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Core Portfolios Reducing Exposure

160902MarketHealth

Over the past week, my core market health indicators bounced around a bit. Most notably is that my core measures of the economy fell below zero. This results in a change in the core portfolio allocations as follows: Long / Cash portfolio: 60% long and 40% cash Long / Short portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or an ETF like SH) The Volatility hedged portfolio is not impacted by the core indicators so it is still 100% long (since 7/1/16) One other notable thing this week is my core measures of risk are still close to signaling a very bullish condition for the market. They aren’t being impacted by the small dip that started a couple of weeks ago which is a positive sign, but they haven’t moved into the “very bullish” territory yet either. This is the thing I’m watching most closely for signs of a strong rally into the end of the year.

 
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Measures of Economy Fall

Just a quick note. My core measures of the economy have fallen below zero and I doubt they’ll recover by the close on Friday. As a result, the core portfolio allocations will raise some cash or add some hedges tomorrow. The volatility hedged portfolio won’t be affected. As always, use your personal risk tolerance to determine your own portfolio allocations.

 
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Adding Exposure

160805MarketHealth

Over the past week the majority of my core market health indicators improved. Most notably is the market strength category. It has finally pushed above zero, resulting in a change to the core portfolios. The new allocations are as follows. Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short Volatility Hedged portfolio: 100% long (since 7/1/2016) In early July, I highlighted some problems with leadership in the market. Most of those problems have been resolved. As you know, I’ve been watching the ratio between the Nasdaq 100 (NDX) and the S&P 500 (SPX). It made a good break higher two weeks ago and is currently fueling the rally as NDX plays catch up to SPX. One thing that hasn’t fully resolved itself is the ratio between the S&P 500 Equal Weight index (SPXEW) and SPX. The current rally has this ratio moving sideways, which shows lackluster participation from the “smaller” big cap stocks in SPX. If the ratio

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That Was Quick

160701MarketHealth

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, Dow

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Market Risk Warning

160624MarketHealth

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.

 
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Measures of Trend Positive

160422MarketHealth

Over the past week all of my core market health indicators improved. Most notably are my measures of trend, which went positive. Measures of market strength almost made it into the green, but missed it by a fraction. I suspect that category will be positive next week (even with a bit of consolidation in the market). With measures of trend moving from negative to positive it changes the core portfolio allocations as follows: Long / Cash portfolio: 60% long and 40% cash Long / Short Hedged portfolio: 80% long high beta stocks or ETFs and 20% short the S&P 500 Index Volatility Hedged portfolio: 100% long (since 3/4/16) The chart below shows allocations changes over the past year. Green lines represent adding long exposure, yellow represents reducing exposure or adding a SPX short as a hedge, red lines represent aggressive hedging with volatility. It’s been a rocky road where we get aggressively hedged in a steep decline then the market makes a low shortly after without accelerating to the downside.

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Core Market Risk Clears

160311MarketHealth

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)  

 
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Market Risk Clears

160304MarketHealth

My market risk indicator cleared its warning this week. As a result, the volatility hedge will go 100% long.  In addition, the core portfolios will remove their aggressive hedge and replace it with a short of the S&P 500 Index (SPX). My core market health indicators all improved with the exception of market quality. My measures of the economy improved enough to go positive which will change the core portfolio allocations a follows. Long / Cash portfolio: 20% long and 80% cash Long / Short portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or use the ETF SH) Volatility Hedged portfolio: 100% long Below is a chart of recent market risk indicator signals. As I noted in January, the market risk indicator signals near inflection points where the market either turns back up quickly or accelerates to the downside. This signal has the same appearance as the 2012 and 2015 signals, where the market traded slightly lower after the signal, but the warning didn’t clear

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Probably Soften Hedge Friday

Just a heads up. My market risk indicator cleared early this week and has remained that way. I suspect it will not be warning tomorrow unless we have a substantial drop. In addition, my core measures of the economy have gone positive. The only other category that has a chance at going positive is my core measures of risk, but this isn’t likely. As a result, it appears that I’ll be removing the volatility hedge from the core portfolios, and in addition, adding about 20% exposure to the market. I’ll do an official call about an hour before the market closes, but wanted to give you time to plan. As always, when making decisions about your portfolio allocations take your own risk tolerance into account.

 
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It’s Ugly Out There

160115MarketHealth

Wow. What a week. Like the market all of my core health indicators got hammered. They are now all deep in negative territory. I’ll let the chart speak for itself. One thing of note is that my market risk indicator is now signalling. This changes the volatility hedged portfolio to 50% long and 50% hedged with mid term volatility (an ETF/ETN like VXZ) or dynamic volatility (XVZ). For official tracking purposes I use XVZ, but the instrument is thinly traded so it introduces problems in actual portfolio management. First is that thin trading means it is difficult to fill large trades at a good “market” price. Second is that in a swiftly declining market the bid may as much as 20% below the market so you’ll have difficulty getting out of the position (or rebalancing) when pure panic has set in. As a result, I personally use mid term volatility like VXZ instead of dynamic volatility. But, since the back test has been done with XVZ I’ll continue to use

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