Video Transcript
Hello everyone and welcome to beat the market. In the next ten minutes or so I'm going to talk about our investment strategy for the week ahead, with my views on the sectors, and the stocks that will be in our macro regime switching portfolio.
Last week both equities and bonds rallied while commodities sold off and the dollar was unchanged.
Bonds and stocks higher means that this was primarily a liquidity easing week.
However, international equities lagged the US, and copper did worst of all, so there is some pessimism towards global growth mixed in. The Nasdaq led on lower rates while small caps lagged. This is a reversal of the price action we saw at the end of last year.
This was the 4th of the last 5 weeks in the liquidity easing regime, so this is clearly the major market theme at present.
Indeed we've only have 1 week in the last 6 months where bonds rallied while equities sold off. I think the message from the market is clear: the one place in the West where they have plenty of ammunition is the Fed. In the Goldilocks story, the protagonist always wanted things to be just right. For markets, this means that there
is a narrow path for growth and inflation to avoid a recession. The tools at the disposal of the Fed are giving Goldilocks quite a bit of wiggle room at the minute.
Globally there was a big divergence between Japanese and Korean equities.
This wasn't on the back of a weaker Yen though. The point here is that when the Fed has lots of ammunition, we don't need a currency war to dictate equity returns. Instead it is going to be relative growth expectations. While the US is trying to hold back Chinese technology, Japan is probably even more motivated to stay ahead. Their strategy seems to be to adopt different technologies, such as hybrid cars instead of EVs. Indeed Toyota was one of the leaders for Japan last week. In another challenge to Chinese technology an alternative solar panel was also in the news this week. This is more evidence of the Japanese strategy, but I think that technology is still just hype for now.
While Japanese cars are becoming more popular, Korean cars are apparently being stolen due to TikTok how-to videos. I guess China sees Korea as their main threat. The sell-off in Korea seems mostly to have been a result of sales of Samsung for tax payments though, so I'd look for that to mean revert.
The sectors tell us much the same story as macro markets with technology leading the way, and the growth sensitive sectors of financials, materials and industrials all underperforming slightly.
Next week I think that financials and industrials will continue to lag. I think Industrials is the most attractive sector to short, as positioning still looks crowded, and its missing a wave C of a correction. Against that I like buying small caps. I think the underperformance we saw this week was continued profit taking, and with the lower rates trade still very much on, people will look to get back into IWM.
For similar reasons, I'd look to buy a sell-off in financials, that might well be triggered by more bank earnings, with GS, MS and Schwab among others
reporting next week.
At the industry level we can see that last week was a broad technology rally, with software, hardware and infrastructure all among the leaders.
If 2023 was all about the magnificent 7, then 2024 is shaping up to be a year where global competition in technology attracts capital. There is also a very clear message on energy, with both oil and clean energy stocks testing trend line support, while the Uranium ETF broke resistance and closed at a 10 year high.
Nuclear energy is a political more than an economic trade, so in a big year of elections, the market is telling politicians what it would like to see. Nuclear is also a long term project, so in the short term, I think oil stocks are likely to hold support. In particular I like SLB, the largest holding in OIH. SLB bounced handily off
its long term trend line support last week so technically looks good.
The Biden administration is also likely to be supportive of new projects, which should benefit SLB even if the price of oil is little changed. SLB report earnings at the end of next week though so I'm only looking at this as a very short term trade for now.
With oil selling off, you might think that airlines would have done well, but after Delta released weak guidance on Friday, airline stocks reversed sharply. DAL put in a bearish outside reversal week, so more downside in the industry seems likely in the short term. UAL reports this week.
With stocks pushing a new high, it was an uneventful week for VIX.
There was some demand for puts though, causing an increase in the volatility skew. You might expect this kind of demand to emerge at these levels of vol, so it isn't necessarily a big deal. It makes the Nasdaq in particular look a bit crowded to my position models though.
We saw a big fall in rates volatility last week, with the MOVE getting within spitting distance of the 100 level that has defined the bottom of its range.
This suggests that market is not concerned about a rise in rates putting pressure on tech stocks.
Turning now to our macro regime switching portfolio.
Last week our signal was to buy stocks, and this proved to be correct. Our portfolio managed a 1.7% gain, beating out the 1.3% gain of its benchmark.
Our exposure to technology was the main driver of returns while Tesla was the main laggard. The chart of Tesla looks a bit scary, but there was more interest in calls than puts last week. There was also continued massive interest in calls on Chinese stocks, so I think the China theme, of which Tesla is part is still in play.
This week we are again going to be long stocks. We're going to take profit in the position in MELI, which had a nice gain last week, and also exit our position in RCL, where it looks like another leg lower is coming.
To be clear, these are signals from the model and not discretionary on my part.
In their place, we will add MPWR and AXON.
MPWR is in the semiconductor space. They have quite a diverse business in terms of products, though most of their sales are in Asia, so they are less diverse geographically. It looks like a decent entry point to me in a growing company with no debt and positive cashflow.
AXON is the company that makes TASERs. They also help police with video evidence, which is growing significantly as cameras get cheaper. We might be a bit early on this one, but I can imagine that TASERs might be in high demand
in a contentious election year as well.
Among the stocks in the portfolio, I'm looking for a strong week from TTD in particular.
If the wavecount shown turns out to be correct and the rally at the end of last year was the start of the next big move higher, then we shouldn't retrace much more than has already happened. Otherwise, it just looks like it is in a downtrend channel.
Okay so to summarize: we're long the market this week, adding MPWR and AXON in place of MELI and RCL.
In the sectors I like selling XLI to fund IWM. I think JETS has short term downside and SLB has short term upside.