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.
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.
On August first I warned that the meme of poor breadth would likely cause a “substantial disruption in the markets“. This week a new meme is emerging that the all time highs in the CBOE SKEW Index indicates everyone is afraid of a black swan event and thus the market is due to crash. There has been a spike in searches on Google for “skew index” confirming the frenzy. So, is the market going to fall due to an all time high in SKEW? I’m sorry, but I just don’t buy it. Why? Because the SKEW data doesn’t correspond to market tops. Take a look at the chart below and you’ll notice that SKEW doesn’t have a good track record of predicting declines. It has a plethora of false signals and just a few correct signals. What do you think would have happened to your portfolio if you had gone to cash or added a hedge every time SKEW spiked above 135? Side note: I pulled 135 as a signal
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
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
The most significant thing I’m seeing this week is my measures of risk strengthening amid large range days and high volatility. Market participants are getting comfortable with wide swings in their portfolios. The improvement in my measures of risk still aren’t enough to clear my market risk indicator, but a continued rally next week just might do it. On the other hand, my measures of stock market quality, trend, and strength all fell this week even with four days of rally. This action is similar to what I was seeing a few weeks ago that indicate we’re probably seeing another dead cat bounce. Last week I said that I intended to take some profit from the hedge if the market retested the August low. I didn’t do it for a couple of reasons. The major reason is that at the lows on Monday the hedged portfolios were roughly allocated still at 50% long, 33% aggressively hedged (with mid term volatility), 17% short the S&P 500 Index. As a result, I
Over the past week all of my core market health indicators fell. They continue to be mired in negative territory and aren’t responding much when the market rallies. My market risk indicator is also still negative, however, it continues to improve. It will take some positive price action next week to clear the warning. One thing of note is that a daily chart (closing prices) of the S&P 500 Index (SPX) appears to be painting a bear flag that is consolidating the August losses. This pattern has high odds of breaking lower. If that occurs then we’ll almost certainly see the August lows again and have a high likelihood that they won’t hold. That would put 1800 to 1820 on SPX in play as the first area for a bounce. If the market makes it back to the August lows I’ll take more profit from the hedge and soften it again…just in case the lows hold. Conclusion Core indicators are falling while risk is abating. Meanwhile, SPX is painting a
Three weeks ago my market risk indicator signaled which caused me to change the portfolio allocations to an aggressive hedge. After the decline into the August 25th low the S&P 500 Index (SPX) has been consolidating…although in a very wide and loose fashion. The current rally is consolidating the steep losses after the break of 2040 on SPX. As a result, the most likely resolution will be a break lower sometime in the next few weeks. However, my expectation is that the short term triangle from daily closing prices will be broken to the upside before the market ultimately turns lower. Looking at a point an figure chart which removes the linear time scale shows the consolidation and volatility much more clearly than a line chart. The current down trend line is on target to meet price at about 2000 on SPX which should provide some resistance. The 50 day moving average for SPX is also on a trajectory that should meet price near the 2000 level as well. The
At the end of August monthly momentum for the S&P 500 Index (SPX) joined MACD in warning that the long term trend has changed from bullish to bearish. This is just one more domino to fall in the ongoing battle between bullish indicators and bearish. Over the past week my core market health indicators bounced around a bit, but all of them are still warning. In addition, my market risk indicator is still warning and is showing no signs of abating at the moment. As a result, the portfolios are still aggressively hedged. This post shows the current allocations. Below is a chart with the current market health indicator categories. Please note: If we get a good washout next week that basically retests the August low I’ll likely (based on my read of the washout) take more profit from the hedge and rebalance to the following allocations: 50% long, 25% aggressively hedged, and 25% short SPX.
I’m seeing a lot of people pointing to last week’s strong rally and making comparisons to October 2014. Here are a few charts that show some big differences between then and now. First is a point and figure chart of the S&P 500 Index (SPX). Last October the decline was deep, but it still held the long term trend that started in late 2012. The current decline broke that uptrend and two more attempts to create a new uptrend. In addition, the decline broke a tight six month price range. This pattern indicates that a lot of distribution was occurring during the sideways trading. This will create strong overhead resistance if price makes it back to the 2040 area on SPX. Another chart that shows the difference is SPX with its 50 and 200 day moving averages. Last October the decline started well above the 200 day moving average on SPX. As a result, it was an easier level to reclaim. The current decline started in earnest when SPX broke