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Raising Cash and Adding Hedges in Core Portfolios

Over the past week most of our indicators rose, however, our measures of market quality slipped enough that we’re changing our portfolio allocations.  In both of our Long/Cash portfolios we’ll now be 60% long and 40% cash.  Our Hedged portfolio will be 80% long and 20% short.  We’re long stocks that we believe will out perform the market in an uptrend. Our hedge is a simple short of the S&P 500 Index (or SH).

Please be aware that this isn’t a prediction of a market top or even a correction.  Our measures of market quality tend to be longer term in nature and often lead our other indicators by several weeks or even months. So this is simply a recognition that enough of the underlying indicators that we follow are falling that we feel it prudent to raise a bit of cash and become more cautious.  Our goal is not to track every move in the general stock market, rather we want to participate in strong rallies and avoid catastrophic draw downs.  This means we often hold large amounts of cash when the market is trading sideways or up in a choppy fashion.  Please use your own judgement for your own portfolio allocations.

Below are charts of our Long / Cash and Hedged portfolio allocation changes over the past year.  The green lines represent adding exposure (the thicker the line the more exposure), the yellow lines represent raising cash (and adding shorts in the hedged portfolio), and the red lines represent aggressive hedging (puts, volatility, etc.) due to our Market Risk Indicator signaling.

Long Cash Portfolio Allocation

Long Short Portfolio Allocation

Below is a current chart of our core market health indicator categories.  There is still almost no perception of risk by market participants. Our measures of the economy, market strength, and trend continued to move higher as the market moved to new all time highs.

 
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