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Core Portfolios Fully Hedged or All Cash

160108MarketHealth

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

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Year of Whipsaws

Portfolio Allocation Changes

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

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Tipping Point

151218markethealth

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

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Market Quality, Trend, and Strength Rise

151106markethealth

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!

 
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Core Risk Improves

151023markethealth

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.

 
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Core Risk Falling

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.

 
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Market Risk Cleared

151009MarketHealth

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

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ETFs vs Stocks With a Hedge

SPHBsectors

Yesterday my market risk indicator moved back to positive territory. It’s looking like price above 1975 on the S&P 500 Index (SPX) is roughly the level where the risk indicator clears so you can use that level for planning during the week. If the readings can hold into Friday it will clear the current market risk warning. If that happens it will result in the Volatility Hedged portfolio going 100% long (for official tracking purposes I use SPX for the longs). The Core Long/Short Hedged portfolio will remove the aggressive hedge (mid term volatility) and replace it with a short of SPX (or using SH). The longs for the core portfolio are stocks that should outperform the market during an uptrend (high beta stocks). As I mentioned above I use SPX for tracking the Volatility Hedged portfolio, but I personally use high beta stocks with that strategy. Recently I’ve been asked if an ETF can be used for the long portion of the core portfolio rather than stocks. The answer

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Softening Hedge and Rebalancing

With the sell off this morning I’m taking the opportunity provided by a spike in volatility to take some profit from the hedge and soften it in the Long / Short Hedged portfolio. I’m taking all profit from the hedge and buying new long positions with it. In addition, I’m selling 1/3 of the aggressive hedge (mid term put options, VXZ, or XVZ) and buying a short of the S&P 500 Index (or using SH). Usually, the longs in the portfolio have dropped enough that the new allocations are fairly close to a 50% long and 50% hedged position after a rebalance. But due to the large increase in volatility without much price damage in the market since 8/21/15 (when my market risk indicator signaled) the new allocations have a slightly smaller hedge than is normal after a rebalance. The new allocations for the Long / Short portfolio are as follows. 53% Long stocks that I believe will outperform in an uptrend (high beta stocks) 15% Short the S&P 500

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Core Portfolios Getting Cautious

150724MarketHealth

Over the past week most of my core market health indicators fell. Most notable is my measures of the economy which have gone negative. As a result, the core portfolios are adding a larger hedge or raising cash. Below are the current core portfolio allocations. Long / Cash: Long 40% – Cash 60% Long / Short: Long 70% – Short the S&P 500 Index 30% My market risk indicator currently has two of four indicators warning, but the other two a long way away from a signal. It appears that people aren’t too concerned about the current dip. In the absence of any risk event (i.e. Greece, Ebola, etc.) my risk indicator generally won’t signal without serious price deterioration. As a result, the Volatility Hedge stays long during “normal” consolidation periods. It is currently 100% long and I expect it to stay that way unless we see a steeper decline ensue. Below is a chart with changes to the core portfolio allocations over the past year. Green lines represent adding

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