Wow. Just “wow”. The model score today worsened to -41. Despite the strong rally. The model says we are very close to or at a significant top in the risk relationship. We are on the cusp of a large move either way. This kind of oscillation of score counter to equity market action, presages volatility.
Owners of MSFT & V should check to see if these securities are still needed in their portfolio, as the picture is rapidly deteriorating in those names.
We are still in full Risk Off, invested in TLT.
We are very near to a big impulsion moment, either up or down. Maximum protection of portfolio time via options.
Nick—as we have discussed previously your experience observing markets is at least as valuable as the model—maybe more! Can you give us some context for how often this type of big divergence has occurred (and when—2001, 2008, 2015, etc.?) in your time using the model?
Unfortunately the parallels are not ever perfect. The interesting thing was that yesterday we had an almost equal rally in risk assets (equities) and risk off assets (bonds). We also had a greater rally (!!) in risk off internals within equities (utilities, staples, etc.) than in high beta stocks. This caused the model to go even more negative. But it was month end and all kinds of window dressing appears then. Therefore I cannot put my hand in the fire and say this is it, nothing else matters.
All I can say is that there are times to play offence and times to play defense. This is another sign that makes me cautious. Playing the odds warrants hedging of equity exposure, especially given that volatility is much cheaper now and options are relatively cheap.
Having said that, it seems obvious that the model will give a buy signal sometime in this Q1 2019, from very low moving average levels. Every time this has happened, it has meant an equity uptrend which has lasted many, many months.
Recommendations for option structure?
Cannot really comment as I don’t know your personal position. But some cheap puts 1/2 or 1% below the money for 1-2 weeks cannot hurt too much.