The volatility in the market over the past week was accompanied by a deterioration in all of our core market health indicators. Every category is now negative. As a result, our long/cash portfolio allocations are now 100% cash. Our hedged portfolio allocation is 50% long stocks -- which we believe will out perform the market in an uptrend -- and 50% short the S&P 500.
Please note that this isn’t a prediction of a market decline. Instead it is simply acknowledgement that enough things are wrong with our underlying indicators that I feel it prudent to step aside until the indicators give clear positive signs.
Close To A 'Warning?
Before Friday's U.S. close, our Market Risk Indicator was very close to a warning. It would have taken a steep sell off in the day’s remaining trading session to create that signal. If it were to occur, our hedged portfolio would replace the S&P 500 short position with an aggressive hedge using a product that will benefit from a rise in implied volatility. A mi- term or dynamic-volatility ETF/ETN is what we use for official tracking purposes. Here are some ticker symbols that are available: (VXZ), (VIXM) or (XVZ). If you aren’t comfortable with volatility, a managed short fund like (HDGE) is an alternative. As always, use your own judgement and never purchase a security that you don’t understand.
UPDATE 3:32 PM Eastern: OUR MARKET RISK INDICATOR SIGNALED AFTER THIS INITIAL POST. AS A RESULT, OUR HEDGED PORTFOLIO WILL USE AN AGGRESSIVE HEDGE.
Below is a chart of our current market health categories.
Here is a chart with the changes to our portfolio allocations over the past year. Green lines represent adding long positions and removing hedges. Yellow lines represent raising cash and adding short positions (as a hedge).
The post Moving to Cash or Full Hedge appeared first on Downside Hedge.