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Another Year of Whipsaws

170102DowTheoryLong

2015 was a year of intermediate term whipsaws. 2016 saw longer term indicators whipsawing. The longest term indicator I follow is Dow Theory. It looks for trends that last from one to three years (or longer). As a result, Dow Theory gives a lot of leeway to counter trend moves. It’s common to have a 10% or 15% correction during a long term bull market that doesn’t change Dow Theory’s long term trend. You can see some examples during the long term uptrend from mid 2009 to early 2016 in the chart below. Zooming in to the last few years, you can see what appeared to be a long term trend change according to Dow Theory. In August of 2015, both the industrials (DJIA) and the transports (DJTA) had large enough corrections to mark Dow Theory secondary lows. In December of that year, DJTA broke below its secondary low point and created a bearish non-confirmation in the indexes. In February 2016, DJTA broke its secondary low point. This created a

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Year of Whipsaws

Portfolio Allocation Changes

2015 was a year of whipsaws for the core portfolios. Take a look at the chart below and you’ll see the allocation changes throughout the year. Green lines represent adding exposure, yellow reducing exposure (or adding a hedge), and red represents a market risk warning. The core portfolios added exposure early in the year only to reduce it just before the August drop. It was nice to sleep at night during the turbulence, but it didn’t help the portfolios much because we then added exposure just before the market started to dip again. If you were holding small caps the changes were more painful than if your portfolio was closer to Nasdaq or the S&P 500 Index (SPX). Overall, the portfolios did as expected in a flat year for the market. Without a direction, whipsaws are expected. The important thing to notice on the chart is that the core portfolios were 100% in cash or 50% long and 50% short just before the decline in August. In contrast, my market

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2014 Hedged Portfolio Performance

150105VolHedgePerf

During 2014 all of our portfolios lagged the market. Most of them by a significant margin. You’d think this would concern me, but it doesn’t. The purpose of a hedge is to position a portfolio for more than one outcome when market conditions are uncertain.This means a hedged portfolio will not track the market…by design. This is the reason that most people can’t hedge. They want to participate in every uptick in the market. The hedging strategies here at Downside Hedge are designed to track the market over very long time frames. They do so by avoiding losses during severe downturns at the expense of lagging during market rallies. The performance charts below provide some good examples. Our Volatility Hedge performed the best this year. It was up up 6.5%. It is our most aggressive portfolio because it only uses our Market Risk Indicator as a signal. It is 100% long when risk is low and 50% long and 50% hedged using a volatility product such as the iPath® S&P

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