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Home Portfolio Allocation Archive for category "Long / Short Position" (Page 7)
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Adding Exposure to Portfolios

Long or Cash portfolio allocations

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

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Raising Cash and Adding Hedges

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

 
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Long / Short Portfolio – 90% Long and 10% Short

Our Market Risk Indicator finally made it back to a positive reading this week.  As we’ve noted in our weekly market comments, our core market health indicators have been fighting against market risk.  While the market health indicators were strengthening over the past month our Market Risk Indicator stayed stubbornly negative.  With the clearing of our risk indicator we move from an aggressively hedged position to a 90% long position with a 10% short position.  The longs are stocks that we believe will outperform the market and the short is a simple short of the S&P 500 Index.  An ETF that can be used is SH. As always, we can’t see the future so we allocate our portfolios based on the probabilities created by the history of our indicators.  The current condition of our indicators suggests that the market should move higher over the intermediate term.  Once again, not a prediction, merely a situation where the odds favor higher prices. The current hedge ratio is .11. The green lines in

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Tightening Our Hedge

We tightened our hedges in our Long / Short hedged portfolio today.  Some of our longs were getting away from their hedge so we brought them closer together.  As I’ve noted on Twitter @DownsideHedge, our core market health indicators are strengthening this week, but our market risk indicator refuses to come in line.  That leaves us aggressively hedged even though we’re seeing underlying health in the market.  A further rally (and resolution of the budget negotiations in Washington) will most likely improve both our core health indicators and our market risk indicator.  As a result, good news that is accompanied by a rally will most likely move us from aggressively hedged to a large long exposure all at the same time.  Nevertheless, we’ll continue to follow our discipline and wait for a signal before making any portfolio adjustments.

 
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Long / Short Hedge – 50% Long 50% Aggressively Hedged

Long Short Hedging Strategy

Our Market Risk Indicator closed the week in negative territory.  This signal caused us to aggressively hedge our portfolio.  We’re effectively 50% Long and 50% short, but our shorts consist of instruments that will benefit from increased volatility in the market.  Some examples are puts against our long positions or mid term volatility like VIXM or VXZ.  A lesser alternative would be an actively managed bear fund similar to HDGE. The long portion of our portfolio continues to be stocks that we believe will outperform the general market over the long run. This move in the portfolio is not a prediction of lower prices in the market.  Rather, it reflects enough increased risk that we want to insure our portfolio.  As we’ve noted before, our Market Risk Indicator has many false signals that are usually short in duration.  If this signal is false we expect to take a small loss which we consider paying for insurance.  If the signal proves to be correct we expect to make money as volatility

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Long Short Hedge Allocation 100% Long

Our Long/Short Hedge strategy is now 100% net long.  The break out above 1422 in the S&P 500 Index brought with it strength in enough of our indicators to get us fully invested on the long side of the market.  Our long portfolio consists of stocks that we want to own over the long run. The current situation in our indicators has occurred several times over the past 12 years.  Almost all of these instances were followed by multi-week (or month) rallies.  We did have one occurrence in May of 2006 that was reversed one week later to an aggressively hedged position and resulted in a whip saw.  Here are some examples of where we were 100% exposed to the market after coming out of a correction.  July 2003, December 2005, May 2009, November 2010, and January 2012. We can’t see the future so we don’t know if this will be a good signal, but we follow where the market leads. On the chart above the green lines indicate adding

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Long Short Hedge 80% Long 20% Short

Our Long / Short hedging strategy is now 80% long and 20% short.  As the market consolidated above 1400 we saw improvement in most of our core indicators tracking market trend, risk, and strength.  We’re still not seeing the strength we’d like in enough of our measures of the economy and market quality. Conditions such as we’re experiencing today are most likely associated with a continuation of an up trend after a correction.  However, during a bear market these conditions occur near bear market rally highs. Our current Hedge Ratio is .25. The long portion of our portfolio continues to be stocks we want to own for the long run that we believe will out perform in an up trend.  Our 20% offsetting short is simply a short of the S&P 500 Index. The green lines are adding exposure (removing shorts and increasing longs).  Yellow lines represent increasing our hedging (reducing longs and increasing shorts).  The red line signals aggressive hedging with instruments like puts, volatility, or actively managed bear

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Long Short Strategy Now 70% Long

Our core market indicators continued to improve this week allowing us to increase our long exposure and reduce our hedge.  We are currently 70% long and 30% short.  The increase was fairly rapid as it appears more market participants are joining this rally. The long portion of the portfolio consists of stocks we want to own due to many factors including; individual company growth prospects, value, and beta.  Our current short is simply a short of the S&P 500 Index. The current hedge ratio is .43. The green lines on the chart above represent us adding longs to our portfolio and reducing shorts.  The yellow lines represent increasing short positions and decreasing our portfolio of long stocks.  The red line represents aggressive hedging with instruments like puts, volatility, or actively managed short funds.  

 
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Long Short Strategy Removing Some Hedges

Our core indicators improved enough today to remove a portion of our hedges.  We added exposure by removing some of our hedge and using the money to add to our long portfolio. We are now 60% long and 40% short (using a short of the S&P 500 Index). The current hedge ratio is .67. Several of our core indicators are lagging so it’ll probably be more than a couple of weeks before we add additional exposure.  But as always, we’ll keep you updated with any changes. The green lines on the chart below represent us adding exposure to the long portion of our portfolio.  The yellow lines represent adding hedges.  The red line represents aggressive hedging.  

 
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Market Strengthens – Negates Risk Warning

Our market risk indicator flashed this week, however, we always use a weekly close to generate a signal.  The strength on Thursday and Friday reversed the signal early this week so we end the week without a risk warning. This means we didn’t add any aggressive hedges today.  Instead, we’re following our core hedging strategy indicators leaving us 100% cash in our Long/Cash strategy and 100% hedged with a short of the S&P 500 in our Long/Short strategy. Some of our core indicators are getting close to going positive that could give us some exposure to the market at the end of next week if the trend continues.  

 
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