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Home Archive for category "Portfolio Allocation"
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Ready for a Move Higher

150220markethealth

Over the past week all of our core market health indicator categories rose. This rise came as the S&P 500 Index (SPX) consolidated just below the 2100 level. Our measures of market risk and quality moved from negative to positive. Our measures of market trend couldn’t quit make it. If the market can hold at current levels I suspect our measures of trend will move back above zero next week. Our measures of the economy are still posting sluggish numbers, but slowly improving. Overall I’m seeing good behavior from almost all the market internal indicators I follow. This suggests the market should rally. As a result, our new portfolio allocations will be as follows: Long / Cash portfolio: 60% long and 40% cash. Long / Short portfolio: 80% long stocks we believe will out perform in up trends and 20% short (using SH). Volatility Hedged portfolio: 100% long (since 10/24/14). Below is a chart with our portfolio changes over the past year. Green represents adding exposure and reducing hedges. Yellow

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Market Health Improving

150213markethealth

Over the past week our core market health indicators rose sharply again. Everything with the exception of our measures of the economy are hovering right near a pivot point. Our measures of market strength have gone positive while measures of risk, quality, and trend are barely negative. It appears that those three categories will most likely go positive next week if the S&P 500 Index (SPX) breaks to new highs. Overall I’m seeing healthy behavior after six weeks of consolidation. With the current conditions starting to look positive we’re adding a bit more exposure to the core portfolios. The long / cash portfolio will now be 20% long and 80% cash. The long / short (hedge) portfolio will be 60% long stocks that we believe will outperform SPX in up trends and 40% hedged with a short of SPX (or using SH). The volatility hedged portfolio remains 100% long (since 10/24/14) due to no signs of extreme risk in the market. Below is a chart with the core portfolio changes

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Measures of Strength Going Positive

Just a quick heads up today. Our core indicators that follow market strength are showing positive readings today as of the close. If this can hold into the close on Friday we’ll be adding more exposure and reducing our hedge in the core portfolios. If we get a strong move to the upside in the market there is a slight chance that one of our other categories (trend, quality, or risk) could go positive as well. I’ll do a full update on Friday before the close, but wanted to give you a heads up to be looking at longs that you think will out perform the market as a whole.

 
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Risk on the Rise and Core Indicators Oversold

150116MarketHealth

Over the past week our core measures of risk fell into negative territory. It was the last category to go negative. Our other measures of market health started going negative in early September and haven’t recovered. In fact, they have continued to deteriorate to the point where several of our indicators are now oversold. Our measures of market quality and strength are at points that have often marked lows similar to May 2012 and April 2013. The only recent occurrence of oversold conditions when the market was close to all time highs came in early 2008 and persisted into July/August of 2008. This puts the market in a position where it could go either way. Until conditions clear our Long / Cash portfolios will be 100% in cash. Our Long / Short hedged portfolio will be 50% long stock that we believe will outperform in an uptrend (high beta stocks) and 50% short the S&P 500 Index (using SH or a short of SPY). Our Market Risk Indicator has only

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Possible Allocation Change on Friday

150107ndx

Our core measures of risk have been bouncing back and forth across the zero line this week. The category closed today barely above. A weekly close below zero will cause us to change our allocations in the long / cash portfolios to 100% cash. The long / short hedge portfolio will go 50% long and 50% short the S&P 500 Index (using SH or an outright short of SPY). Our market risk indicator has two of four components warning at the moment. Two are deep in negative territory. One has been moving back and forth across zero over the past several weeks. The fourth component is still a good bit away from turning negative so it appears that the market risk indicator won’t signal this week. As a result, the Volatility Hedge will most likely stay 100% long. A sharp move lower between now and Friday would be required to trigger a hedge signal in that portfolio. One chart I’m watching at the moment for clues to which way we

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No Portfolio Changes This Week

Just a quick note. No portfolio changes this week. If I get time over the weekend I’ll do a full update with our core indicators and things I’m watching.

 
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Risk Falling

141121allocations

Over the past week most of our core market health indicators improved a bit. Our core measures of risk made it into positive territory. As a result, long/cash allocations will now be 20% long and 80% cash. The hedged portfolio will be 60% long stocks we believe will out perform in an uptrend and 40% short the S&P 500 Index (SH). The volatility hedge is 100% long (since 10/24/14). Below is a chart that shows changes to our portfolio allocations. Green lines represent adding exposure and reducing the hedge. Yellow lines represent reducing exposure and adding a hedge. Red lines represent an aggressive hedge using a security that benefits from increasing volatility. This week marks the first week since July that all four components of our market risk indicator are positive. Our market risk indicator is completely independent of our core measures of risk mentioned above so we now have two sets of indicators confirming that market participants are comfortable. It feels more like complacency (and top ticking) to me, but my

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No Portfolio Changes This Week

Just a quick note this week. The damage done to our core indicators hasn’t been repaired by the rally back near the old highs in the S&P 500 Index. Part of the reason our indicators are having trouble clearing is a result of the steep V pattern being painted so fast that price is outrunning everything else (causing our indicators to lag). Unfortunately, that isn’t the only problem. A larger problem is that our measures of the economy and market quality are still falling. This poses a longer term problem for the market as a whole. So here we are, back at all time highs and hedged. Long time readers know this isn’t a cause for concern…because hedging isn’t about being right or wrong. It’s about acknowledging I can’t see the future so I simply hedge out risk if our indicators are warning or unclear. Our current allocations for the long/cash portfolios are 100% cash. Our hedged portfolio is 50% long stocks we believe will out perform the market in

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Softening Hedge

141024allocations

Our Market Risk Indicator cleared its warning this week. However, our core measures of market health are still mired in negative territory. As a result, we’ll be softening the hedge in the hedged portfolio and staying 100% in cash in the long/cash portfolios. To soften the hedge we’re removing put options and/or volatility products. For the model portfolio we’re selling ETFs or ETNs like VXZ, VIXM, or XVZ and replacing it with at short of the S&P 500 Index (you can use the symbol SH). The end result is a portfolio that is roughly 50% long stocks we believe will outperform in an uptrend (high beta stocks are likely candidates for the hedged portfolio) and 50% short the S&P 500 Index. Below is a chart with the changes in our portfolio allocations over the past year. Green lines represent adding exposure, yellow lines are reducing exposure (and adding SH as a hedge), red lines are market risk signals where the hedged portfolio uses instruments that benefit from increasing volatility as

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Moving to Cash or Full Hedge

141010markethealth

The volatility in the market over the past week was accompanied by a deterioration in all of our core market health indicators. Every category is now negative. As a result, our long/cash portfolio allocations are now 100% cash. Our hedged portfolio allocation is 50% long stocks we believe will out perform the market in an uptrend and 50% short the S&P 500 Index (ticker symbol SH). Please note that this isn’t a prediction of a market decline. Instead it is simply acknowledgement that enough things are wrong with our underlying indicators that I feel it prudent to step aside until the indicators give clear positive signs. UPDATE 3:32 PM Eastern – OUR MARKET RISK INDICATOR SIGNALED AFTER THIS INITIAL POST. AS A RESULT, OUR HEDGED PORTFOLIO WILL USE AN AGGRESSIVE HEDGE. Our Market Risk Indicator is very close to a warning, but it hasn’t yet (2 PM Eastern). It will take a steep sell off in today’s remaining trading session to create a signal. If it signals before the close

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