Portfolio Rebalance / September 17
In today’s Portfolio Rebalancing process, we’ll focus on the process used to rebalance our Live-Trading Sigma Portfolio.
Just as an FYI, there hasn’t been a Rebalance process nor have any Trade Alerts been issued over the last month — there was no need to make any adjustments, as more frequent trading would have been counterproductive given the current low volatility environment.
Let’s recap our previous positioning — Time Machine also works in Portfolios, and is very useful for analysis of previous allocations! From an asset class perspective, we had the following exposure:
68% to Stocks
25% to Bonds
4% to Gold
A small cash remainder
Looking at the portfolio in finer detail (and using Custom Groups view), we can observe the following split:
49% Millennium Alpha Stock Picks
10% Vision Stock Picks
10% Discretionary Stock Picks
25% Bonds
4% Gold
A small cash remainder
We were positioned for a risk-on environment, with plenty of Tech exposure, including some risky names from the Vision Strategy. With the exception of 2 positions, all of the stocks in the portfolio were selected from our automatic models. The overall allocation was inspired from the Enterprise strategy, as the live Sigma Portfolio is compared to the same 60-40 stock-bonds benchmark.
Performance Review & Weeding Out Underperforming Assets
First of all, let’s take a look at how our positions performed over the last month. We’ll connect the Sigma Portfolio to an empty Watchlist via the Actions > Link Setup feature which allows us to quickly sync 2 objects on the platform.
You can cycle through the screenshots below to understand how each portion of the portfolio contributed to the overall performance. Our Discretionary picks performed worst, while the 3 Vision stocks did the best versus the market.
GEX-to-Volume stats look positive overall, except for CMG, which is deeply negative.
Another powerful indicator from the options market is the risk-reward ratio from the perspective of Call and Put Walls. These represent the levels where there is a concentration of call/put positions that might act as resistance/support for the stock.
The higher the percentage to the call wall, the better the odds of gains in the next month.
The lower the distance to the put wall, the lower the risk of losses.
As one would expect, this view is completely different from the ones above. Due to its drop in share price, CMG appears to be the safest investment, with the highest potential to rebound. Conversely, a stock like APH can gain very little else. LRCX and MA also appear vulnerable.
Now that we have an overall understanding of our Portfolio, let’s screen the Millennium Alpha Ranking for the stocks that we own and also for the stocks that we may want to include or exclude.
Using the above framework, we have identified MA as a candidate for exclusion. By the same metrics, MSI must be included due to its high ranking (the first 6-7 stocks in Millennium Alpha are “auto-picks” for us), and we also like BX from the list.
2. Profit Taking / Reducing Positions
Now that we have a good idea of which assets are likely to underperform, let’s also check for outstanding winners. First of all, when our Price Targets are hit, the Last Price in the Portfolio instrument will turn green.
From this perspective, we need to investigate:
Out of the whole lot, LRCX is the one most egregiously overbought, so it would make sense to cut the position partially. SITM was already a candidate for exclusion. We will adjust price and stop targets on all positions, including these.
3. The Macro Environment
Our first stop when evaluating the general market disposition is always the Enterprise Strategy. Our core model is maintaining its risk-on approach this week as well. “If it ain’t broke, don’t fix it” is the model’s mantra in September as well as August.
Top 10 S&P 500 stocks, Current vs Max Rally, 2 Years
The most impactful economic event of the week is happening today. While a lot of ink has been spilled on the rate cuts theme, we’ve done our own research using the Market Study instrument, as far as this quarter century is concerned.
The fact is that rate cuts seem to precede events that are not absorbed well by the equity market. Whenever the Fed recently cut rates, it was behind the curve and trying to stop a recession from happening that was already ongoing.
We will also look to our top 10 Millennium Alpha stock picks to form the basis of our portfolio. The scorecard is not pretty. Following a rate cut decision, the median returns for the market 1 year later would be -6.6%.
However, using the same dataset, we can isolate rate cuts where the market’s reaction was positive after 1 month. In these instances, median returns are more palatable, although the selection includes a rate cut from April 2008.
In any case, due to the overwhelmingly bearish rhetoric and “sell the news” commentary on display this week, we ran a multitude of macro backtests and studies to determine if the broad market is at risk of a pullback.
The result is no. There’s nothing bearish about the current price action. First off, Sentiment among the top 1000 stocks is optimistic, but not euphoric.
The major Sectors ETFs distance to their respective call walls is not exceedingly low (which would telegraph complacency).
The market is sufficiently hedged, as the current volatility Premium (1M) is rather high. This tells us that options are expensive, which can only mean that they’ve been bid more than is normally the case.
Several other studies, like the Mag-7 Variance, as well as the Sectors GEX Study are not showing warning signs yet.
In other words, there is currently no real reason to become overly defensive at the moment, aside from doing a little profit taking in LRCX. Can the market decline -2%, -3% following Powell’s press conference? Of course.
But it can do so in any other given week for any other reason (or no reason at all).
We are very much interested in the reaction 1 month forward from today. It is going to be a lot more telling regarding the evolution of the business cycle.
Meanwhile, we will continue our rebalancing process. As a reminder, here’s how to do it from your Portfolio menu.
Click “Rebalance Portfolio”, taking the Portfolio into Rebalancing Mode…
And then we will proceed to make our Portfolio removals, by setting the Amount / Percent to zero for the following positions:
MA
SITM
CMG
We will also reduce LRCX by half. These actions have now freed up a chunk of cash (16%) for us to re-allocate.
Additions include:
BX (5%)
MSI (5%)
ENVX (2.5%) - Vision Pick
BKR (2.5%) - Also Vision Pick and uncorrelated with the rest of the portfolio
Once the additions are made, we click Next -> Set as Target…
The orders list is generated…
And we can now place the following orders with our brokerage at our discretion.
Afterwards, for all positions we reset Price Targets and Stop Levels, using a short / medium term horizon.
Summary of Trades
Buy Orders
Baker Hughes Co (BKR): 2.97%
Blackstone Group Inc (BX): 4.97%
Motorola Solutions Inc (MSI): 4.94%
Enovix Corp (ENVX): 2.49%
Sell Orders
Mastercard Inc (MA): -4.67%
Lam Research Corp (LRCX): -2.21%
Chipotle Mexican Grill Inc (CMG): -4.32%
Sitime Corporation (SITM): -3.45%
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