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.
As of this moment, my market risk indicator is signalling. It requires a Friday close with all four components signalling to create a market risk warning. So we’ll have to wait till Friday before we panic with the rest of the market. Here are a couple of things I’m seeing. Two of the four components of my market risk indicator are very oversold. My core market health indicators are still all positive My core market health indicators are falling from overbought levels to more reasonable levels My conclusion is that the selling is due merely to fear and not concern over core market health. It looks to me like everyone knew that the market was overbought and now they’re all taking profit at the same time. As noted above, don’t panic until we see what the market looks like on Friday.
We’ve got an interesting situation in the markets where perceptions of risk are extremely low, but my core indicators show an unhealthy market profile. This suggests that the unhealthy internals are most likely a result of rotation, and not the start of a longer term top. Of course, that’s not to say that mere rotation can’t turn into mass selling. But, for now, I’m not too concerned. One of the reasons I’m not to concerned is that even with the Nasdaq 100 (NDX) weakness over the past week, the percent of stocks in the S&P 500 Index (SPX) above their 200 day moving average is rising. This tells me that investors are rotating into beaten down stocks. This isn’t the way tops are usually made. Tops are made when leaders and beaten down stocks are being sold at the same time. As I mentioned above, my core indicators are showing weakness in underlying technical support. Most notably, is the market quality category which fell below zero this week. That changes our
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.
Last week we got a market risk warning due to the surprise of the Brexit vote. This week, that warning has been cleared as market participants realize it will take a couple of years to sort out… so they can wait until then to panic. 😉 My core market health indicators, with the exception of trend, improved last week. The overall numbers are still soft, but positive enough to change the portfolio allocations to the following. Volatility Hedged portfolio: 100% long Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or the ETF SH) Long / Cash portfolio: 60% long and 40% cash One thing of note that happened over the past few weeks is the Dow Jones Transportation Average (DJTA) created a new secondary high near 8110. The Dow Jones Industrial Average (DJIA) also created a new secondary high near 18100. DJIA is above November 2015 secondary high, but DJTA is below all of its recent secondary highs. As a result,
Just a quick note, my Market Risk Indicator is warning today. As a result, the portfolio allocations are now as follows: Volatility Hedged portfolio: 50% long and 50% hedged with mid term volatility (and ETF/ETN similar to VXZ) Long / Short Hedged portfolio: 50% long high beta stocks and 50% hedged with mid term volatility Long / Cash portfolio: 100% cash I suspect it will take a couple of weeks to see what the fallout of Brexit will be. Until the market has less risk the portfolios will remain hedged or in cash. FYI, the market risk warning takes precedence over my core market health indicators.
This past week has seen a significant increase in my stock market risk indicator components. Currently, two of the four components are warning, however, three components warned at times during the week. The fourth component still has a bit of room before creating a market risk signal. With the market so close to all time highs it is odd behavior to see market participants so skittish. The behavior I’m seeing in the indicator components is similar to the action during the dip in mid June 2011. This isn’t a prediction of any decline to come, merely a heads up to let you know that a warning could come quickly if the market continues to fall. Risk is rising, but we don’t have a warning yet so there is no change to the Volatility Hedged portfolio. It remains 100% long. My core market health indicators are still suffering damage as the market dips. Most significantly, my measures of trend could go negative over the next few weeks if the market can’t
All of my core market health indicators bounced around this week without much change. However, my core measures of risk moved enough to go positive. This changes the core portfolio allocations as follows: 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 SH) Volatility hedged portfolio: 100% long (since 3/4/16)