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
As I mentioned on Monday, the damage done to the core indicators would be hard to overcome and that the intermediate term trend is now likely down. Since Monday things have only gotten worse. All of my core indicators dipped even deeper into the red. As a result, the core portfolio allocations are now fully hedged or 100% in cash. My market risk indicator has three of four components warning at the moment, but the forth is still positive. That leaves the volatility hedged portfolio 100% long. Here’s a complete list of the allocations: Long / Cash portfolio: 100% cash Long / Short Hedged portfolio: 50% long high beta stocks and 50% short the S&P 500 index (or use SH) Volatility Hedged portfolio: 100% long As an example of the broken intermediate term trend here’s a point and figure chart of the S&P 500 index. The damage done this week was pretty significant, but looking longer term there is still the possibility that once the current correction has ended we’ll
The chart of my core market health indicators says it all. Weak economy and every other category near zero. This week my measures of trend fell into negative territory, while the other categories are barely hanging on. It appears that the 2020 area on the S&P 500 Index (SPX) is a tipping point. The market needs to bounce here or I suspect the rest of the categories will fall below zero next week. Due to the negative reading from measures of trend, the core portfolio allocations change this week. Here are the new allocations: Long / Cash portfolio: 60% long and 40% cash Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or use the ETF SH) Currently, two of the four components of my market risk indicator are warning. A third is waffling and could warn at any moment. The fourth is well away from a signal, but a sharp sell off would probably take it negative too, which would bring
My measures of trend are negative at the moment and it appears that it would take a monster rally (like 75 S&P 500 points) to get them positive before the close Friday. As a result, the core portfolios will be raising some cash or adding a larger hedge. I’ll do a full post with my thoughts (which are mixed at the moment) before the last hour of trading tomorrow.
I’m seeing several signs that suggest the market is getting ready to make a breakout to new all time highs. Over the past few weeks my core indicators didn’t deteriorate much as the market consolidated. This week they all strengthened with the exception of the economy category. Most notable is that my measures of market quality moved back above zero again. That changes the core portfolio allocations. The current allocations are below: Long / Cash portfolio: 80% long and 20% cash Long / Short Hedged portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or the ETF SH) Volatility Hedged portfolio: 100% long (since 10/9/15) One thing I’m seeing that suggests we’re headed to new highs is the Trade Followers sentiment indicator which is calculated from the text of tweets about the S&P 500 Index. 7 day momentum is turning up from a level that has historically been an oversold level during bullish trends. These upturns are generally associated with a resumption of the uptrend in
Just a quick heads up. My measures of market quality are back above zero and will likely stay positive into tomorrow’s close. As a result, the core portfolios will be adding exposure. I’ll post sometime before the close with an official call and the new allocations.
Over the past week my core measures of market quality, trend, and strength all rose significantly. Market trend and strength moved above zero which results in changes to the core portfolio allocations. Market quality is just barely below zero and will almost certainly go positive next week (even with some consolidation in the market). Here are the new allocations: Long / Cash portfolio: 60% long and 40% cash Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or use the ETF SH) Volatility Hedged portfolio: 100% long (since 10/9/15) As always make your own decisions about your own portfolio allocations based on your personal risk tolerance. Enjoy the weekend everyone!
Just a heads up about likely portfolio allocation changes tomorrow. My core measures of trend and strength are currently positive. If they hold their readings into the close tomorrow then the new core allocations will be as follows. Long / Cash portfolio: 60% long and 40% cash Long / Short Hedged portfolio: 80% long and 20% short The Volatility Hedged portfolio will remain 100% long (since 10/9/15). If the selling today continues into tomorrow the measures of trend may stay negative, but I expect strength to hold up barring a catastrophic down day. I’ll do a post with an official call before the last hour of the market tomorrow.
Over the past week most of my core measures of market health improved. Most notably is that my measures of risk went positive. This changes the portfolio allocations as follows: Long / Cash portfolio: 20% long and 80% cash Long / Short Hedged portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or the ETF SH) Volatility Hedged portfolio: 100% long (from 10/9/15) Another thing of note this week is that the Bullish Percent Index (BPSPX) is back above 60%. This reduces the risk of a steep or waterfall type decline. Here’s a post that explains the risk associated with poor breadth in the market.
Just a quick note. My measures of core risk are falling. With an inverted scale this is making the core risk category go positive. None of the other measures of market health are positive yet. So if the measures of risk stay positive into the close tomorrow (Friday) the core portfolios will be adding some exposure as follows. Long / Cash portfolio: 20% long and 80% cash Long / Short Hedged portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or use the ETF SH) I’ll make a post with a final call an hour before the market closes tomorrow, but wanted to give you a heads up so you can plan on what longs you’d like to hold.