Portfolio Rebalance / August 14
In today’s Portfolio Rebalancing process, we’ll focus on the process used to rebalance our Live-Trading Sigma Portfolio.
First — a bit of background, for those that are new here. The Sigma Portfolio was launched in April 2022, as the first version of Signal Sigma came to the market. It was (and still is) intended as a tool to showcase what can be done in real life using a hybrid human-machine decision system as it pertains to stock market investment. As the tag line suggests, this portfolio has real money on the line (my money — Andrei).
I’ve chosen to benchmark the performance to a classic 60% Stocks (SPY) + 40% Bonds (TLT) portfolio, so that a wide variety of investors can extract value from it. Many times, I’ve been more aggressively allocated in real life than my published positioning, as I have been able to afford it due to my age (though that is slowly changing, sadly).
On that note, check out a younger version of me presenting the idea for this portfolio using the legacy website graphics and an oddly placed golden palm tree behind my head:
In the new version of the app, the Sigma Portfolio is available as both a Portfolio-type instrument, as well as a Strategy-type instrument that tracks the portfolio’s performance.
Recently, my activity has centered much more around the V2 application development rather than managing this portfolio week-to-week. However, it doesn’t mean that it’s been forgotten, I simply chose to rebalance on a monthly basis. Now that the rebalancing interval has been reached, it’s time to get down to business.
The Macro Environment
The first step in our process involves assessing the market from a macro perspective. This stage will allow us to build the asset class allocation for our portfolio composition going forward.
Our primary tool for macro analysis is (surprise, surprise) another automatic system — the Enterprise Strategy.
Enterprise is our core asset allocation system, designed to translate the current macro environment into a simple 4 ETF allocation:
SPY - equities, risk-on
TLT - bonds, hedging
GLD - gold, alternative asset, uncorrelated
DBC - commodities, less correlated, useful in certain scenarios
This model is purely analyzing the balance between these ETFs on a price and trend basis. It has been our cornerstone for the past 3 years and helped us navigate various market environments in real life.
The real strength of the system lies not in its potential to outperform in bull markets, but in its safety during bear markets and sudden crashes: drawdowns barely exceeded -8% during the last 3 years of live trading.
So what is this system telling us today?
A cursory look at its asset allocation lets us know that this system is most definitely in risk-on mode due to its 70% allocation to SPY.
Bonds stand at 25%, while the rest of positioning goes to Gold and Commodities.
Cash is nearly at 0%, a position which totally makes sense in an environment where Central Banks are outbidding each other in currency devaluation.
Also part of the macro picture is seasonality.
We’ve had a positive H1 close, which tends to translate into a further +7.3% gain until the end of the year.
After a correction and consolidation period is coming up that lasts up until mid-September. Following that, markets tend to rally into the end of the year, especially if we’re looking at strong performances during June and July (second chart).
Not even the strongest markets managed to avoid the seasonal weakness that is associated with the month of September.
Filtering for the strongest 4 markets in the last 10 years…
Taking a Technical analysis look at the benchmark index, we can target $677 as an end of year value, representing a further gain of +5%,.
However, while stock indexes generally give a broad idea of what is happening, they can greatly overlook the performance of many individual stocks.
A subset of stocks that has a high 90-day correlation to SPY also has an average Z-Score of 0.33 (relatively high on the trading channel).
Looking at the top 20 stocks that drive index performance, we can see that many of them are pushing the boundaries of what rallies are typically encountered.
The only stocks to have significant potential of further gains are:
META
JPM
AAPL
AMZN
LLY
Top 10 S&P 500 stocks, Current vs Max Rally, 2 Years
As such, our strategy for the next month will have a “barbell” approach:
On one hand, we’d like stocks with the price potential to appreciate, possibly laggards in the current environment, with strong technicals
We’ll set our screener to exclude stocks that have a 90D correlation to SPY of over 0.6. Their Z-Score should be lower than 0.33. This results in a list of “BUY THE DIP” stocks, with safe entry points and fundamental upside (despite ugly charts).
Our discretionary picks from this screen of former high-fliers would be:
RACE
CMG
CHWY
We are also interested in screening within the Vision strategy (highly speculative) for stocks with high rally potential that also enjoy positive GEX values and Dark Pools accumulation. The following stocks stand out:
AAOI (though less on the Dark Pools criteria)
SLAB
SITM
We will also look to our top 10 Millennium Alpha stock picks to form the basis of our portfolio.
Now, it’s time to REBALANCE, keeping the same broad 70% Stocks / 25% Bonds / 5% Gold general allocation. We’ll close positions not in our selection for the month, while adding new positions / rebalancing existing into the portfolio.
We can navigate to the Risk Explorer tab to see the effect of our changes relative to each stock’s moving averages by clicking the Actual / Target toggle during the portfolio Rebalance Process. Our goal of LOWERING risk into the mid september weak period, without touching the overall stocks allocation looks to be achieved.
Today’s Trades
At the end of the process, we’ll get a full list of BUY and SELL orders which we may execute at our discretion. For the Sigma Portfolio simulation purposes, we will just execute all orders at market close, but the real-life application will probably take around 10 days.
BUY Orders:
SITM - Sitime Corporation - 0.77%
APP - Applovin Corp - 1.82%
LLY - Eli Lilly and Company - 0.58%
CMG - Chipotle Mexican Grill Inc - 4.98%
AAOI - Applied Opt - 1.31%
BKNG - Booking Holdings Inc - 4.67%
HALO - Halozyme Therapeutics Inc - 4.99%
APH - Amphenol Corporation - 4.99%
MA - Mastercard Inc - 4.93%
CHWY - Chewy Inc - 4.98%
SLAB - Silicon Laboratories Inc - 2.91%
META - Meta Platforms Inc - 4.70%
RACE - Ferrari NV - 4.73%
LRCX - Lam Research Corp - 3.93%
SELL Orders:
CF - CF Industries Holdings Inc - -4.91%
MCO - Moodys Corporation - -5.78%
CME - CME Group Inc - -4.46%
EXEL - Exelixis Inc - -4.01%
BR - Broadridge Financial Solutions Inc - -6.44%
BBIO - BridgeBio Pharma Inc - -2.10%
EME - EMCOR Group Inc - -5.22%
KLAC - KLA-Tencor Corporation - -1.62%
IESC - IES Holdings Inc - -5.45%
HLI - Houlihan Lokey Inc - -5.79%
NVDA - NVIDIA Corporation - -0.47%
UI - Ubiquiti Networks Inc - -4.94%
Disclosures / Disclaimers: This is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this blog post. I currently do not own or plan to own any position, long or short, in the securities mentioned.
I am not a financial advisor licensed in the United States. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject to change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this blog post.
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The primary purpose of this blog post is to share industry expertise and research and receive feedback (confirmation / refutation) regarding my investment theses.