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Core Portfolios Getting Cautious

Over the past week most of my core market health indicators fell. Most notable is my measures of the economy which have gone negative. As a result, the core portfolios are adding a larger hedge or raising cash. Below are the current core portfolio allocations.

Long / Cash: Long 40% – Cash 60%

Long / Short: Long 70% – Short the S&P 500 Index 30%

My market risk indicator currently has two of four indicators warning, but the other two a long way away from a signal. It appears that people aren’t too concerned about the current dip. In the absence of any risk event (i.e. Greece, Ebola, etc.) my risk indicator generally won’t signal without serious price deterioration. As a result, the Volatility Hedge stays long during “normal” consolidation periods. It is currently 100% long and I expect it to stay that way unless we see a steeper decline ensue.


Below is a chart with changes to the core portfolio allocations over the past year. Green lines represent adding exposure. Yellow represent raising cash or adding shorts. Red lines represent an aggressive hedge due to a market risk signal.


I’m seeing some of the same action that occurred during 2007 where the market pushes to marginal new highs and drags the indicators positive. Then slight price weakness turns the indicators negative again. The result was whip saws to the portfolio allocations that caused a draw down that mirrored the market itself until the bottom fell out in 2008. My point isn’t that we’re on the verge of a decline in 2008. I just want you to be aware of the potential for whip saws so you can take it into account if you adjust your own allocations.

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