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Raising Cash and Adding More Hedge

This past week our core market health indicators continued their recent trend.  All of them except for our measures of the economy fell. Our measures of trend fell sharply and ended the week well below zero.  As a result, we’re raising more cash and/or adding a larger hedge to our core portfolios.  By the close today our Long/Cash portfolios allocations will be 20% long and 80% cash.  Our hedged portfolio will be 60% long stocks that we believe will out perform the market in an uptrend and 40% short the S&P 500 Index (or use the ETF SH).  Below is a chart of our portfolio changes over the past year.  The yellow lines represent raising cash/adding hedges.  The green lines represent removing hedges and adding more longs to the portfolios. As I pointed out a few weeks ago, historically our indicators deteriorating to these levels have resulted in an extended choppy market or an extended decline 65% of the time.  35% of the time these conditions marked a short term low

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Market Health Drops Dramatically

Over the past week our market health indicators dropped significantly.  Most importantly our measures of market quality fell below zero.  As a result, the Long/Cash portfolios will be raising cash by the end of the day.  They will both be 40% long and 60% cash by the end of the day (3/14/14).  Our hedged portfolio will be 70% long stocks we believe will out perform the market in an uptrend and 30% short the S&P 500 Index (or simply buy the ETF SH). There is small chance that we’ll raise even more cash or add a larger hedge if the market accelerates lower in the last hour of trading.  Our measures of market trend are still positive, but could go negative before the end of the day.  If that happens I’ll update the site and do a new post with the details. Below is a chart of our allocation changes over the past year.  The green lines represent adding long exposure to the portfolios. The yellow lines represent raising cash

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Market Health Falls Perceptions of Risk Fall

Over the past week most of our measures of market health fell. Measures of trend rose and perceptions of risk abated a bit.  The market is trying to bounce, but isn’t showing the type of strength usually associated with a short term low.  While underlying internals are deteriorating, price for the S&P 500 Index (SPX) is painting a pattern that often marks the halfway point in a short term decline.  The pattern is still short in duration and will require a break below 1770 on SPX to increase the probability of a continued decline.  A few closes above about the 1820 level would negate the pattern and suggest the market will rally higher. Our measures of the economy, market quality, and strength all fell sharply.  Our measures of strength fell far enough that we’re raising some cash in the long/cash portfolios and adding a larger hedge to the hedged portfolio.  The long/cash portfolios are now 60% long and 40% cash.  The hedged portfolio is now 80% long stocks that we

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Raising Cash and Adding Hedges

Over the past week all of our core market health indicators fell sharply. Most notably is that perceptions of risk are rising sharply.  Two of the components of our Market Risk Indicator are currently warning.  The sharp drop in this indicator shows that investors are dancing close to the door.  Our measures of market quality and strength fell quickly as well.  Our measures of the economy have fallen back below zero which has us raising cash in the long / cash portfolios. They are now 80% long and 20% cash.  We’re adding a 10% hedge to the hedged portfolio.  It is currently 90% long with stocks that we believe will outperform the market in an uptrend and 10% short the S&P 500 index (or an ETF like SH). If the current trajectory of our measures of market quality and strength continues we’ll probably be raising more cash next week. But as always we’ll wait for a signal.  I’ll post mid week if anything significant happens to any of the indicators. 

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100% Long in All Portfolios

Over the past week our measures of the economy finally moved back to positive. As a result, our portfolio allocation will change by the close today (1/3/2014).  All of our portfolios will be 100% long. Sometimes it feels like we’re buying at a high, but we follow the indicators not our feelings. All of our other indicator categories except for perceptions of risk improved last week.  Our measures of risk are acting very skittishly and have fallen quite a bit with virtually no deterioration in price.  This suggests that it won’t take much downside price action for people to start selling in earnest.  Currently two of the four components of our Market Risk indicator are very close to signalling while our core indicators are very positive. As a result, I suspect that market risk would be what moves the portfolios to a hedged position or raising cash in the event of a more serious decline. Below is a chart with the normalized scores for each of the core indicator categories.

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Raising Cash and Adding a Small Hedge

Over the past week our measures of market quality fell below zero. As a result, we’re raising some cash in both our long/cash strategies and we’re adding a small hedge to the hedged portfolio.  Both of our Long/Cash portfolios are now 80% long and 20% cash. Our hedged portfolio is 90% long and 10% short.  The long portion of the portfolio consists of stocks that we believe will outperform the general market in an uptrend. The short is a simple short of the S&P 500 Index (SPX). Please note the purpose of our portfolio strategies is to help individual investors remove the risk of large draw downs from their own portfolios. We don’t list the longs we hold because we feel you should do your own due diligence before buying any security. This isn’t a prediction of a market top, instead when our indicators start to weaken (especially after a strong rally) we feel it prudent to take some profits or hedge against a possible decline.  We still believe the

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Portfolio Allocation Rules Remove Whipsaws

The government induced volatility this year provides an example of the importance of removing emotion from portfolio management.  An emotional investor is prone to make portfolio adjustments at all the wrong times, while an investor who follows a fixed set of rules is more likely to avoid whipsaws.  This isn’t to say that a good set of rules will get you in or out of the market at exactly the right time.  However, discipline in following market internals gives a higher probability of catching up trends and helps avoid large down trends. In May of this year the taper talk caused shocks in price for the market, but didn’t do serious damage to internals.  As a result of following our core indicators we avoided selling on emotion.  As the market moved higher into the first of August internals started to show some larger divergences and slightly negative readings. This caused us to raise some cash.  Then as the market fell, internals began to improve again.  By September 5th we were

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Adding Long Exposure

All of our core market health indicator categories improved this week. Our measures of market quality moved back above zero and as a result we’re removing hedges and adding long exposure to our portfolios.  All of our portfolios are now 100% long. Measures of perceived risk subsided this week, but most of the components of our Market Risk Indicator are still negative. At the moment this is the most likely indicator that could have an impact on our allocations.  If the market falls substantially then I expect it will signal, resulting in aggressive hedges or moving to cash.  In the absence of a market risk warning we’ll most likely be riding out any volatility over the next few weeks. Below are charts that show our allocations changes over the past year. Green lines represent adding long exposure. Yellow lines represent raising cash. Red lines represent aggressive hedging.

 
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Market Health Improves – Adding Exposure

All of our market health indicators except for perception of risk improved over the past week. Our measures of market trend and strength continue to show high readings. Our measures of market quality are almost positive and I suspect that baring a large sell off we’ll see them move to positive territory by next week.  Our measures of the economy finally moved into positive territory. As a result, we’re adding exposure to our portfolios.  Both of our long / cash portfolios are now 80% long and 20% cash. Our hedged portfolio is 90% long stocks we believe will outperform the market and 10% the S&P 500 Index (or the ETF SH). Below are charts of our portfolio changes over the past year.  The green lines represent adding exposure. The yellow lines represent raising cash or adding hedges. The red lines represent the hedged portfolio in an aggressively hedged position with instruments that benefit from increasing volatility. Current market health indicator status.

 
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Raising Cash and Adding Hedges in Core Portfolios

Long Cash Portfolio Allocation

Over the past week most of our indicators rose, however, our measures of market quality slipped enough that we’re changing our portfolio allocations.  In both of our Long/Cash portfolios we’ll now be 60% long and 40% cash.  Our Hedged portfolio will be 80% long and 20% short.  We’re long stocks that we believe will out perform the market in an uptrend. Our hedge is a simple short of the S&P 500 Index (or SH). Please be aware that this isn’t a prediction of a market top or even a correction.  Our measures of market quality tend to be longer term in nature and often lead our other indicators by several weeks or even months. So this is simply a recognition that enough of the underlying indicators that we follow are falling that we feel it prudent to raise a bit of cash and become more cautious.  Our goal is not to track every move in the general stock market, rather we want to participate in strong rallies and avoid catastrophic

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