Over the past week all of our core market health indicators fell sharply. Most notably is that perceptions of risk are rising sharply. Two of the components of our Market Risk Indicator are currently warning. The sharp drop in this indicator shows that investors are dancing close to the door. Our measures of market quality and strength fell quickly as well. Our measures of the economy have fallen back below zero which has us raising cash in the long / cash portfolios. They are now 80% long and 20% cash. We’re adding a 10% hedge to the hedged portfolio. It is currently 90% long with stocks that we believe will outperform the market in an uptrend and 10% short the S&P 500 index (or an ETF like SH). If the current trajectory of our measures of market quality and strength continues we’ll probably be raising more cash next week. But as always we’ll wait for a signal. I’ll post mid week if anything significant happens to any of the indicators.
Over the past week our measures of market quality fell below zero. As a result, we’re raising some cash in both our long/cash strategies and we’re adding a small hedge to the hedged portfolio. Both of our Long/Cash portfolios are now 80% long and 20% cash. Our hedged portfolio is 90% long and 10% short. The long portion of the portfolio consists of stocks that we believe will outperform the general market in an uptrend. The short is a simple short of the S&P 500 Index (SPX). Please note the purpose of our portfolio strategies is to help individual investors remove the risk of large draw downs from their own portfolios. We don’t list the longs we hold because we feel you should do your own due diligence before buying any security. This isn’t a prediction of a market top, instead when our indicators start to weaken (especially after a strong rally) we feel it prudent to take some profits or hedge against a possible decline. We still believe the
Over the past week most of our indicators rose, however, our measures of market quality slipped enough that we’re changing our portfolio allocations. In both of our Long/Cash portfolios we’ll now be 60% long and 40% cash. Our Hedged portfolio will be 80% long and 20% short. We’re long stocks that we believe will out perform the market in an uptrend. Our hedge is a simple short of the S&P 500 Index (or SH). Please be aware that this isn’t a prediction of a market top or even a correction. Our measures of market quality tend to be longer term in nature and often lead our other indicators by several weeks or even months. So this is simply a recognition that enough of the underlying indicators that we follow are falling that we feel it prudent to raise a bit of cash and become more cautious. Our goal is not to track every move in the general stock market, rather we want to participate in strong rallies and avoid catastrophic
Although I don’t see very many near term concerns in the market, we are seeing some cautiousness by longer term investors. One of the things I like to watch is a comparison between a S&P 500 short (SH), an actively managed bear fund (HDGE), and mid term volatility (VXZ). As the market started to decline at the first of May we saw a slight rise in HDGE which signaled that people were starting to short the market, but were being cautious in pressing them. At the same time VXZ started to rise much more rapidly, which indicated that investors who hedge their portfolios with futures or options further out on the curve were adding protection. VXZ rising shows investors placing bets that the market will become volatile sometime over the next four to seven months. The taper talk by Bernanke caused another surge higher in VXZ as people started targeting September to December as the beginning of the end of QE. Once other Fed officials started making dovish comments much
Every weekend I review the charts of the 50 most active stocks on Twitter then place them into categories. This past weekend I noticed that the number of stocks in a confirmed downtrend is growing. In addition, the number of stocks in a confirmed up trend is growing too. The number of stocks that are unclear, showing a divergence, or indicating that a counter trend move is falling. This is somewhat disconcerting for the longer term because it suggests that market participants are piling on to the strong stocks and ignoring the weak stocks. This type of divergence is often one of the first signs of a thinning market. The value players have stopped trying to pick up stocks in down trends while the momentum players are buying anything in an up trend. Our concern is that we may be in the early stages of a blow off top. We want to see this situation resolve with more interest in the weak stocks and also some divergences in sentiment for
Since mid April we’ve seen a bit of bottom fishing among the 50 most active stocks on Twitter. We currently have four stocks with counter trend bounce signals in place. Each of those stocks have rallied to moving averages (50 and 200 day) and also down sloping trend lines. This is a point where people who are bearish on the stocks should be selling them short. This creates a battle between the longer term investors who are picking up the stocks as they fall and bears who sell every bounce off the underside of moving averages. By watching these battles we can learn about the underlying strength of the general market. If the current rally is near a turning point we would expect to see more short selling in the market. In addition, the stocks that are being sold should fall and continue their long term down trends. For a general view we like to compare a short of the S&P 500 Index (SH) against an actively managed bear fund
Over the past week most of our core market health indicators improved. Our measures of the economy are still negative, but improving slowly. Our measures of risk showed some weakness that signals investors are getting a bit more concerned about the market. However, we believe that this is a normal condition when the market stalls rather than an indication of substantially lower prices. Our measures of market quality, trend, and strength jumped substantially this week. It is interesting that our measures of trend followed quality and strength in going positive especially since the rally out of the November lows has trended so strongly. It is an indication of how odd this rally has been from a underlying technical perspective. The positive changes in market trend is causing a change in our core portfolio allocations. Our Long / Cash strategies are now 80% long and 20% cash. Our Hedged portfolio is now 90% long and 10% short (using a simple short of the S&P 500 Index — or the ETF
Our core market health indicators saw improvement in everything except our measures of the economy. We’re increasing exposure in our core portfolios today. Our Long / Cash portfolios will now be 60% long. Our hedged portfolio will be 80% long and 20% short. The short is a simple short of the S&P 500 Index (or SH). Below are charts showing where we added exposure (green lines) and raised cash or added hedges (yellow and red lines). The core long / cash portfolio has had limited exposure that has varied from 20% long to 100% long. The hedged portfolio (Long / Short Hedge) Has had a bit more exposure to the long side, but carried a fairly significant hedge during the last part of this rally. This was due to our core market health indicators remaining mostly negative during the move from 1550 to 1650.
Over the past week all of our core market health indicators fell sharply. Many of them have readings usually seen after a severe correction in price. This condition highlights the large disparity between market internals and price. We have a stock market that believes external forces (like QE) are the driving factor. Until that belief is shaken we suspect we’ll continue to see internals diverge from the market as a whole. Our measures of risk have finally started to show some weakness. Market participants are beginning to get concerned that this small consolidation could turn into something larger. Our market risk indicator is still quite far away from a signal, but our other measures of risk are getting fairly close. At the moment it appears that weakness over the next week might get our Long/Cash portfolios 100% in cash and or Hedged portfolio 50% Long and 50% short (using SH or an equivalent). While a rally would leave us positioned the same. It would take a very swift move down
We’re seeing caution signs from several areas. The most important to us is that our core market health indicators continue to weaken. They track the economy and market internals that we categorize into quality, trend, strength, and risk. They have fallen enough to limit our exposure to the market in our Long / Cash portfolios and to moderately hedge in our hedged portfolio. The silver lining that has kept us out of an aggressive hedge is that price hasn’t confirmed the market internals and our measures of risk haven’t shown us that market participants are expecting a large move down in price. Today our Twitter sentiment indicator for the S&P 500 Index (SPX) again warned that the market may need some time to consolidate gains. After the last warning near the end of January the market rose for another few weeks gaining 30 points. It then had a small reversal giving back 45 points. Add one more thing giving us concern. Next is that several leading stocks on Twitter are