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Setting Up for Year End Rally

Over the past week, my core measures of market quality moved back above zero. During the same period my measures of market trend and strength surged higher as well. The strength in these indicators suggest that the market will rally into year end. Earning season could change the market’s opinion, but without major problems during the first few weeks I suspect we’ll be off to the races. The move in market quality changes the current core portfolio allocations as follows:

Long / Cash portfolio: 80% long and 20% cash

Long / Short portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or use the ETF SH)

Volatility Hedged portfolio: 100% long (since 7/5/2016)

161007MarketHealth

Here is a chart that shows the core portfolio allocations over the past year. Green lines represent adding long exposure. Yellow is raising cash or adding hedges. Red is an aggressive hedge using mid term volatility.

161007PortfolioAllocations

Another sign that market participants are expecting a year end rally comes from the ratio between the Nasdaq 100 (NDX) and the S&P 500 Index (SPX). Over the past few months of consolidation in SPX we’ve had a rally to new highs in NDX. This indicates that money managers have been rotating their portfolios toward risk going into the end of the year.

161007NDXvSPX

Conclusion

Core health indicators are strengthening and market participants are rotating toward risk going into the end of the year. If we can make it through the first few weeks of earnings season without major blow ups we should see a nice run higher.

 
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