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Raising Cash and Adding a Hedge

This past week our measures of the economy dipped into negative territory. As a result, we’ll be changing our core portfolio allocations (details below). All of the rest of our core market health indicators dropped as well. They had held up fairly well earlier in the week, but Thursday’s market action did some damage to them. ¬†As a side note, it is extremely unusual for one indicator to warn without others warning within a month so it is likely we’ll be raising more cash over the coming weeks. But as always, we’ll wait for a signal before making further moves.


Our core measure of risk turned down after touching over bought readings the last few weeks. It is painting lower peaks which suggests investors are getting more concerned as the market moves higher. Our market risk indicator still has one component that is negative even though the market has moved to all time highs. All the other risk components peaked recently and have turned back down. Right now it is NOT warning of an accelerated decline and it hasn’t signaled since late 2012 so it’s merely background information. Here’s a hedge strategy that uses volatility when market risk is high. It reacts much more slowly to market conditions than our other strategies which reduces the number of portfolio adjustments (at the cost of more portfolio volatility).

As mentioned above, our measures of the economy are causing changes in our portfolio allocations. Our long/cash portfolios will now be 80% long and 20% cash. Our hedged portfolio will be 90% long stocks we believe will outperform the market in an uptrend and 10% short the S&P 500 index (using SH).

Please note, this is not a prediction of a market decline. We simply reduce our allocations when we see things that have historically been associated with market declines or choppy conditions. When the evidence changes our portfolios change.

Below is a chart with our portfolio changes over the past year. The yellow lines represent raising cash and/or increasing a hedge. The green lines represent reducing the hedge and/or raising cash.



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