Over the past week, some serious damage has been done to my core stock market health indicators. Most notably, the measures of the economy and market strength have gone negative. The changes the 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 use an inverse etf like SH) Volatility Hedged portfolio: 100% long (since 11/11/2016) As always, use your own risk tolerance and read on the market to guide your investment decisions.
Over the past week, all of my core market health indicators rose. Most notably, are my measures of market quality. This category of indicators went negative just two weeks ago, then flipped back to positive this week. Normally, the core indicators don’t whipsaw because they are attempting to catch intermediate term trends. In fact, there were only a handful of times in the last 16 years where a category went negative for only two weeks. This is the first occurrence of a category whipsawing without any of the other categories already in negative territory. With measures of market quality now positive the core portfolio allocations are as follows: Long / Cash portfolio: 100% long Long / Short Hedged portfolio: 100% long high beta stocks Volatility Hedged Portfolio: 100% long (since 11/11/2016)
2015 was a year of intermediate term whipsaws. 2016 saw longer term indicators whipsawing. The longest term indicator I follow is Dow Theory. It looks for trends that last from one to three years (or longer). As a result, Dow Theory gives a lot of leeway to counter trend moves. It’s common to have a 10% or 15% correction during a long term bull market that doesn’t change Dow Theory’s long term trend. You can see some examples during the long term uptrend from mid 2009 to early 2016 in the chart below. Zooming in to the last few years, you can see what appeared to be a long term trend change according to Dow Theory. In August of 2015, both the industrials (DJIA) and the transports (DJTA) had large enough corrections to mark Dow Theory secondary lows. In December of that year, DJTA broke below its secondary low point and created a bearish non-confirmation in the indexes. In February 2016, DJTA broke its secondary low point. This created a
Over the past week my core market health indicators continued to fall. Most notably was the measures of market quality, which fell below zero. This changes the core portfolio allocations as follows: Long / Cash portfolio: 80% long and 20% cash Long / Short Hedged portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or use the ETF with symbol SH) Volatility Hedged portfolio: 100% long (since 11/11/2016)
Over the past week, my core measures of market quality moved back above zero. During the same period my measures of market trend and strength surged higher as well. The strength in these indicators suggest that the market will rally into year end. Earning season could change the market’s opinion, but without major problems during the first few weeks I suspect we’ll be off to the races. The move in market quality changes the current core portfolio allocations as follows: Long / Cash portfolio: 80% long and 20% cash Long / Short portfolio: 90% long high beta stocks and 10% short the S&P 500 Index (or use the ETF SH) Volatility Hedged portfolio: 100% long (since 7/5/2016) Here is a chart that shows the core portfolio allocations over the past year. Green lines represent adding long exposure. Yellow is raising cash or adding hedges. Red is an aggressive hedge using mid term volatility. Another sign that market participants are expecting a year end rally comes from the ratio between the
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,
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