/ November 05 / Mid-Week Review
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Thursday:
Various Fed Speakers
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Friday:
Michigan Consumer Sentiment
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Thursday:
ConocoPhillips
Airbnb, Inc.
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Friday:
KKR & Co. Inc.
Enbridge Inc
Duke Energy Corporation
“Whiplash”
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We’ve been a little light on the Market Updates this week. The Millennium Alpha Challenge set-up, as well as the addition of 2 Strategy Creation guides (Momentum and Mean Reversion) were big time sinks, so today’s update will be super focused and to the point.
The market started the new week on a high note, with a relatively calm and uneventful Monday session that quickly turned into a sell-off on Tuesday after some prominent stocks (PLTR most notably) dived -10% on an earnings related miss and Michael Burry’s short position announcement.
Sentiment in the broad market instantly shifted to “Extreme Fear” as AI-related names were hammered. This predicament occurs again with markets very close to all time highs, which is a historical rarity.
What is NOT a historical rarity is the fall in Market Breadth while the broad indices keep making new highs. This has been the case out for the whole of 2024 and it eventually became an unsustainable condition. For now, the trend is relatively new, as breadth has been on the decline only since mid-July.
Despite the obvious warning signals coming from the internal structure of the market, we are trading in an extended buying regime, which persists, despite the drop. For now, this predicament keeps us allocated to the long side of the market, on our selection of names.
More importantly for market timers (or those hunting for the perfect entry point), our short term BUY SIGNAL has not yet triggered. In short, the market has not become oversold enough yet to elicit conditions where a reversal tends to occur over the next period.
Taking everything into account, Enterprise, our main asset allocation system, has rebalanced to an intriguing allocation emphasising stocks (60%) and commodities (27.5%) + very little cash. This is “risk-on” but with an inflation protection twist. In any case, it’s a meaningful shift away from the 70% stocks + 25% bonds that has been the hallmark of the system since April.
Technically speaking, Tuesday offered investors a garden variety dip within an ongoing bull market trend that shows little signs of stopping. But we do have to recognize the cracks that are forming in the positive narrative: participation is narrowing to the point where markets are driven exclusively by Mega Cap Tech & AI names.
There is simply less and less upside possible, given the recent advance. Earnings misses have been severely punished (DoorDash being the latest example), while beats accounting for 80%+ of earnings results have failed to meaningfully push the market higher. In other words, this is a market priced for the best outcome possible and the inability to rise to that exceedingly high fundamental bar translates into downside.
That’s what the chart below shows - traders seeking medium term protection and compressing the upside potential, resulting in a skewed risk-reward equation.
Meanwhile, the extremely speculative risk sector of the market (cryptos) came crashing down especially hard, most notably the altcoins (everything not Bitcoin). In the chart below, we look at some significant names in the crypto space with current drawdown next to max drawdown (chart baseline is -12%, not 0%).
While BTC and ETH have a long way to go to match their max drawdowns, half of the assets presented have already surpassed their max drawdown mid-point. This is a symptom that we also experience in the equity market, where capital gets ever more concentrated into the larger, high liquidityy names.
From a Sectors perspective, the best risk-reward proposition right now is in the Staples (XLP) space, followed by Basic Materials (XLB). Meanwhile, risk in Utilities (XLU), Financials (XLF) and Tech (XLK) is skewed to the downside, while everything else is in a balanced predicament.
Our Trading Strategy
Our last portfolio rebalancing was in mid-October when we added our positions in Staples (XLP). At the moment, we need to carry out a further rotation in order to align our holding with both Millennium Alpha and Vision.
In terms of the core asset allocation, we will continue to reduce risk slowly, keeping our live portfolio in alignment with Enterprise (though probably not as exposed to commodities).
As always, we will keep you in the loop via trade alerts (if you are subscribed to these).
Signal Sigma Research & PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!
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.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this blog post myself, and it expresses my own opinions. I do not have a business relationship with any company whose stock is mentioned in this blog post. The information in this blog post is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog post is to share industry expertise and research and receive feedback (confirmation / refutation) regarding my investment theses.