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Core Indicators Not Impressed

My core market health indicators weren’t impressed by this week’s rally. All of them fell in the face of a rising S&P 500 Index (SPX). This isn’t an encouraging trend. During the month of July as the market traded sideways in a 5% range my core indicator categories have broken down one after another. This week my measures of market strength fell below zero which is changing the allocations in the core portfolios. The new allocations are as follows.

Long / Cash portfolio: 20% L0ng and 80% Cash

Long / Short portfolio: 60% Long and 40% Short the S&P 500 Index


Below is a chart with the portfolio changes over the past year. Green is adding exposure / reducing a hedge. Yellow represents adding a hedge or raising cash. Red represents a market risk warning where I use an aggressive hedge (with put options or a product that benefits from rising volatility).


Fortunately price hasn’t broken yet and as a result market participants are comfortable keeping core measures of risk in the moderate range. My market risk indicator is completely in the green with none of its four components warning. As a result, the volatility hedge is still 100% long (from 10/24/14).


One sign that the current rally isn’t healthy is the stocks that are rallying and showing bullish sentiment on Twitter are laggards. While the most bearish stocks contain a lot of leaders. Market participants are buying beaten down stocks and selling their winners. At the very least this means we’re likely to see continued chop. You can see a full article on individual stock sentiment here.



Core market conditions are breaking down one after another, but price is holding up. That puts my core indicators at odds with measures of risk. Each individual should look at their own risk tolerance and decide if now is the time to take some money off the table or wait until price breaks and we get a market risk warning.

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