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Still Hedged

Another week and our core market health indicator categories are still mired in negative territory. That leaves the long/cash portfolios 100% cash and the hedged portfolio 50% long and 50% short the S&P 500 index (SPX). As I mentioned last week, I don’t see this as a problem…because hedging isn’t about being right or wrong. It’s about reducing risk when market internals are unclear.


Just for fun I went back to see how many times all of our indicators were negative and the market was rallying past previous highs. There were five instances since 2000. Three of them resulted in the market continuing to rally and clearing our all of the warnings. They were April 2005, June 2006, and May 2012.

There were two times the market continued rallying, but our indicators didn’t completely clear. The first was in April of 2000. By the end of August 2000 (just before the market turned over hard) the hedged portfolio was 80% long and 20% hedged. By 9/22/2000 it was fully hedged again (50% long / 50% short).

The second instance was June of 2011. At the end of July (just before the market turned down) the portfolio was 60% long and 40% hedged.

The lesson to be learned from the data is that I can’t tell if the market is going to go up or down from here…which I hope you find amusing. What I do know is that market internals aren’t acting healthy. As a result, I hedge out risk and wait for a resolution.

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