Is There a Bull Market Stirring? It started with an arguably dumb decision at Silicon Valley Bank. Put an unholy amount of long-duration bonds into the portfolio at the most inopportune time – just prior to the Fed’s interest rate thrill ride. Rates go up, value of bonds plummet. To meet the demands for routine withdrawals, sell bonds at a big loss.
No problem. Announce the raising of $2.25 billion in public and private offerings to shore up balance sheet. But that idea didn’t sit well with a few depositors, and they withdrew their money and then, of course, tweeted about it.
Big problem. The ensuing run on the bank brought it to its knees overnight.
No problem. Announce the raising of $2.25 billion in public and private offerings to shore up balance sheet. But that idea didn’t sit well with a few depositors, and they withdrew their money and then, of course, tweeted about it.
Big problem. The ensuing run on the bank brought it to its knees overnight.
Treasury stepped into the collapse, and when the dust settled on SBV (and a second rapidly-failing bank, crypto-focused Signature Bank), 100 percent of deposits in both (former) banks would be insured. An unprecedented move.
Contagion Quelled? Almost.
There was a third near collapse of yet another bank, this one oversees (Credit Suisse, the second largest bank in Switzerland). But the Swiss government orchestrated a shotgun wedding of the thing to its chief rival UBS.
While all this was going on, markets were volatile like nobody’s business. Large and regional bank shares crashing and spiking and crashing, dragging the broader markets with them. Treasury yields on a roller coaster. Palpable fear of a return to the 2008 financial crisis.
And then, an eerie calm. Money began coming off the sidelines. Markets stabilized. The S&P 500 now looks to close out the month with a decent gain.
What Happened?
The reasoning goes something like this. The Fed finally broke something. And not just any old something, but the U.S. banking system. The speed at which they tightened monetary policy induced an unacceptable level of stress into the banking system and down went two dominoes. Yes, the fix was quick and the spread was stopped. But it certainly got the Fed’s attention.
The odds now favor only one other 0.25% rate hike in May - if that - and a pause over the summer. And there’s increasing chatter of the Fed pivoting to monetary easing (cutting the federal-funds rate) in late 2023 as inflation continues to come down and economic growth becomes an increasing concern.
Bull Stirring?
Might we be looking at the long-awaited stirring of a market bull? Sure there have been a few false starts over the past year. But this time? Is it the real thing?
Debbie Downer Says…
Inflation is still high, and the Fed just raised interest rates again - even after the banking mini-crisis (so who really knows what they may do). Russia remains at war with Ukraine. Middle East tensions are growing. Tensions between the U.S. and China are growing. And just like the banking crisis that came out of left field, you never know what’s going to hit you next.
All true.
So, I want to believe in a stirring bull. But this market will teach you to keep your hedges in play.
And For What It’s Worth…
An Australian company (Vow) has generated lab-grown cultured meat using the genetic sequence from the long-extinct Woolly Mammoth. Fashioned into a wad about the size of a soccer ball, the company used publicly available genetic information from the mammoth, filled missing parts with genetic data from its closest living relative, the African elephant, and inserted it into a sheep cell. The cells multiplied in a lab until there were enough to roll up into a giant meatball.
Slow baked and finished off with a blow torch, no one has actually taken a bite. The company says “the ball must go through rigorous test before it’s okay to eat.”
Down goes my fork.
Article here.
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.
Best always,
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 (it has still managed to outperform the S&P 500 over the long run).
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 new 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.
Contagion Quelled? Almost.
There was a third near collapse of yet another bank, this one oversees (Credit Suisse, the second largest bank in Switzerland). But the Swiss government orchestrated a shotgun wedding of the thing to its chief rival UBS.
While all this was going on, markets were volatile like nobody’s business. Large and regional bank shares crashing and spiking and crashing, dragging the broader markets with them. Treasury yields on a roller coaster. Palpable fear of a return to the 2008 financial crisis.
And then, an eerie calm. Money began coming off the sidelines. Markets stabilized. The S&P 500 now looks to close out the month with a decent gain.
What Happened?
The reasoning goes something like this. The Fed finally broke something. And not just any old something, but the U.S. banking system. The speed at which they tightened monetary policy induced an unacceptable level of stress into the banking system and down went two dominoes. Yes, the fix was quick and the spread was stopped. But it certainly got the Fed’s attention.
The odds now favor only one other 0.25% rate hike in May - if that - and a pause over the summer. And there’s increasing chatter of the Fed pivoting to monetary easing (cutting the federal-funds rate) in late 2023 as inflation continues to come down and economic growth becomes an increasing concern.
Bull Stirring?
Might we be looking at the long-awaited stirring of a market bull? Sure there have been a few false starts over the past year. But this time? Is it the real thing?
Debbie Downer Says…
Inflation is still high, and the Fed just raised interest rates again - even after the banking mini-crisis (so who really knows what they may do). Russia remains at war with Ukraine. Middle East tensions are growing. Tensions between the U.S. and China are growing. And just like the banking crisis that came out of left field, you never know what’s going to hit you next.
All true.
- Indeed, Boston Fed President Susan Collins just said on Thursday she believes “some additional tightening” is needed to fight inflation.
- Liz Young, Head of Investment Strategy at SoFi: “I would be fading little rallies along the way.”
- Ron Insana, co-CEO of Contrast Capital: “The markets are screaming recession.”
So, I want to believe in a stirring bull. But this market will teach you to keep your hedges in play.
And For What It’s Worth…
An Australian company (Vow) has generated lab-grown cultured meat using the genetic sequence from the long-extinct Woolly Mammoth. Fashioned into a wad about the size of a soccer ball, the company used publicly available genetic information from the mammoth, filled missing parts with genetic data from its closest living relative, the African elephant, and inserted it into a sheep cell. The cells multiplied in a lab until there were enough to roll up into a giant meatball.
Slow baked and finished off with a blow torch, no one has actually taken a bite. The company says “the ball must go through rigorous test before it’s okay to eat.”
Down goes my fork.
Article here.
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.
Best always,
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 (it has still managed to outperform the S&P 500 over the long run).
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 new 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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