Over the past week, my core market health indicators bounced around a bit. Most notably is that my core measures of the economy fell below zero. This results in a change in the core portfolio allocations as follows: Long / Cash portfolio: 60% long and 40% cash Long / Short portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or an ETF like SH) The Volatility hedged portfolio is not impacted by the core indicators so it is still 100% long (since 7/1/16) One other notable thing this week is my core measures of risk are still close to signaling a very bullish condition for the market. They aren’t being impacted by the small dip that started a couple of weeks ago which is a positive sign, but they haven’t moved into the “very bullish” territory yet either. This is the thing I’m watching most closely for signs of a strong rally into the end of the year.
Last week we got a market risk warning due to the surprise of the Brexit vote. This week, that warning has been cleared as market participants realize it will take a couple of years to sort out… so they can wait until then to panic. My core market health indicators, with the exception of trend, improved last week. The overall numbers are still soft, but positive enough to change the portfolio allocations to the following. Volatility Hedged portfolio: 100% long Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or the ETF SH) Long / Cash portfolio: 60% long and 40% cash One thing of note that happened over the past few weeks is the Dow Jones Transportation Average (DJTA) created a new secondary high near 8110. The Dow Jones Industrial Average (DJIA) also created a new secondary high near 18100. DJIA is above November 2015 secondary high, but DJTA is below all of its recent secondary highs. As a result, Dow
My market risk indicator cleared its warning this week. As a result, the volatility hedge will go 100% long. In addition, the core portfolios will remove their aggressive hedge and replace it with a short of the S&P 500 Index (SPX). My core market health indicators all improved with the exception of market quality. My measures of the economy improved enough to go positive which will change the core portfolio allocations a follows. Long / Cash portfolio: 20% long and 80% cash Long / Short portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or use the ETF SH) Volatility Hedged portfolio: 100% long Below is a chart of recent market risk indicator signals. As I noted in January, the market risk indicator signals near inflection points where the market either turns back up quickly or accelerates to the downside. This signal has the same appearance as the 2012 and 2015 signals, where the market traded slightly lower after the signal, but the warning didn’t clear
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 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
2015 was a year of whipsaws for the core portfolios. Take a look at the chart below and you’ll see the allocation changes throughout the year. Green lines represent adding exposure, yellow reducing exposure (or adding a hedge), and red represents a market risk warning. The core portfolios added exposure early in the year only to reduce it just before the August drop. It was nice to sleep at night during the turbulence, but it didn’t help the portfolios much because we then added exposure just before the market started to dip again. If you were holding small caps the changes were more painful than if your portfolio was closer to Nasdaq or the S&P 500 Index (SPX). Overall, the portfolios did as expected in a flat year for the market. Without a direction, whipsaws are expected. The important thing to notice on the chart is that the core portfolios were 100% in cash or 50% long and 50% short just before the decline in August. In contrast, my market
The chart of my core market health indicators says it all. Weak economy and every other category near zero. This week my measures of trend fell into negative territory, while the other categories are barely hanging on. It appears that the 2020 area on the S&P 500 Index (SPX) is a tipping point. The market needs to bounce here or I suspect the rest of the categories will fall below zero next week. Due to the negative reading from measures of trend, the core portfolio allocations change this week. Here are the new allocations: Long / Cash portfolio: 60% long and 40% cash Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or use the ETF SH) Currently, two of the four components of my market risk indicator are warning. A third is waffling and could warn at any moment. The fourth is well away from a signal, but a sharp sell off would probably take it negative too, which would bring
Over the past week my core measures of market quality, trend, and strength all rose significantly. Market trend and strength moved above zero which results in changes to the core portfolio allocations. Market quality is just barely below zero and will almost certainly go positive next week (even with some consolidation in the market). Here are the new allocations: Long / Cash portfolio: 60% long and 40% cash Long / Short Hedged portfolio: 80% long high beta stocks and 20% short the S&P 500 Index (or use the ETF SH) Volatility Hedged portfolio: 100% long (since 10/9/15) As always make your own decisions about your own portfolio allocations based on your personal risk tolerance. Enjoy the weekend everyone!
Over the past week most of my core measures of market health improved. Most notably is that my measures of risk went positive. This changes the portfolio allocations as follows: Long / Cash portfolio: 20% long and 80% cash Long / Short Hedged portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or the ETF SH) Volatility Hedged portfolio: 100% long (from 10/9/15) Another thing of note this week is that the Bullish Percent Index (BPSPX) is back above 60%. This reduces the risk of a steep or waterfall type decline. Here’s a post that explains the risk associated with poor breadth in the market.
Just a quick note. My measures of core risk are falling. With an inverted scale this is making the core risk category go positive. None of the other measures of market health are positive yet. So if the measures of risk stay positive into the close tomorrow (Friday) the core portfolios will be adding some exposure as follows. Long / Cash portfolio: 20% long and 80% cash Long / Short Hedged portfolio: 60% long high beta stocks and 40% short the S&P 500 Index (or use the ETF SH) I’ll make a post with a final call an hour before the market closes tomorrow, but wanted to give you a heads up so you can plan on what longs you’d like to hold.
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