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Home Portfolio Allocation Archive for category "Long / Cash Position"
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Raising Cash and Adding a Hedge

140905markethealth

This past week our measures of the economy dipped into negative territory. As a result, we’ll be changing our core portfolio allocations (details below). All of the rest of our core market health indicators dropped as well. They had held up fairly well earlier in the week, but Thursday’s market action did some damage to them.  As a side note, it is extremely unusual for one indicator to warn without others warning within a month so it is likely we’ll be raising more cash over the coming weeks. But as always, we’ll wait for a signal before making further moves. Our core measure of risk turned down after touching over bought readings the last few weeks. It is painting lower peaks which suggests investors are getting more concerned as the market moves higher. Our market risk indicator still has one component that is negative even though the market has moved to all time highs. All the other risk components peaked recently and have turned back down. Right now it is

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Heads Up

Just a heads up. Our measures of the economy have been negative all week long and it appears they’ll end that way on Friday. If they stay negative into Friday afternoon we’ll be raising 20% cash in the long/cash portfolios (will be 80% long and 20% cash) and going 90% long and 10% short in the hedged portfolio. I give the warning so you can evaluate your positions and determine which stocks would fair worst or you’d be uncomfortable holding if the market turns down over the next several weeks. As always, I can’t see the future and as a result make allocations based on the odds. I’ll do a post on Friday before the close to let you know if the measures of the economy are still negative. As a side note, all of our other indicators are still positive and mostly moving up. The only dark cloud would be our market risk indicator hasn’t cleared one of its components and the others have turned down this week. It

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Market Health Positive

140703MarketHealth

Our core market health indicators strengthened enough during this past week to move all of them into positive territory. As a result all of our portfolios are 100% long. Our core measures of risk have been overbought for almost three weeks. They can stay that way for a few months as the market rallies strongly. The longest occurrence since 1990 was October through December 2013 (three months). As I’ve noted before overbought conditions on this category of indicators have almost always been followed by a 10% correction within a few months. The exceptions to this were in early 1999 and all of the occurrences during 2013…which should tell you something about the strength of the current market. I’m not concerned about this indicator yet, but when it turns down from overbought readings it will provide warning that a decent correction is most likely underway. Below is a chart with our current market health readings. Below that are our portfolio adjustments over the past year (green lines represent adding longs and

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Market Health Indicators Diverge

140627MarketHealth

Over the past week our core market health indicators diverged from each other. Our measures of the economy and trend rose while our measures of quality and strength fell. None of them moved much, but measures of trend moved back above the zero line.  This changes our portfolio allocations as follows. The long/cash portfolios are now 60% long and 40% cash. The hedged portfolio is 80% long stocks we believe will outperform in an uptrend and 20% short the S&P 500 Index (long SH as an alternative to shorting SPY). Our core measures of risk moved further into overbought territory this week. As I noted over the weekend, when this occurs a dip of more than 10% often follows within a month or two. For now it’s not too concerning, but something to watch closely going forward. Below is a chart of our current market health category readings (normalized).   Here’s a chart of our portfolio allocation changes over the past year. The green lines represent adding long exposure and removing hedges.

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Market Health Strengthens – Adding Exposure

140502HedgeAllocations

Over the past week all of our core market health indicators strengthened. Our measures of the economy rose back above the zero line which results in us adding long exposure to our core portfolios. Both of our long/cash portfolios will now be 40% long and 60% cash. Our hedged portfolio will be 70% long and 30% hedged with a market short (either shorting SPY or buying SH). As always, the longs in the hedged portfolio are stocks that we believe will outperform the market in an uptrend. We leave it to you to make your own picks. In the past when the market was choppy near a high and four out of five of our categories went negative, then a reversal occurred in one of the categories (what just happened today with economic measures moving above zero) the market continued on to new highs 60% of the time and made a intermediate term top 40% of the time.  This tells you that we’re not out of the woods yet, but

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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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