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Home Archive for category "Market Risk"
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We’ll Have to Wait Another Week

140801markethealth

Over the last week most of our market health indicators fell slightly, but didn’t suffer enough damage to make any changes to our core portfolios. Our measures of risk showed a large amount of concern from market participants, but didn’t fall below the zero line. Our Market Risk Indicator has two of the four components warning. The other two components moved rapidly toward signaling yesterday, but have backed off a bit today. As a result, our risk indicator shouldn’t warn today unless the market falls sharply in the last hour. One interesting thing of note is that our risk indicator almost never signals without at least one of our core indicators warning as well. The only instance since 2000 was on 9/19/2008. With modest strength in our core indicators and no risk signal our portfolios will remain 100% long for at least another week. Any changes next will will almost certainly be a result of a continued decline that triggers our risk indicators. Below is a chart with our current health

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Market Risk Rises While Health Improves

140725MarketHealth

Over the past week our indicators are showing more risk entering the market while most of our core health indicators are improving. This is a change from the past 18 months where risk entering the market has been associated with deterioration in our core indicators. This signals a change in the character in the market that we should watch closely. Market participants are now starting to show concern about world events and earnings misses. In the past, earnings misses were considered company specific and didn’t have much impact on the market. This is something to keep an eye on. Since our core indicators are all positive we’re still 100% long in all portfolios. Any changes over the next several weeks will almost certainly come on the back of an “event” or a severe down turn. In the absence of a sharp market decline I doubt we’ll have any changes. Below is a chart of our core health categories.

 
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Market Health Rises – So Does Risk

140718MarketHealth

Over the past week market health rose, but every measure of perceptions of risk rose too. It speaks to the current theme in the market where core indicators are rising and ancillary indicators are falling. While the underlying health of the market wasn’t affected by this week’s volatility it did do some damage to market participant confidence in the market. Our core measure of risk along with our Market Risk Indicator have slowly been moving closer to warning. At the moment they have plenty of room above the positive line so they aren’t overly concerning, but something to keep an eye on in the next few weeks. Below is a chart with our core health categories.

 
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Make or Break Time

By almost all the measures I track it’s make or break time for the market.  I’m seeing a pattern in both core and ancillary indicators that has often marked lows in the market over the past few years.  Each time our indicators were close to signalling an extreme warning the market promptly turned back up and resumed the rally out of the 2009 lows. Over the longer term when our indicators have reached these levels the market rallied 35% of the time and had an extended decline or choppy period 65% of the time.  As you know, I can’t see the future so all we do is go with the odds.  As a result, our core portfolios raised cash and/or added a hedge yesterday.  Here are some highlights of things I’m seeing that makes me cautious. The ratio between near term volatility (VIX) and 3-Month volatility (VXV) is currently rising as a result of both VIX and VXV moving up.  This is a condition that has only occurred a few

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More Thoughts on the Volatility Hedge

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

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Dancing on the Line

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

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Risk Rises as Market Health Holds Steady

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

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Perception of Risk Rising But No Panic

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

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Market Health Rising as Stocks Fall

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

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Market Risk Indicator is Signaling

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

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