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Core Indicators Not Impressed

150731markethealth

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

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Raising Cash and Adding More Hedge

This past week our core market health indicators continued their recent trend.  All of them except for our measures of the economy fell. Our measures of trend fell sharply and ended the week well below zero.  As a result, we’re raising more cash and/or adding a larger hedge to our core portfolios.  By the close today our Long/Cash portfolios allocations will be 20% long and 80% cash.  Our hedged portfolio will be 60% long stocks that we believe will out perform the market in an uptrend and 40% short the S&P 500 Index (or use the ETF SH).  Below is a chart of our portfolio changes over the past year.  The yellow lines represent raising cash/adding hedges.  The green lines represent removing hedges and adding more longs to the portfolios. As I pointed out a few weeks ago, historically our indicators deteriorating to these levels have resulted in an extended choppy market or an extended decline 65% of the time.  35% of the time these conditions marked a short term low

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