Market Risk Clears

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 until prices were higher. Depending on what volatility product you used (XVZ or VXZ) you either had a small gain or a small loss (paid a bit for insurance against a catastrophic loss) on this signal.


Disclosure: None.

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