This past week our measures of the economy dipped into negative territory. As a result, we’ll be changing our core portfolio allocations (details below). All of the rest of our core market health indicators dropped as well. They had held up fairly well earlier in the week, but Thursday’s market action did some damage to them. As a side note, it is extremely unusual for one indicator to warn without others warning within a month so it is likely we’ll be raising more cash over the coming weeks. But as always, we’ll wait for a signal before making further moves. Our core measure of risk turned down after touching over bought readings the last few weeks. It is painting lower peaks which suggests investors are getting more concerned as the market moves higher. Our market risk indicator still has one component that is negative even though the market has moved to all time highs. All the other risk components peaked recently and have turned back down. Right now it is
Over the past week our core market health indicators diverged from each other. Our measures of the economy and trend rose while our measures of quality and strength fell. None of them moved much, but measures of trend moved back above the zero line. This changes our portfolio allocations as follows. The long/cash portfolios are now 60% long and 40% cash. The hedged portfolio is 80% long stocks we believe will outperform in an uptrend and 20% short the S&P 500 Index (long SH as an alternative to shorting SPY). Our core measures of risk moved further into overbought territory this week. As I noted over the weekend, when this occurs a dip of more than 10% often follows within a month or two. For now it’s not too concerning, but something to watch closely going forward. Below is a chart of our current market health category readings (normalized). Here’s a chart of our portfolio allocation changes over the past year. The green lines represent adding long exposure and removing hedges.
The Active Bear ETF (HDGE) is rising, a short of the S&P 500 Index is falling (SPX), and mid term volatility (VXZ) is falling. It tells a simple story. Shorts are working, but not affecting the market, nor causing any fear.
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
Over the past week our market health indicators dropped significantly. Most importantly our measures of market quality fell below zero. As a result, the Long/Cash portfolios will be raising cash by the end of the day. They will both be 40% long and 60% cash by the end of the day (3/14/14). Our hedged portfolio will be 70% long stocks we believe will out perform the market in an uptrend and 30% short the S&P 500 Index (or simply buy the ETF SH). There is small chance that we’ll raise even more cash or add a larger hedge if the market accelerates lower in the last hour of trading. Our measures of market trend are still positive, but could go negative before the end of the day. If that happens I’ll update the site and do a new post with the details. Below is a chart of our allocation changes over the past year. The green lines represent adding long exposure to the portfolios. The yellow lines represent raising cash
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