Our Market Risk Indicator finally made it back to a positive reading this week. As we’ve noted in our weekly market comments, our core market health indicators have been fighting against market risk. While the market health indicators were strengthening over the past month our Market Risk Indicator stayed stubbornly negative. With the clearing of our risk indicator we move from an aggressively hedged position to a 90% long position with a 10% short position. The longs are stocks that we believe will outperform the market and the short is a simple short of the S&P 500 Index. An ETF that can be used is SH.
As always, we can’t see the future so we allocate our portfolios based on the probabilities created by the history of our indicators. The current condition of our indicators suggests that the market should move higher over the intermediate term. Once again, not a prediction, merely a situation where the odds favor higher prices.
The current hedge ratio is .11.
The green lines in the chart above represent selling hedges and adding longs to the portfolio. The yellow lines represent raising cash and adding short positions to the portfolio. The red lines represent aggressive hedging with instruments such as puts, volatility, or an actively managed bear fund.