Getting Yippy If you had – God forbid - slipped on the dog’s squeaky toy and hit your head on the way down and lapsed into a 30-day coma, you would be excused if you woke up and looked at your account balance and concluded that nothing much happened in April.
Sure, SPY is down around -1.0%, you say. But half the strategies are green for the month and NBC’s Lester Holt is showing a video of a barefoot Marine veteran wrestling an alligator on the Nightly News.
What you missed, however, was a…
Sure, SPY is down around -1.0%, you say. But half the strategies are green for the month and NBC’s Lester Holt is showing a video of a barefoot Marine veteran wrestling an alligator on the Nightly News.
What you missed, however, was a…
Historic Upheaval in International Relations
The announcement of Donald Trump's so-called "reciprocal tariffs" on April 2 - what he called "liberation day" - caught the analyst community off guard, sent a shockwave through the global trading system and financial markets, and resulted in the biggest rout in U.S. stocks since the market crash of COVID-19 in 2020.
Fed To The Rescue?
Investors hoped Fed Chair Jerome Powell would calm nerves at a conference on April 4. It didn’t happen. Trump's new tariffs are "larger than expected," said Powell, and added that the economic fallout including higher inflation and slower growth likely will be as well. He went on to caution that it was too soon to know what the right response from the central bank ought to be.
The global bloodletting in stock markets continued. Within a week, both the S&P 500 and the blue-chip Dow Jones Industrial Average were deep in correction territory. The tech-heavy Nasdaq Composite fared the worst, slumping into bear market territory with a -22.7% retreat from its most recent record close. U.S. growth expectations rapidly soured and recession odds spiked.
A Little Yippy
The administration largely waved off the plight of Wall Street – right up to the point where the bond market started acting squirrely. That got their attention.
U.S. Treasuries are normally the safest and most stable bond market on the planet, but they weren’t acting safe and stable. Long-term yields were soaring, bond funds crashing (bond prices are inversely correlated to yields). The 10-year Treasury saw the biggest three-day jump since 2001, raising questions about the future of the asset as a safe haven and whether foreign nations might use their debt holdings as weapons of financial warfare.
The prospect of a failing safe-haven shocked the administration.
“I thought that people were jumping a little bit out of line... they were getting yippy… getting a little bit afraid.”
That was the president's stated reason on April 9 for a stunning about-face, calling off many of his “liberation day” tariffs—at least for 90 days – and setting off a massive relief rally in stock markets. But a subsequent doubling down on tariffs for China, and a tit-for-tat from same, has left business leaders frantically rerouting supply chains and countries scrambling to establish new and more stable relationships with anyone but the U.S. In the meantime, thousand-point swings in the Dow have become commonplace.
“This is the worst self-inflicted wound that I have ever seen an administration impose on a well-functioning economy,” said former Fed Chair and Treasury Secretary Janet Yellen.
As of this writing, it remains unclear exactly what U.S. tariff policy will be and how other countries will deal with the United States going forward. The administration claims tariff negotiations are underway with 17 countries; China is not one of them.
Talking Heads
The back half of April has seen the major averages gradually narrowing the month's losses on easing angst about tariffs and Federal Reserve independence. The strength and breadth of the rally has triggered some positive technical signals. Fundstrat’s Tom Lee says “probabilities favor a V-shaped recovery in equities.”
Not so fast, says Dan Niles of Niles Investment Management. He worries that we’ve just seen a bear market rally and valuations are still too high. Niles expects stocks to retest the recent lows “at the very least.”
Breaking News
GDP data out this morning shows the US economy contracted at the start of the year for the first time since 2022 on a monumental pre-tariffs import surge and softer consumer spending. Separate data showed hiring at US companies moderated in April to the slowest pace in nine months, indicating waning demand for workers amid economic uncertainty.
So we go into May with extremes: risk, opportunity, uncertainty.
And For What It’s Worth…
According to the Wall Street Journal, Hostess hopes to boost declining sales of “Twinkies” by marketing the snack to stoners. New owner J.M. Smucker, which bought the 106-year-old snack maker for $4.6 billion in 2023, launched a “Munchie Mobile” on a road trip leading up to the unofficial holiday for weed lovers on April 20 to hand out free Hostess brands outside cannabis dispensaries.
It’s a departure from Hostess marketing in its pre-Smucker era, when its sweet baked goods were advertised largely with families and children in mind, using cartoons and characters like Twinkie the Kid. But times they are a changing.
The good news is, the golden sponge cake with a creamy filling is American made. No tariffs to come between you and your saturated fat.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
The announcement of Donald Trump's so-called "reciprocal tariffs" on April 2 - what he called "liberation day" - caught the analyst community off guard, sent a shockwave through the global trading system and financial markets, and resulted in the biggest rout in U.S. stocks since the market crash of COVID-19 in 2020.
Fed To The Rescue?
Investors hoped Fed Chair Jerome Powell would calm nerves at a conference on April 4. It didn’t happen. Trump's new tariffs are "larger than expected," said Powell, and added that the economic fallout including higher inflation and slower growth likely will be as well. He went on to caution that it was too soon to know what the right response from the central bank ought to be.
The global bloodletting in stock markets continued. Within a week, both the S&P 500 and the blue-chip Dow Jones Industrial Average were deep in correction territory. The tech-heavy Nasdaq Composite fared the worst, slumping into bear market territory with a -22.7% retreat from its most recent record close. U.S. growth expectations rapidly soured and recession odds spiked.
A Little Yippy
The administration largely waved off the plight of Wall Street – right up to the point where the bond market started acting squirrely. That got their attention.
U.S. Treasuries are normally the safest and most stable bond market on the planet, but they weren’t acting safe and stable. Long-term yields were soaring, bond funds crashing (bond prices are inversely correlated to yields). The 10-year Treasury saw the biggest three-day jump since 2001, raising questions about the future of the asset as a safe haven and whether foreign nations might use their debt holdings as weapons of financial warfare.
The prospect of a failing safe-haven shocked the administration.
“I thought that people were jumping a little bit out of line... they were getting yippy… getting a little bit afraid.”
That was the president's stated reason on April 9 for a stunning about-face, calling off many of his “liberation day” tariffs—at least for 90 days – and setting off a massive relief rally in stock markets. But a subsequent doubling down on tariffs for China, and a tit-for-tat from same, has left business leaders frantically rerouting supply chains and countries scrambling to establish new and more stable relationships with anyone but the U.S. In the meantime, thousand-point swings in the Dow have become commonplace.
“This is the worst self-inflicted wound that I have ever seen an administration impose on a well-functioning economy,” said former Fed Chair and Treasury Secretary Janet Yellen.
As of this writing, it remains unclear exactly what U.S. tariff policy will be and how other countries will deal with the United States going forward. The administration claims tariff negotiations are underway with 17 countries; China is not one of them.
Talking Heads
The back half of April has seen the major averages gradually narrowing the month's losses on easing angst about tariffs and Federal Reserve independence. The strength and breadth of the rally has triggered some positive technical signals. Fundstrat’s Tom Lee says “probabilities favor a V-shaped recovery in equities.”
Not so fast, says Dan Niles of Niles Investment Management. He worries that we’ve just seen a bear market rally and valuations are still too high. Niles expects stocks to retest the recent lows “at the very least.”
Breaking News
GDP data out this morning shows the US economy contracted at the start of the year for the first time since 2022 on a monumental pre-tariffs import surge and softer consumer spending. Separate data showed hiring at US companies moderated in April to the slowest pace in nine months, indicating waning demand for workers amid economic uncertainty.
So we go into May with extremes: risk, opportunity, uncertainty.
And For What It’s Worth…
According to the Wall Street Journal, Hostess hopes to boost declining sales of “Twinkies” by marketing the snack to stoners. New owner J.M. Smucker, which bought the 106-year-old snack maker for $4.6 billion in 2023, launched a “Munchie Mobile” on a road trip leading up to the unofficial holiday for weed lovers on April 20 to hand out free Hostess brands outside cannabis dispensaries.
It’s a departure from Hostess marketing in its pre-Smucker era, when its sweet baked goods were advertised largely with families and children in mind, using cartoons and characters like Twinkie the Kid. But times they are a changing.
The good news is, the golden sponge cake with a creamy filling is American made. No tariffs to come between you and your saturated fat.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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