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Raising Cash – Adding Hedge

Over the past week all of our market health indicators fell. Our measures of trend fell into negative territory which causes us to change our portfolio allocations. The Long / Cash portfolios will now be 60% long and 40% cash. The hedged portfolio will be 80% long stocks we believe will out perform the market in an uptrend (high beta stocks) and 20% short the S&P 500 Index (SH).

Our market risk indicator hasn’t signaled so our volatility hedge is still 100% long.

Below is a chart with the core portfolio allocation changes over the past year. The green lines represent adding exposure to the market and the yellow lines represent raising cash or adding a hedge.

140926hedgeallocation

Here is a chart of the current readings (normalized) of our market health categories.

140926markethealth

The thing I’m watching most carefully at the moment is breadth. The NYSE cumulative Advance / Decline line (NYAD) is getting close to painting a lower low. This would be a warning sign of the most significant top we’ve seen in about two years.

140926nyad

Another warning of a larger correction would be if the percent of stocks in the S&P 500 index below their 200 day moving average falls below 60%.

140926spx200

 

Elder Impulse for the S&P 500 index is currently painting a red bar on a weekly chart. When this happens there is usually more downside ahead.

140926spxei

 
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