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Raising Cash and Adding Hedges

Our core market health indicators deteriorated enough this week that we’re raising cash in our Long/Cash portfolios.  They are both now 80% cash and 20% long.

Our hedged portfolio is now 60% long (stocks we believe will outperform the market in an uptrend) and 40% short the S&P 500 Index (either short SPY or buy SH).

Our measures of the economy slipped from -7 to -8.  The economy measures continue to disappoint us as they just can’t seem to get a footing.  They went negative near the first of December, got all the way down to -10 (our worst reading), moved back up to -3 at the beginning of February then turned over again.  This indicator usually has a pretty good lead time at both bottoms and tops so the fact that it has kept a portion of our portfolios under invested for almost three months gives us concern.

Market Health Indicators

Our measures of risk dropped a bit this week to +5. There still isn’t much concern from market participants about a large or continued sell off.

Our measures of quality dropped from +1 to -2, while our measures of trend fell from -1 to -4, and our measures of strength went from +1 to -1.  When our indicators are falling and below zero we raise cash or add hedges because they usually portend a correction in the market or at least sideways choppy action.

The chart below shows the allocations to our core Long / Cash portfolio over the past year.  The yellow lines represent raising cash (selling longs).  The green lines represent adding exposure to the portfolio by buying stocks.

Long Short Portfolio Allocations

The chart below is our Long / Short (Hedged) portfolio.  The yellow lines represent reducing longs and adding a short of the S&P 500 Index (short SPY or long SH). The red lines represent aggressive hedging where we’ve essentially covered our entire long position with puts or some type of volatility (XVZ or VXZ).  The green lines represent removing hedges or shorts and increasing the longs in the portfolio.

Long Short Portfolio Allocations - Hedging

 
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