Over the past week most of our core market health indicators improved. Our measures of the economy are still negative, but improving slowly. Our measures of risk showed some weakness that signals investors are getting a bit more concerned about the market. However, we believe that this is a normal condition when the market stalls rather than an indication of substantially lower prices.
Our measures of market quality, trend, and strength jumped substantially this week. It is interesting that our measures of trend followed quality and strength in going positive especially since the rally out of the November lows has trended so strongly. It is an indication of how odd this rally has been from a underlying technical perspective.
The positive changes in market trend is causing a change in our core portfolio allocations. Our Long / Cash strategies are now 80% long and 20% cash. Our Hedged portfolio is now 90% long and 10% short (using a simple short of the S&P 500 Index — or the ETF SH). For the first five months of the year our Long / Cash portfolios are up roughly 5%. Our Hedged portfolio is up 4.5%. This is very uncharacteristic performance for us during a strong rally. Our portfolios generally catch large portions of up trends in the general market. We caught much of the rally from the first of the year, however, our indicators got very cautious near the end of March leaving our portfolios with too much protection on the run in SPX from 1550 to 1650. Since our goal is to participate in strong up trends and get cautious when market internals are indecisive or negative we’re comfortable with the returns so far this year given the odd nature of latest rally.
Below are charts showing our allocation changes over the last year. Here is a post that explains what all the lines on the chart mean. The first chart is our core Long / Cash portfolio. The second is our Hedged (Long / Short) portfolio.