- Market Risk Archive

More Thoughts on the Volatility Hedge

Published on January 9, 2014 by Blair in Hedging Strategy, Market Risk, Portfolio Performance

I got a few questions about the volatility hedge strategy that I mentioned yesterday that provoked a few thoughts I thought might interest you. The first thought is that there is no need to go all the way to 50% hedged with XVZ (and 50% long) when our market risk indicator signals. I personally use a large hedge when it signals because the indicator is designed to warn of an acceleration to the downside. As a result, I’m willing to give up some upside gains on whip saws for the chance of making money if the market falls rapidly…and volatility rises. However, I recognize that you may have different goals than mine so here’s a performance chart that shows varying sizes of the hedge. Notice that a hedge below 20% (80% long and 20% XVZ) would have resulted in the portfolio continuing to fall with the market during the 2008 financial crisis. However, during a large swift draw down a 20% hedge with volatility was enough to protect the portfolio

Tags: spx, xvz

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Dancing on the Line

Published on October 9, 2013 by Blair in Market Comments, Market Risk, Social Media Stock Sentiment

Just a quick note today to update you on some of our indicators that are dancing on the line between positive and negative. First and most important is our market risk indicator has been bouncing back and forth between a warning signal during the day lately. All but one of its components have been mostly negative for a few weeks now, but the one hold out has only started printing negative readings yesterday and today. Since we’re intermediate to long term investors we don’t like to hedge our portfolio unless there is a high probability of a substantial decline (we ride out the smaller dips). Currently, our risk indicator is telling us that the market could accelerate to the downside, but to avoid whipsaws we wait for a weekly warning signal (close the week with all components negative). As a result, we won’t be adding aggressive hedges or raising cash unless the current conditions persist into Friday. Our measures of market quality and strength have been flirting negative territory as

Tags: spx

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Risk Rises as Market Health Holds Steady

Published on September 27, 2013 by Blair in Featured, Market Comments, Market Risk

Over the past week most of our core market health indicators held steady. As a result, there are no changes to our core portfolios. The most significant changes came from our measures of risk and quality. Market quality fell and looks like it could go negative again over the next couple of weeks if the market doesn’t move to new highs. Our measures of risk are showing signs of concern with several components of our market risk indicator going negative. This isn’t surprising considering all of the sabre rattling going on in Washington so I don’t have big concerns for the market yet. Our sentiment indicators that quantify tweets and StockTwits messages are pretty tame today even with the S&P 500 Index (SPX) down almost 10 points. Twitter is reading -3 and StockTwits +3 going into the last hour of trading. Bottom line, I’m seeing strength in our core indicators and overall sentiment which indicates market participants are still long, but some are hedging and reducing exposure over a weekend

Tags: spx

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Perception of Risk Rising But No Panic

Published on August 17, 2013 by Blair in Featured, Market Risk, Social Media Stock Sentiment, Twitter Sector Sentiment, Twitter Support and Resistance

Over the past week all of our market health indicators improved except for the perception of risk. None of them moved enough to change our core portfolio allocations. Our measures of the economy and market quality are very close to going positive which would result in removing our hedges and getting fully long if it occurs. We’re looking at a market that is showing some strength under the covers while price is falling. One of the few things I see that is potentially troubling is various measures of breadth have been diverging from price and are now falling with the market. But as I’ve mentioned in the past several weeks, breadth is coming down from extremely high levels. As a result, I view the current consolidation a result of investors getting more selective in the stocks they want to own rather than fear or panic driving an increase in selling. Our investor contentment index and market stability index are both sitting right above the zero line which indicate a lack

Tags: spx, vix, vxv

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Market Health Rising as Stocks Fall

Published on June 21, 2013 by Blair in Featured, Market Comments, Market Risk

Our core market health indicators moved slightly higher this week even though the market fell. This signals that the current correction is most likely healthy, rather than the start of a long term down trend. The only fly in the ointment is our market risk indicator. It signaled intra-day a couple of times this week, but it doesn’t appear that it will close the week on a warning signal. Bottom line we still have a battle brewing between rising perception of risk (bearish) against healthy underlying conditions in the market. This battle is occurring while the market is right next to an important support/resistance level. At the time of this writing (3:30 Eastern) the S&P 500 Index (SPX) is rallying into the close and is at about 1597. We’d like to see it close the day above 1600 as that is one of our major support levels generated from the Twitter stream. Our portfolios will remain with the same allocations since we didn’t get a signal from market risk (or

Tags: market health, spx

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Market Risk Indicator is Signaling

Published on June 20, 2013 by Blair in Market Comments, Market Risk

Just a quick note today. Our market risk indicator is currently signaling. We require a weekly close for an official signal so a strong rally tomorrow could negate it. If it is still signaling tomorrow before the close of the market we’ll be changing our portfolio allocations in the portfolios that use our risk indicator. Our core long cash portfolio will stay 80% long and 20% cash. It follows market internals and our core market health indicators. As a result, it doesn’t react to increasing odds of market risk. Our long cash portfolio that recognizes market risk will go 100% to cash. Here’s a link with some information about both of our long / cash portfolios. Our hedged portfolio (long/short) will be aggressively hedged using put options or a volatility ETF (like XVZ). Please remember we won’t make any changes unless we’ve still got a signal at the close tomorrow. We’ll post an update here and on Twitter @DownsideHedge before the market closes if we make any changes to the

Tags: spx, xvz

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Risk vs. Internals

Published on June 15, 2013 by Blair in Featured, Market Comments, Market Risk, Social Media Stock Sentiment, Twitter Sector Sentiment, Twitter Support and Resistance

Stock market indicator from the Twitter stream

Over the past week our core market health indicators fell slightly, but we made no changes to our core portfolios. The details are in this post. We’re seeing a battle between event risk and market internals. Overall our measures of market health and internal structure are constructive, while our measures of risk are signalling skittishness by investors. The S&P 500 Index (SPX) held up fairly well last week in the face of several market scares. It seemed like every day brought some new rumor that drove the market up and down. But when the dust settled SPX only gave up a little over one percentage point. Meanwhile measures of intermediate term breadth like the percent of stocks above their 200 day moving average and the bullish percent index still have very healthy readings. Looking at market internals this appears to be a garden variety consolidation. We’re not seeing any real damage under the covers as price pulls back. SPX has held a critical support level near 1600 and bounced twice

Tags: spx

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Finally Some Excitement

Published on June 12, 2013 by Blair in Market Comments, Market Risk, Social Media Stock Sentiment

As intermediate to long term investors we often ignore the daily gyrations of the market. We don’t pay a lot of attention to what happens during the day because most of the time it just doesn’t matter. In fact, a lot of times we’re flat out bored and have difficulty finding things to talk about. Our days are usually filled with waiting for weeks on end for something that changes the underlying technical structure of the market enough to change our portfolio allocations. Those changes are usually in small increments so they’re boring events too. I’ll even make the confession that I don’t have CNBC or Fox Business on TV during the day. I have Fast Money in my DVR, but only because it runs an hour after the market closes so it covers earnings announcements. Long story even longer, most of the time what we see on a daily basis is irrelevant. However, once in a while we get near an inflection point where things can get exciting very

Tags: spx, vix, vxv

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Near Term Risk Rising

Published on June 5, 2013 by Blair in Market Comments, Market Risk

Ratio of VIX vs VXV signals stock market corrections

One of the charts that we like to keep an eye on to determine the amount of perceived risk in the market is the ratio between one month volatility (VIX) and three month volatility (VXV). When the ratio is low, market participants believe that near term risk is lower than risk further in the future. When the ratio rises it shows a sentiment shift from money managers indicating that they are getting fearful about the near term. If the ratio moves above 1 it warns that more people are fearful about the next month than those worried about the next three months. As a side note there is a new volatility ETF (XVZ) that attempts to take advantage of this theory. Right now we’re seeing the ratio approach 1 telling us that we’re almost to the point where investors believe there is more risk of the market being volatile over the next month than over the next three. Over the past several years this has been a point that marks

Tags: vix, vxv, xvz

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Using Volatility as an Investment Hedge

Published on May 13, 2013 by Blair in Hedging Strategy, Market Risk

The past fifteen years have been a very volatile time for the stock market. Not only has the market had large corrections and bear markets it has also had huge rallies and bull markets. These swings have made and broken many portfolios. An investor can limit the violent swings in their portfolio by implementing a hedging strategy designed to limit downside losses. With the explosion of ETFs over the past few years there are now several investment vehicles that can be used as a hedge against extensive declines in the stock market. One method that is gaining popularity among investors is volatility. The most common measure of volatility is the CBOE S&P 500 Volatility Index (VIX). When an investor buys a VIX future or option they are placing a bet that the variance or deviation in the price of the S&P 500 Index (SPX) will increase at some point in the future. Basically it is a bet that the market will experience large price swings. When the stock market declines

Tags: spx, vix, xvz

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More Thoughts on the Volatility Hedge

Dancing on the Line

Risk Rises as Market Health Holds Steady

Perception of Risk Rising But No Panic

Market Health Rising as Stocks Fall

Market Risk Indicator is Signaling

Risk vs. Internals

Finally Some Excitement

Near Term Risk Rising

Using Volatility as an Investment Hedge

Twitter Support and Resistance
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Support: 1850 and 1800

Resistance: 1890, 1900, and 1920

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