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