Back on the Road — With Prudence

As our Margin Signal’s color indicator surged to a striking 14, we viewed it as a clear opportunity to take profits. While not every market pullback is preceded by a peak in this signal, a peak is almost always followed by some degree of retracement. And indeed, just a few days later, the market dipped in response to weaker-than-expected job creation numbers.

The decline was relatively mild: QQQ retraced 3.92% intraday and SPY about 3%. Despite this modest drop, fear returned swiftly. The VIX spiked across all durations, market breadth deteriorated, and our Risk Index rose to 4.

Since then, much of that fear has receded. Our Margin Signal reset to 0, which prompted us to begin increasing exposure with a 33% position in QQQ yesterday — followed by another buy today. In this update, we’ll explain why we chose a gradual re-entry without leverage and outline our roadmap for the weeks ahead.

Risk Down

What prompted us to re-enter the market was a clear shift in how risk had eased across the options landscape. Not only had the VIX cooled off, but all the option-related metrics that contribute to our Risk Index flipped bullish yesterday.

Our NYSE and Nasdaq derivative volume indicator, which came close to flipping red in early August, has since improved significantly and now shows substantial width — a sign of growing conviction.

Our Implied Correlation signal, which had dipped into the red zone, flipped back to green a few days ago — and more importantly, in the correct order (short-term first).

Then yesterday, our Option Model flipped back to bullish (and Safe) at the close (we’ll touch on recent Option Model issues at the end of this post).

Another options-based metric — not part of the Risk Index, but used in our hedge strategy — turned notably bullish. When market fear subsides rapidly, we often see a sharp downward impulse in option positioning. This impulse rarely crosses our hedge trigger unless we’re in a major correction, but three days ago, it registered a strong enough move to mark a clear sentiment shift — especially given how modest this pullback has been.

On top of that, sector rotation is looking constructive. At the end of July, nearly all S&P 500 sectors had moved into the lagging or weakening quadrants. In the past week, many have shifted into improving or even leading — a classically bullish rotation.

Lastly, our Margin Signal color indicator gave us a meaningful bounce. A few weeks ago, I shared this data with ChatGPT’s o3 Reasoning model, and it offered a sharp insight I hadn’t fully appreciated: the bounce zone matters. It observed that a rebound from the 4–6 range typically signals a buying opportunity, while a plunge straight to 2 or below is a reason to stay hedged.

This time, the bounce occurred right at 5.5 — right in the sweet spot.

Putting all these together, we felt confident stepping back into the market — with a 33% position in QQQ yesterday, followed by another 34% allocation today.

Risk Down, But Not Gone

 The reason we didn’t go all-in with our available cash or use leverage is because, while several signs point to reduced risk, others still urge caution.

One of those caution flags is market breadth. Breadth often starts to degrade before a pullback, which is exactly what happened at the end of July. Conversely, it typically improves before the next sustained uptrend — but for now, breadth remains directionless, despite a slight improvement last week.

Another metric on our radar is the SKEW index. At the time of writing, today’s SKEW value hasn’t been published yet. Yesterday’s reading, however, was still hovering around 150 (it is now out at 153). While not as extreme as the February spike, it’s still elevated. Historically, new uptrends tend to begin when SKEW retreats sharply.

We also considered the historical behavior of our Hedge Strategy. Right now, its most recent trade is already showing a meaningful profit based on historical patterns.

It’s not an outlier yet — but if history is a guide, we may have already captured a good chunk of the move, meaning the remaining upside could be more limited before the next deeper pullback.

Finally, we’re watching macro catalysts closely. With mounting political pressure on Fed Chair Jerome Powell, the upcoming Jackson Hole Symposium could be a market-moving event. The soft jobs data and a cooler CPI reading have raised expectations for a rate cut in September. But Wednesday’s hot PPI print tempered some of that optimism. In such an ambiguous environment, Powell’s remarks next week could play a pivotal role in shaping risk sentiment.

All of these factors led us to take a more measured approach. While we had enough evidence to step back into the market, we chose to do so in two staggered QQQ buys — and we’ve deliberately avoided leverage for now.

We’re comfortable proceeding cautiously at this stage. If we see a rapid improvement in market breadth and a meaningful drop in the SKEW, we may consider rotating one-third of our portfolio into a leveraged position like TQQQ. If those signals don’t materialize, we’ll likely wait for the next pullback before making a more aggressive beta shift.

Either way, we’ll continue to keep you informed.

Varia

 

Option Model: We’ve always observed a slight discrepancy between the TradingView version of our Option Model and the one running on our internal DataHub. The root cause? The data source. Strangely, despite both pulling from the CBOE, one dataset used in the model doesn’t return exactly the same numbers across platforms — and we’ve never been able to get a straight answer from the data provider.

In short, the TradingView version fetches data from CBOE, while we purchase the data directly from them. The DataHub version perfectly matches the official CBOE daily report, but the TradingView version does not. The difference is very minor — only about 0.26% over a month — but that’s still enough to sometimes cause the model to trigger differently across platforms.

When we released the DataHub version, our backtesting showed that this data variance might delay a signal by about a day — which had minimal effect on the overall performance stats. However, the strategy that determines when the Option Model triggers red, green, or blue flags is highly nonlinear. So even a small difference in the input can in theory cause a bigger mismatch — like one model triggering while the other doesn’t.

That’s exactly what happened recently.

To address this, we’ve been working on a simpler way to interpret the Option Model signal — one that’s less sensitive to small data discrepancies. We were actually about to release it when this mismatch happened. The updated strategy won’t fix the data divergence itself, but it will ensure that the models stay aligned: in the worst case, any discrepancy will cause a one-day difference in signal timing, not a full divergence.

The new version maintains a similar performance (about 73% hit rate instead of 71.73%, and still significantly outperforming buy-and-hold) and should be released next week. We’ll follow up with a detailed post explaining the changes and updated stats. We apologize for the friction that comes with maintaining signals across two platforms, but we’re working to keep them as consistent as possible.

Bitcoin: As of today, IntoTheBlock — one of our on-chain data providers — has officially discontinued their TradingView feed. We had only a few days’ notice, but fortunately, most of our indicators that relied on their data are already updated and remain unaffected.

The only exception is our Exchange Money Flow Bottom indicator, which will temporarily stop functioning until we find a suitable replacement data source. That said, this is an indicator we likely won’t need for at least another year (fingers crossed).

Still, this sudden interruption was a wake-up call — and it’s finally pushed us to invest more seriously in our Bitcoin infrastructure. We’ve decided it’s time Bitcoin got the same DataHub treatment as our S&P 500 signals.

Why didn’t we do this sooner? Cost. In 2023, API access to institutional-grade on-chain data skyrocketed—once providers understood that deep-pocketed institutions were their captive market. Glassnode’s professional plan, for instance, jumped from $99/month to $899/month — and that doesn’t even include API access. For companies feeding back data like us, the cost is lot higher.

But this week, we broke the piggy bank. Even if this eats into a significant portion of our Bitcoin-related revenue for now, it was necessary. We’ve already brought back our MLDP Z-Score and revived the Exchange Money Flow Bottom using the new data. With some luck, our new Bitcoin DataHub will be ready for release early next month—perhaps just in time for the final leg of Bitcoin’s euphoria?

Health: While I don’t mind sharing happy events—like when I got married in May—I hesitated before sharing what follows. But I decided to, because it will have some short-term impact on WealthUmbrella.

On July 28th, I had a massive heart attack. My doctor and I were aware of a genetic condition, but all signs had pointed to me being spared. After all, my blood pressure was normal, my yearly EKGs were fine, I wasn’t struggling with high cholesterol, and just five years ago I was still doing canoe ultramarathons with a six-pack—not bad for a 39-year-old dad. (Okay, the six-pack didn’t survive my 40th birthday, but still…)

Thanks to an alignment of lucky circumstances, I made it through. After a couple of surgeries, I’m now back on my feet. This explains why Zack wrote the most recent update, and why we may not have published as much over the last two weeks. The thing is, I lost a considerable part of my heart in the process, and now I have the next three months to recover as much as possible.

To do so, I’m on a very intense cocktail of medications. They numb me until I adapt—at which point the dose is increased again. It’s a constant balance between staying conscious and the doctors raising the dosage. This leaves me almost disabled for about three days every two weeks. Combined with frequent hospital visits, it will impact WealthUmbrella slightly: I’ll likely miss an update here and there. This won’t affect your experience since Zack will step in, as he did on August 1st, but I apologize if I feel less present for the next two months. I also apologize to those who recently wrote to me—I’m far behind on emails, and the inbox monster keeps growing faster than I can catch up. Hopefully, by the end of October, things should be back to normal.

We somehow all know it, but living through a tough experience is always a sharp reminder that health is the real wealth. Life gave me my first real lesson on that back in 2018. Although I had been investing since 2008, my wealth grew significantly in November 2018 after a secondary round at Robotiq, where I sold about 8% of my shares. The money was wired straight into my regular checking account, following an SMS from my lawyer that read only: “The cuckoo is in its nest. I repeat, the cuckoo is in its nest.”

Before I even had time to move those funds into my investment account, I was rushed into emergency surgery for a gallbladder removal. If you’ve ever passed a gallstone or kidney stone, you know the pain. If you haven’t—believe me—it’s worse than a heart attack.

So there I was: newly wealthy, but moaning in an unflattering hospital gown, while nurses spoke to me in the tone usually reserved for very old, very deaf patients. And in a country with a public healthcare system (a good thing!), my wealth gave me no advantage whatsoever. The experience was humbling. It reminded me that no matter what we accumulate in life, the exit path is the same—and none of us will bring our money to paradise and that money is useless when reaching that place.

My recent experience has been a repeat of that same lesson. I’ll stop the philosophy here, but I truly hope each of you invests as much in your health as in your wealth. And by investing in health, I don’t just mean push-ups or workouts—I mean enjoying the journey itself.

At least on my side, if I hadn’t made it through, I can honestly say I’ve enjoyed the process. My life has been full of incredible adventures. Just the week before my misadventure, I had a wonderful evening in Madrid, sharing wine and food in an unforgettable restaurant with Ben, one of our members here. I look forward to raising a glass with other members in the future as well. Hope you all follow a Health Risk index!