Over the past week our measures of market quality fell below zero. As a result, we’re raising some cash in both our long/cash strategies and we’re adding a small hedge to the hedged portfolio. Both of our Long/Cash portfolios are now 80% long and 20% cash.
Our hedged portfolio is 90% long and 10% short. The long portion of the portfolio consists of stocks that we believe will outperform the general market in an uptrend. The short is a simple short of the S&P 500 Index (SPX). Please note the purpose of our portfolio strategies is to help individual investors remove the risk of large draw downs from their own portfolios. We don’t list the longs we hold because we feel you should do your own due diligence before buying any security.
This isn’t a prediction of a market top, instead when our indicators start to weaken (especially after a strong rally) we feel it prudent to take some profits or hedge against a possible decline. We still believe the market has enough underlying strength to rally into the end of the year, but we don’t allocate money based on our beliefs…we follow our indicators.
Below is a chart of our core Long/Cash changes during the past year. Green lines represent adding long exposure and yellow lines represent raising cash.
The next chart shows the changes to our hedged portfolio. The green lines represent adding longs and removing hedges. The yellow lines represent adding hedges and reducing our long exposure. If we add aggressive hedge instruments such as puts or volatility it is represented as a red line.
Below are the current numbers for our core market health indicator categories (normalized to a scale of +10 to -10).