Over the past week our core market health indicators diverged from each other. Our measures of the economy and trend rose while our measures of quality and strength fell. None of them moved much, but measures of trend moved back above the zero line. This changes our portfolio allocations as follows. The long/cash portfolios are now 60% long and 40% cash. The hedged portfolio is 80% long stocks we believe will outperform in an uptrend and 20% short the S&P 500 Index (long SH as an alternative to shorting SPY).
Our core measures of risk moved further into overbought territory this week. As I noted over the weekend, when this occurs a dip of more than 10% often follows within a month or two. For now it’s not too concerning, but something to watch closely going forward.
Below is a chart of our current market health category readings (normalized).
Here’s a chart of our portfolio allocation changes over the past year. The green lines represent adding long exposure and removing hedges. The yellow lines represent raising cash and adding hedges.