The volatility in the market over the past week was accompanied by a deterioration in all of our core market health indicators. Every category is now negative. As a result, our long/cash portfolio allocations are now 100% cash. Our hedged portfolio allocation is 50% long stocks we believe will out perform the market in an uptrend and 50% short the S&P 500 Index (ticker symbol SH).
Please note that this isn’t a prediction of a market decline. Instead it is simply acknowledgement that enough things are wrong with our underlying indicators that I feel it prudent to step aside until the indicators give clear positive signs.
UPDATE 3:32 PM Eastern – OUR MARKET RISK INDICATOR SIGNALED AFTER THIS INITIAL POST. AS A RESULT, OUR HEDGED PORTFOLIO WILL USE AN AGGRESSIVE HEDGE.
Our Market Risk Indicator is very close to a warning, but it hasn’t yet (2 PM Eastern). It will take a steep sell off in today’s remaining trading session to create a signal. If it signals before the close our hedged portfolio will replace the SPX short position with an aggressive hedge using a product that will benefit from a rise in implied volatility. A mid term or dynamic volatility ETF/ETN is what we use for official tracking purposes. Here are some ticker symbols that are available VXZ, VIXM, or XVZ. If you aren’t comfortable with volatility a managed short fund like HDGE is alternative. As always, use your own judgement and never purchase a security that you don’t understand.
NOTE: I’ll update this post before the close if our Market Risk Indicator signals. But at the moment it is not signalling so the we expect to be hedged with a short of SPX (SH).
Below is a chart of our current market health categories.
Here is a chart with the changes to our portfolio allocations over the past year. Green lines represent adding long positions and removing hedges. Yellow lines represent raising cash and adding short positions (as a hedge). UPDATE: our market risk indicator signaled so the red line represents an aggressive hedge using a security that will benefit from rising volatility.