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Market Risk Cleared

As I mentioned on Tuesday, my market risk indicator cleared during the week and the positive readings have held throughout the week. However, my core market health indicators are all still below zero.


This changes the portfolio allocations as follows.

Long / Cash portfolio: 100% cash

Long / Short Hedged portfolio: 50% long stocks I believe will outperform in and uptrend and 50% short the S&P 500 Index

Volatility Hedged portfolio: 100% long

As was the case in mid August the core indicators don’t like the current market internals, but the perception of risk is low. You’ll need to assess your own needs and risk tolerance to decide how much of a hedge (if any) you leave on your portfolio. If you’d rather use an ETF for the long portion of your portfolio here are some ideas on how to find one. Look at the comments too as a reader found several ETFs that met the high beta criteria.

At the end of August I wrote a post explaining why mid term volatility is a good hedging instrument. This latest signal provided a good example. From the market risk warning till today’s clearing the  longs in the “official tracking” portfolio are down about 2% while VXZ is up roughly 6.5% and XVZ is up about 5%. The S&P 500 Index (SPX)  is up almost 2%. So even though the market is higher than it was on the warning date, mid term volatility is still positive. The point to be remembered here is that volatility on risk events enters the market quickly, but leaves it slowly.

Here’s a chart with the allocation changes over the past year. Green indicates increasing longs. Red is an aggressive hedge. Yellow is either adding a hedge (yellow after green) or softening it (yellow after red).


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