Caught off sides in the market. This has been painful.
Before today, the Nasdaq was down -9.0% from its most recent high – just 15 days ago. The S&P 500 down -4.0% over the same two weeks. But for American Muscle, no strategy got out of July unscathed. What went wrong?
The Great Rotation
One major U.S. index that was not struggling in July was the Russell 2000. It’s a market index composed of 2,000 smaller U.S. companies, and so far in July, the Russell 2000 has outperformed the Nasdaq by 12.8 percentage points. It’s on pace for its largest monthly lead since February 2001.
Before today, the Nasdaq was down -9.0% from its most recent high – just 15 days ago. The S&P 500 down -4.0% over the same two weeks. But for American Muscle, no strategy got out of July unscathed. What went wrong?
The Great Rotation
One major U.S. index that was not struggling in July was the Russell 2000. It’s a market index composed of 2,000 smaller U.S. companies, and so far in July, the Russell 2000 has outperformed the Nasdaq by 12.8 percentage points. It’s on pace for its largest monthly lead since February 2001.
The Great Rotation
One major U.S. index that was not struggling in July was the Russell 2000. It’s a market index composed of 2,000 smaller U.S. companies, and so far in July, the Russell 2000 has outperformed the Nasdaq by 12.8 percentage points. It’s on pace for its largest monthly lead since February 2001.
The idea of a coming rotation out of high-flying tech stocks into largely undervalued smaller companies has been a veiled threat hanging over the market for months. In the run-up to the AI frenzy, valuations for the tech behemoths had been stretched to historical proportions. But a good talking head on TV could justify said valuations, and buyers kept coming. All the while, small caps stocks suffered in a pricing purgatory. They couldn’t ‘catch a bid’ as insiders are prone to say. The interest was all with the Big Boys.
Most analysts assumed that if a day of reckoning ever came, it would do so in fits and starts and stretch over months. It didn’t. It came suddenly and violently.
Healthy?
A rotation can be healthy for the market; reducing concentration risk and overstretched valuations of key players, boosting other sectors, and helping to sustain the current rally.
"Now that we're seeing more participation, even though it's caused some volatility over the past few weeks, I think this is ultimately a better story for long-term investors as we move forward," said Callie Cox, chief market strategist at Ritholtz Wealth Management.
That said, Big Tech has a staying power that small caps simply don’t. And the enthusiasm around artificial intelligence and accompanying corporate profits – at whatever point in the future they come – is real. The recent pause or pullback in tech, while it looks scary and has definitely been painful, is temporary.
Upcoming Stuff
Earnings will be critical in the next couple of weeks. Optimism over artificial intelligence has been the key driver that has propelled the broader market to record highs (that is, until July). The biggest tech players in the industry (think Microsoft, Meta, Apple and Amazon) are flush with cash, and they’re expected to be deploying that cash like drunken sailors to areas they see as the next engine for growth (think AI).
The problem is, all of a sudden Investors want to hear how all that spending will lead to profits. But profiting from AI will take time. Tesla posted earnings last week, kicking their AI-dependent robotaxi vision down the road. Not helpful.
CEO’s on upcoming conference calls will have to muster all their diplomatic skills to sell the need for massive spending to buildout AI platforms while painting a pretty picture of colossal returns in the future. It’s been done before (the internet buildout in the 1990s and the cloud buildout more recently). But investors are impatient. We’ll see.
Wedbush’s Dan Ives is feeling positive. “When we end the week, we’re going to look back and say the monetization of the AI revolution started. This will be a pivotal, historical week for Big Tech.”
Another key event – today’s conclusion of the July Federal Reserve meeting, which will have ramifications into August. The policy statement released by the central bank left rates unchanged, and included comments that could be construed as dovish and laying the groundwork for a September rate reduction.
Tom Lee, Fundstrat’s Head of Research, said the day before that investors should “buy the fear” heading into the Federal Reserve’s interest rate policy announcement. Lee believes small cap stocks will lead a five-day rally post Fed meeting, and the broader market won’t be far behind.
And For What It’s Worth…
A robot toiling away as a civil officer in South Korea’s Gumi City Council is thought to have died by an ‘act of suicide’. The robot was found unresponsive after it reportedly threw itself down a flight of stairs.
Developed by Bear Robotics, a California startup known for its robot waiters, the mechanical helper was a jack-of-all-trades. From delivering documents and promoting the city to providing information to residents, the robot worked tirelessly from 9 am to 6 pm.
No malfunctions had been reported. Was the machine overworked? Stressed? Depressed? Witnesses say they saw the robot mysteriously “circling in one spot as if something was there” before its demise.
The incident has spotlighted the intense work pressure prevalent in South Korea. People have reacted to the news with mixed emotions, with one person commenting, “Why did the diligent civil officer do it?” and another saying, “I pray that scrap metal rests in peace.”
As a side note, my dad used to say, “If the load gets too heavy, put it down.” Good advice, perhaps, for both humans and machines.
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.
One major U.S. index that was not struggling in July was the Russell 2000. It’s a market index composed of 2,000 smaller U.S. companies, and so far in July, the Russell 2000 has outperformed the Nasdaq by 12.8 percentage points. It’s on pace for its largest monthly lead since February 2001.
The idea of a coming rotation out of high-flying tech stocks into largely undervalued smaller companies has been a veiled threat hanging over the market for months. In the run-up to the AI frenzy, valuations for the tech behemoths had been stretched to historical proportions. But a good talking head on TV could justify said valuations, and buyers kept coming. All the while, small caps stocks suffered in a pricing purgatory. They couldn’t ‘catch a bid’ as insiders are prone to say. The interest was all with the Big Boys.
Most analysts assumed that if a day of reckoning ever came, it would do so in fits and starts and stretch over months. It didn’t. It came suddenly and violently.
Healthy?
A rotation can be healthy for the market; reducing concentration risk and overstretched valuations of key players, boosting other sectors, and helping to sustain the current rally.
"Now that we're seeing more participation, even though it's caused some volatility over the past few weeks, I think this is ultimately a better story for long-term investors as we move forward," said Callie Cox, chief market strategist at Ritholtz Wealth Management.
That said, Big Tech has a staying power that small caps simply don’t. And the enthusiasm around artificial intelligence and accompanying corporate profits – at whatever point in the future they come – is real. The recent pause or pullback in tech, while it looks scary and has definitely been painful, is temporary.
Upcoming Stuff
Earnings will be critical in the next couple of weeks. Optimism over artificial intelligence has been the key driver that has propelled the broader market to record highs (that is, until July). The biggest tech players in the industry (think Microsoft, Meta, Apple and Amazon) are flush with cash, and they’re expected to be deploying that cash like drunken sailors to areas they see as the next engine for growth (think AI).
The problem is, all of a sudden Investors want to hear how all that spending will lead to profits. But profiting from AI will take time. Tesla posted earnings last week, kicking their AI-dependent robotaxi vision down the road. Not helpful.
CEO’s on upcoming conference calls will have to muster all their diplomatic skills to sell the need for massive spending to buildout AI platforms while painting a pretty picture of colossal returns in the future. It’s been done before (the internet buildout in the 1990s and the cloud buildout more recently). But investors are impatient. We’ll see.
Wedbush’s Dan Ives is feeling positive. “When we end the week, we’re going to look back and say the monetization of the AI revolution started. This will be a pivotal, historical week for Big Tech.”
Another key event – today’s conclusion of the July Federal Reserve meeting, which will have ramifications into August. The policy statement released by the central bank left rates unchanged, and included comments that could be construed as dovish and laying the groundwork for a September rate reduction.
Tom Lee, Fundstrat’s Head of Research, said the day before that investors should “buy the fear” heading into the Federal Reserve’s interest rate policy announcement. Lee believes small cap stocks will lead a five-day rally post Fed meeting, and the broader market won’t be far behind.
And For What It’s Worth…
A robot toiling away as a civil officer in South Korea’s Gumi City Council is thought to have died by an ‘act of suicide’. The robot was found unresponsive after it reportedly threw itself down a flight of stairs.
Developed by Bear Robotics, a California startup known for its robot waiters, the mechanical helper was a jack-of-all-trades. From delivering documents and promoting the city to providing information to residents, the robot worked tirelessly from 9 am to 6 pm.
No malfunctions had been reported. Was the machine overworked? Stressed? Depressed? Witnesses say they saw the robot mysteriously “circling in one spot as if something was there” before its demise.
The incident has spotlighted the intense work pressure prevalent in South Korea. People have reacted to the news with mixed emotions, with one person commenting, “Why did the diligent civil officer do it?” and another saying, “I pray that scrap metal rests in peace.”
As a side note, my dad used to say, “If the load gets too heavy, put it down.” Good advice, perhaps, for both humans and machines.
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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