/ May 13 / Portfolio Rebalancing
Diversifying Equity Risk
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Email: andrei@signal-sigma.com
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I’d like to quickly touch on some key market dynamics that are currently guiding our approach to the markets. First off, for those of you who are new (or not following along), the trade alerts issued here pertain to the Sigma Portfolio, our live trading demo model which is a blend of everything we have on display on this platform. The Sigma Portfolio is available both as a Portfolio and as a Strategy object.
This portfolio is benchmarked against a classic 60-40 stocks / bonds mix. Year to date, we’re up +32%, versus a benchmark that’s up barely +3.9%.
If you’ve peeked at our Trade Alert issued earlier, you’d know that we’re increasing risk exposure, not decreasing it. In this article, we’ll explore the reasoning.
First off, our asset class allocation will shift as follows:
Stocks: 67% --> 80%
Bonds: 13% --> 10%
Alternatives: 8% (unchanged)
Commodities: 2% (unchanged)
Cash: 9% —> 0%
Stocks get an allocation boost and bonds get reduced, while all other asset classes remain unchanged. We are implementing a very similar allocation to the Enterprise Strategy, which also holds more than 80% equity risk exposure. This is our first green flag in terms of pursuing a more risk-on posture.
Secondly, we are now firmly within a Buying regime, as evidenced by our study below.
Technically, the market has reached an inflection point at the pivot level of $739 which will be breached to the upside at today’s close. While we (and many other market participants) were expecting a pullback or consolidation, we are instead getting a breakout. This should ignite a mechanical chase into a “blow-off top” setup when SPY eventually hits $790.
Despite the current gains, investor sentiment is nowhere near euphoria levels which have previously led to declines and profit taking. Even a cursory glance on X reveals a lot of skeptical opinions on the trajectory of this market.
The risk - reward derived from the options market has done something unusual: it has actually improved on the rally, as traders have bid up long term calls and trimmed medium term protective bets. This is very bullish, as normally the risk - reward ratio should get worse on a rally, not better.
Trading volumes, especially in the Tech sector, have confirmed the increase in prices (lower panel), another bullish indicator.
Conclusion
All in all, the trading done here is meant to trim winners back to target weights, cut losers short and add a lot of diversification to the equity side of the portfolio. This diversification is a bet on a broadening of the rally away from semiconductors and AI-related stocks.
Eventually, there will be some heavy profit taking in the space and benchmarks like the S&P 500 and the Nasdaq will suffer as a consequence. By that time, our aim is to be fully diversified away from the tech space and transition the portfolio to a more resilient version. However, we expect this pivot to arrive during the summer months, especially the July - October window, when seasonality becomes most dangerous. Q2 earnings season will also prove far more challenging due to unfavorable comparisons.
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.
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