As you know the core portfolios are almost fully hedged, but the volatility portfolio is 100% long. The reason for this is the core portfolios rely heavily on market internals to indicate everything is healthy under the surface. The volatility hedged portfolio relies on my market risk indicator that is much more sensitive to price. The core portfolios will often hedge during sideways markets because they see damage to market internals that result in chart patterns that can be either accumulation or distribution. My market risk indicator waits until it’s clear that distribution is underway.
Currently the S&P 500 Index (SPX) is painting a pattern that can be either distribution or accumulation. We wont know which until the current range breaks. A break above 2140 on SPX would indicate accumulation has been under way and a strong rally should follow. A break below 2040 on SPX would indicate distribution has been occurring which should result in at least a 10% correction.
The Dow Jones Transportation Average (DJTA) broke below a five month “line” (similar to the pattern SPX is currently painting) in May. This break will likely cause the decline to carry to at least the 7800 area (which would be a 33% retracement of the rally that started in late 2012).
The Dow Jones Industrial Average (DJIA) is painting a pattern that is generally associated with distribution, but needs a break in price to confirm. A break below 17100 should carry the decline to at least 16400 (33% retracement of 2012 rally). If DJIA can move back above recent highs it would signal the consolidation is over and a good size rally should follow.
One thing that is troubling for the markets is monthly MACD for SPX. It has a fairly large negative gap between signal lines. This size of gap almost always results in at least a 10% correction.
The market is consolidating and painting patterns that often indicate distribution. Price needs to break lower to confirm the patterns. Keep and eye on the 2040 level on SPX and 17100 level on DJIA. If they break lower a decent decline should be underway.