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.
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
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
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
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
Over the past week all of our market health indicators fell. Our measures of trend fell into negative territory which causes us to change our portfolio allocations. The Long / Cash portfolios will now be 60% long and 40% cash. The hedged portfolio will be 80% long stocks we believe will out perform the market in an uptrend (high beta stocks) and 20% short the S&P 500 Index (SH). Our market risk indicator hasn’t signaled so our volatility hedge is still 100% long. Below is a chart with the core portfolio allocation changes over the past year. The green lines represent adding exposure to the market and the yellow lines represent raising cash or adding a hedge. Here is a chart of the current readings (normalized) of our market health categories. The thing I’m watching most carefully at the moment is breadth. The NYSE cumulative Advance / Decline line (NYAD) is getting close to painting a lower low. This would be a warning sign of the most significant top we’ve
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
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
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
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.