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Core Portfolios Fully Hedged or All Cash

As I mentioned on Monday, the damage done to the core indicators would be hard to overcome and that the intermediate term trend is now likely down. Since Monday things have only gotten worse. All of my core indicators dipped even deeper into the red. As a result, the core portfolio allocations are now fully hedged or 100% in cash. My market risk indicator has three of four components warning at the moment, but the forth is still positive. That leaves the volatility hedged portfolio 100% long. Here’s a complete list of the allocations:

Long / Cash portfolio: 100% cash

Long / Short Hedged portfolio: 50% long high beta stocks and 50% short the S&P 500 index (or use SH)

Volatility Hedged portfolio: 100% long

160108MarketHealth

As an example of the broken intermediate term trend here’s a point and figure chart of the S&P 500 index. The damage done this week was pretty significant, but looking longer term there is still the possibility that once the current correction has ended we’ll see higher prices.

160108SPXpnf

Another sign of a broken trend is the bull flag I’ve been watching has broken down. It no longer suggest higher highs in the near future. It looks like the market is going to need some time to digest the recent action before it will have a chance to attack all time highs. One thing of note however, is that the number of bullish stocks on Twitter is ticking up even as the market is falling hard. That suggests people are buying the dip in leading stocks which could set up a short term low.

160108breadth

Conclusion

Looks like we’re in an intermediate term down trend. Now we watch for clues about the long term. While we wait for a resolution, we’ll stay comfortably hedged.

 
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