Update and a Look Ahead

Since my last post, the market rocketed to new highs and my portfolio participated in only limited gains because of my relatively small exposure to the market.  Fortunately, my patience is now paying off.  Because my short position in SH has appreciated, it's current value is now 37% of my long positions in dividend stocks.  Furthermore, because of the relatively low beta of my dividend portfolio, my (small) short position reduced today's losses by a factor of 53%. 

I don't plan to add to my short position.  However, I plan to further reduce my long exposure in the same way that I did on May 31 by selling profits in stocks that have appreciated by 10% or more.  Since I executed my "sell" strategy in late May, several of my dividend stock further appreciated and thus, are now "sell" candidates.  Selling such profits will further reduce my long exposure by another 10% to approximately 30% of my portfolio.  With my shorts in place, my net equity exposure on a value basis will be about 20%.

As far as my macro indicator, it established a new low two weeks ago and increased last Friday.  So what does this mean?  Well, as I mentioned in a prior post, my macro indicator isn't great at identifying market bottoms.  However, as long as my indicator doesn't start to decrease again, it portends a negative market bias until as late as July of 2020. 

As I am writing this blog, S&P futures are implying an open of another -47 points.  Risk management is key.

Longer term monthly chart confirms negative weekly chart

In my last post, I indicated that I observed a descending RSI on the weekly charts that spans the last 18 months.  I looked at a similar monthly chart over the same period and observed the same descending RSI (see below).  I believe that when a longer term chart mirrors or confirms a shorter time frame (weekly), the signals are more significant.  As shown in the monthly chart below, June will close out with a lower RSI after having made a new high during the month.  In my opinion, this is significant.  Although we have a few more days left in the month, it is highly unlikely (improbable) that the RSI will break the descent.  For this reason, I plan to add to my short position tomorrow on any apparent weakness.  I will add to my position in SH so that its total value is 30% of the value of my long position -- this addition represents another 25% over the 5% position that I established last week. 

After I add to my short position, it's likely that I will not do anything further to protect my long portfolio.  After I make the aforementioned trade, my portfolio will be comprised of the following:  40% dividend stocks, 48% cash, 12% short.  As I mentioned in a prior post, I believe that being net short would be too aggressive.  Time to sit back and see what happens.....

More on RSI divergences and expectations for weakness

As planned, I placed a small, rather inconsequential short trade this morning while the S&P hovered at 2953.  My macro indicator closed out the week at -54.

As I mentioned in my last post, I decided to dip my feet into a short trade because of the negative RSI divergences I've observed.  Specifically, since January of 2018, every peak in the S&P (see green vertical lines in the image below) has corresponded to descending peaks in the RSI (see lower panel) -- this Friday's close and RSI reading was most notable.  For this reason, I expect some weakness in the short-term.

With that said, given the "euphoric" price action, there's nothing preventing the market to break the downward RSI trend.  In fact, if the market trades between 3050 and 3100, a meaningful breakout could occur.  Until that time, as the market makes new highs while creating descending peaks in the RSI, I will add to my short position.  Next week, I will be looking for the possibility of further deterioration in the RSI if the S&P exceeds 2964.15 during the week and closes below 2950.46 on Friday.

Remember, positioning for the long-term takes time -- investing isn't a binary activity.

Have a nice weekend!

Is it a divergence? -- A case for a small short trade

The criteria I set last week for a negative RSI divergence will not be met this Friday.  However, in looking back at the charts from the highs reached at the beginning of May to the highs reached today, a weekly negative RSI divergence will be formed.  Because of the aggressive move over the last three weeks, this divergence hasn't had a long time to form and thus, my confidence over its significance isn't high.  In the spirit of my strategy, I plan to place a small short trade using the ETF SH amounting to only 5% of the value of my long positions (as opposed to 10% as originally planned).  Going forward, I still plan to "ratchet" into shorts with the next increment being 25% of the value of my long portfolio (assuming that a clear divergence forms over a more extended period while the market rises).  The following chart depicts the divergence drawn in white.

Targets for the upcoming week

This uneventful week closed with my indicator declining further to -59.  I didn't place any short trades because the criteria for a negative divergence was not met.  For next week, the requirements for such a divergence are: (1) the market must exceed 2910.61 sometime during the week, and (2) close (on Friday) below 2886.98.  Have a nice weekend!