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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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Risk Off

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The last dip in the market caused some damage to the psyche of market participants. So much so that they are exhibiting signs of reducing risk in a variety of ways. Here are three examples. First is high quality bonds (LQD) against junk bonds (JNK). The damage done to junk bonds in July and October isn’t being repaired. People are shying away from junk. Which means they’re starting to get worried about cash flow and the ability to repay debt by middling companies. I’d like to see JNK start to mirror LQD again to give an all clear signal. Next is high beta stocks (SPHB) against low volatility stocks (SPLV). The October sell off did a lot of damage to high beta stocks that was largely recovered, but low volatility stocks held up and have sped to higher highs. This indicates some rotation to safety during the last rally. A move to higher highs by SPHB will be the first step in repairing this relationship. Another indication of reduction of

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