Our core market health indicators deteriorated enough this week that we’re raising cash in our Long/Cash portfolios. They are both now 80% cash and 20% long. Our hedged portfolio is now 60% long (stocks we believe will outperform the market in an uptrend) and 40% short the S&P 500 Index (either short SPY or buy SH). Our measures of the economy slipped from -7 to -8. The economy measures continue to disappoint us as they just can’t seem to get a footing. They went negative near the first of December, got all the way down to -10 (our worst reading), moved back up to -3 at the beginning of February then turned over again. This indicator usually has a pretty good lead time at both bottoms and tops so the fact that it has kept a portion of our portfolios under invested for almost three months gives us concern. Our measures of risk dropped a bit this week to +5. There still isn’t much concern from market participants about a
We’re adding exposure to our portfolios today. Our measures of market quality improved enough to cause this change. On February 22nd, our indicators reacted to the weakness in price and fear of market participants that a correction had started. This caused us to raise cash and add more shorts in our portfolios. This added some protection just in case the sell off accelerated, but also left us with some exposure to the market if it rallied. As you know, our portfolios are designed to participate in up trends, but also protect us from any unrecoverable declines. This was an example of getting cautious that in hindsight was unnecessary, however in our opinion prudent. We don’t mind paying for insurance when the market is uncertain. Our portfolios still participated in almost half the gain of the recent rally, which is enough for us during any period of market uncertainty. We’re now adding more long stock exposure on the expectation of higher prices. Both of our Long/Cash portfolios now have allocations of
Just a quick note about our current portfolio positions. Our core market health indicators have deteriorated further throughout the week. They’ve fallen enough that we’re raising cash in our Long / Cash portfolios and adding hedges to our Hedged portfolio. Our Long/Cash portfolios are both now 40% long and 60% cash. Our Hedged portfolio is now 70% long and 30% hedged with a simple short of the S&P 500 Index. The ETF SH is an easy way to short SPX if you don’t want to short SPY. The long portion of our portfolio still remains the stocks we believe will outperform the market over the long term. However, we’ve trimmed some positions based on their future prospects and used that cash to purchase the hedge. Note: charts added on 2/24/13
Our core market health indicators strengthened again this week. In addition, our market risk indicator has cleared its warning signal allowing us to add more longs to the portfolios. Both the Core Long/Cash portfolio and the Long/Cash portfolio that uses or market risk indicator are now 80% long and 20% cash. On the charts below the green lines represent buying stock and the yellow lines represent raising cash. Core Long / Cash Allocations Long / Cash Allocations – With Market Risk Indicator
Enough of our core market indicators strengthened today to add more long exposure to our core Long/Cash portfolio. The core portfolio is now 60% long and 40% cash. Our other portfolios are still 100% cash or aggressively hedged since 10/19/2012. One thing of note is that our core market health indicators are reflecting the uncertainty in the market. Since the beginning of August they have had eight major signals. All of them have been between 1395 and 1430 on the S&P 500 Index (SPX). We’ve basically put on some longs then raised cash at almost the same level over the past five months. Now we’re adding exposure again…in the same range. The discrepancy between our Core portfolio and our other portfolios gives us concern. Usually we see our Market Risk Indicator looking better when we add exposure to the Core portfolio. Right now we’re seeing risk rising at the same time as the underlying market is getting healthy. This is one more sign about the huge uncertainty in the market…and
We’re seeing more weakness in our Core Market Health indicators this week. As a result, we’re moving to 60% cash and 40% long in our Core Long / Cash strategy. As we noted yesterday, we don’t know where the market goes from here, but market internals are telling us to take caution and protect our portfolios until the internals become more healthy. Here is more information about how we hedge by going to cash. Our hedge strategies that use our market risk indicator went to cash or were aggressively hedged on 10/19/2012. The cash strategy is benefiting, while the aggressively hedged portfolio is currently paying for insurance as the time decay and lack of volatility are eating away at our hedges. Even with the small loss in the portfolio we’re comfortable with our current positioning especially since it doesn’t appear that anyone is looking at the headwinds we’ll face next year regardless of the fiscal cliff resolution. On the chart below the yellow lines are us raising cash. The thickness
Last week several of our core market health indicators strengthened a bit, but not enough to overcome the indicators that showed weakness. The net result was an overall weakening in market health. As a result, we’re raising more cash in our Core Long / Cash Hedge strategy. It is now 60% long and 40% in cash. Here’s more information on our Long / Cash hedging strategies. In the chart below the yellow lines represent raising cash and the green lines are adding exposure to the stock market.
Enough of our core indicators have weakened that our “core” Long / Cash Hedge strategy is now 80% Long and 20% in cash. Our core strategy ignores our Market Risk Indicator. As a result, it takes larger draw downs, but has better overall performance because it enters the market earlier in new rallies. If you follow our Market Risk Indicator you would have gone 100% to cash on 10/19/2012. You can see a comparison of the hedge strategies here. Below is the current chart for the core strategy. The green lines represent adding long stocks. The yellow lines represent raising cash.
Our Long / Cash hedging strategy is now 100% cash. Please see our Long / Short Hedging Strategy Update for an explanation. In the chart below the green lines represent buying stocks for the portfolio (reducing cash). The yellow lines represent raising cash by selling stock.
Our Long/Cash Hedge strategy is now 100% long stocks. For an explanation of current conditions see our Long Short Hedge Strategy update. On the chart below the green lines represent adding long exposure. The yellow lines represent raising cash.