Just a quick note about our current portfolio positions. Our core market health indicators have deteriorated further throughout the week. They’ve fallen enough that we’re raising cash in our Long / Cash portfolios and adding hedges to our Hedged portfolio. Our Long/Cash portfolios are both now 40% long and 60% cash. Our Hedged portfolio is now 70% long and 30% hedged with a simple short of the S&P 500 Index. The ETF SH is an easy way to short SPX if you don’t want to short SPY. The long portion of our portfolio still remains the stocks we believe will outperform the market over the long term. However, we’ve trimmed some positions based on their future prospects and used that cash to purchase the hedge. Note: charts added on 2/24/13
Just a quick post today since it’s Valentines Day…and I have better things to do. We mentioned in our weekend update that our core market health indicators were diverging from price. This week the divergence is continuing with the market going nowhere and our indicators weakening slightly. However, it doesn’t appear any of them will fall far enough to change any of our portfolio allocations…unless we wake up tomorrow and the market is down several hundred points. We’ll do another update if anything changes, but consider no news good news.
Our core market health indicators strengthened again this week. In addition, our market risk indicator has cleared its warning signal allowing us to add more longs to the portfolios. Both the Core Long/Cash portfolio and the Long/Cash portfolio that uses or market risk indicator are now 80% long and 20% cash. On the charts below the green lines represent buying stock and the yellow lines represent raising cash. Core Long / Cash Allocations Long / Cash Allocations – With Market Risk Indicator
Enough of our core market indicators strengthened today to add more long exposure to our core Long/Cash portfolio. The core portfolio is now 60% long and 40% cash. Our other portfolios are still 100% cash or aggressively hedged since 10/19/2012. One thing of note is that our core market health indicators are reflecting the uncertainty in the market. Since the beginning of August they have had eight major signals. All of them have been between 1395 and 1430 on the S&P 500 Index (SPX). We’ve basically put on some longs then raised cash at almost the same level over the past five months. Now we’re adding exposure again…in the same range. The discrepancy between our Core portfolio and our other portfolios gives us concern. Usually we see our Market Risk Indicator looking better when we add exposure to the Core portfolio. Right now we’re seeing risk rising at the same time as the underlying market is getting healthy. This is one more sign about the huge uncertainty in the market…and
We’re seeing more weakness in our Core Market Health indicators this week. As a result, we’re moving to 60% cash and 40% long in our Core Long / Cash strategy. As we noted yesterday, we don’t know where the market goes from here, but market internals are telling us to take caution and protect our portfolios until the internals become more healthy. Here is more information about how we hedge by going to cash. Our hedge strategies that use our market risk indicator went to cash or were aggressively hedged on 10/19/2012. The cash strategy is benefiting, while the aggressively hedged portfolio is currently paying for insurance as the time decay and lack of volatility are eating away at our hedges. Even with the small loss in the portfolio we’re comfortable with our current positioning especially since it doesn’t appear that anyone is looking at the headwinds we’ll face next year regardless of the fiscal cliff resolution. On the chart below the yellow lines are us raising cash. The thickness
Today we find ourselves watching a market that is in no man’s land. After topping in mid September the S&P 500 Index (SPX) suffered a mild correction falling from about 1475 to near 1350. Now it is attempting to rally and is caught between its 50 and 200 day moving averages. Everyone seems to be asking the same questions. Have we topped? Is the bottom in place? Where does the market go next? With that in mind, we thought it would be a good time to talk about a few of our most important observations about market tops over the last 30 years. The first thing we’ve noticed is that tops take a long time to form. They’re brutal to an investor who makes big bets using put options because of the time decay in their options while the market chops around, puts in marginal new highs, then chops around some more. Fortunately they’re a bit less painful for an investor using put options, volatility, or other aggressive financial instruments
Last week several of our core market health indicators strengthened a bit, but not enough to overcome the indicators that showed weakness. The net result was an overall weakening in market health. As a result, we’re raising more cash in our Core Long / Cash Hedge strategy. It is now 60% long and 40% in cash. Here’s more information on our Long / Cash hedging strategies. In the chart below the yellow lines represent raising cash and the green lines are adding exposure to the stock market.
Our Long / Cash hedging strategy is now 100% cash. Please see our Long / Short Hedging Strategy Update for an explanation. In the chart below the green lines represent buying stocks for the portfolio (reducing cash). The yellow lines represent raising cash by selling stock.
While out and about today I saw these two signs just across the street from each other. It made me wonder if there is a relationship between high gas prices and a retail store offering cash for gold. The cash for gold store wasn’t a jeweler who’s offering to buy gold, but an actual retail outlet set up for the express purpose of buying gold (and I assume turning around and selling it for cash). Is gold inflated to the point that it is profitable to trade it at a strip mall? Or is it that people are in such bad economic shape that they’re willing to sell their jewelery for much less than its worth? I can understand buying gold as an add on to a core business. To me it’s completely reasonable for a collectible coin shop or jeweler to buy junk gold as an extra source of income (since their core business pays their fixed costs) . But, a cash for gold retail outlet must pay only
Our internal indicators of core market strength improved enough today to allow us to add more exposure to the market. We are now 40% long and 60% cash. In the following weeks we’ll continue to add exposure if our core market indicators continue to rise. We’ll raise cash if market conditions deteriorate. On the chart below our purchases of additional longs are represented by the green lines. The yellow lines represent selling stock and raising cash.