Once again our core measures of risk are negative. They’ve been there all week long. I suspect that it will take a close above 2050 on the S&P 500 Index (SPX) by Friday to get the category positive. That’s about the point where SPX has been when the risk measures flip. If they are negative on Friday the Long / Cash portfolios will go 100% to cash. The hedged (Long / Short) portfolio will be 50% long high beta stocks and 50% short SPX.
Our market risk indicator has three of four components warning at the moment. The fourth component continues to slowly fall, but hasn’t gone negative yet. The volatility hedge is still 100% long and will stay that way unless the fourth component falls by the end of the week.
One thing I’m seeing is a lot of mixed signals…I’ll post more about them on Friday, but here are a few examples. NYAD advance / declines are acting well, but the percent of stocks above their 200 day moving average aren’t. So breadth measures aren’t sending a clear signal. Another example is the performance of a short of the S&P 500 Index (SH), an actively managed short fund (HDGE), and mid term volatility (VXZ). Look at the chart below. I’m starting to see the same type of behavior as last September where shorts are working (HDGE) and people are hedging their portfolio (VXZ), but SPX continues to hold up (SH falling). This is likely a flight to safety under way so some caution is warranted, but for a clear picture I like to see them all moving together.