won’t worry too much. However, a clear break of the 50 and 20 dmas would tilt the odds toward revisiting and breaking the lows. Dow Theory
On January 30th, 2019 VXZ will be discontinued. It is being replaced by VXZB. In addition to VXZ being delisted, VXX will also be delisted and replaced by VXXB. So, any of you using VXZ (like I am) will want to replace the position with VXZB before the end of next month. You can read more about it at Six Figure Investing.
Both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) have broken their last secondary lows. This officially puts Dow Theory in a bear market by my count. So, what does this mean for trading and investing? First, what it doesn’t mean. It doesn’t mean you move all your money from long to short. Or from long to cash. The reason for this is that Dow Theory changes of long term trend often happen just as the market is ready to make its first counter move of the new trend. In this case, it means we’re likely due for a counter trend rally. Now, on to how I use Dow Theory as a part of my investing strategy. I use it as a part of the timing when rebalancing any hedges. Since we’re now in a bear market, I’m more likely to let the profits from the hedge run a little more than my “about 15%” rule. If we were in a confirmed Dow Theory bull market I’d be
FYI, today near the close I rebalanced the volatility hedged portfolio. VXZ was up 14% and my longs were down about 9%. I sold some VXZ and bought some long positions with the profit. The portfolio is now back to 50% long and 50% VXZ.
On Wednesday, both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) closed low enough that they are in the process of forming new secondary lows. A secondary low is a dip in a long term bull market that retraces between 33% and 66% of the previous rally. They last from about 3 weeks to as much as 3 months. When this current dip ends and the market rallies for more than 3 weeks we’ll have new secondary lows in place. Once that happens, those lows will be the new triggers to signal a long term bear market if they are broken to the downside. The current triggers are 23533.20 on DJIA and 7093.40 on DJTA. As long as this dip doesn’t break both of those lows we’re still in a bull market. Since we’re still in a Dow Theory bull market, this is a dip that should be bought. Yes, a dip that should be bought. Most of the methods I use to allocate money for my portfolio are
My Market Risk Indicator is signalling today. That means I add a mid term volatility hedge to the Volatility Hedged portfolio and the Long / Short hedged portfolio. The Long / Cash portfolio goes 100% to cash. The portfolio allocations are as follows: Long / Cash portfolio: 100% cash Long / Short hedged portfolio: 50% long high beta stocks and 50% long mid term volatility (or an ETF like VXZ or VIXM) Volatility Hedged portfolio: 50% long and 50% long mid term volatility (or an ETF like VXZ or VIXM) As always, use your own judgement and personal risk preferences to allocate your own portfolios. And, of course, never trade a financial instrument that you don’t understand.