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It appears we had another good day with our CQNS model. Last night when it ran, the aggressive RISK-OFF stance of the weekend moderated. Number of stocks dropped to 20, and the stocks were more back to normal with some technology and higher BETA names. The market did trade a bit erratic today, but it ended flat. The model picks were slightly red, but so was the S&P 500, so the hedge would have paid for some of the CQNS long declines. Net-net, the model suggested a less aggressive stance, and the market was pretty subdued. Makes us feel good about the predictive power. And tomorrow...We are starting off 'on the wrong foot' tomorrow.
1. The 13-week US Treasury yield is up to 4.25%. This requires us to adjust a key parameter in our model, the risk-free rate. It is only 5 basis points, but we like to stay a little ahead so may raise it 10 basis points. This will reduce the edge of stocks, and create a new RISK-OFF cycle. The question will be whether other rates rise in the short term, and whether risk-free hits 4.5% (which will be material for our model). 2. Stocks we follow have lower volumes being traded. This can reinforce trends and allow for over-sized movements in stocks which do have volume. The lack of volume can also be a good thing, and dampen down volatility, if the market is not also seeing low liquidity. A lack of both liquidity and volume could mean trouble, like a small helicopter flying too high and running out of oxygen (which causes a lack of lift and power). 3. There is a speech by Chairman Powell on Wednesday. Those can be material to risk if he has a message to send. 4. We started to read the FED FOMC memo from early November. We read portions and they were dire. Lower market liquidity. Higher market volatility. Tightening Main Street Conditions. 5. Headline readings on US Real Estate were poor. On the other hand, Santa may be coming to town. You know that old chestnut, the Santa Clause rally that lifts stocks in December as loss harvesting is completed and people reload positions.
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By: Jeffrey Cohen, Investment Advisor Representative US Advanced Computing Infrastructure, Inc. November 27, 2022 We ran our model last week, but kept a low profile on investments. We focused on family and did not make a single trade (our personal portfolio remains intact and our hedged managed accounts are 100% cash).
What we found today: The expected return from 'risk' of the US Equity market is 4.8% over the next 12 months, including dividends. This compares to a risk-free rate of return of 4.2%. This is not a very large return as compared to the returns of 2021. These conditions require larger portfolios (at least 20 to 35 stocks held equally) to provide significant alpha over buying the SPY, QQQ or IWM and holding. It may not provide a significant advantage over a simple portfolio of SPY and SHY, and maybe 1 or 2 more stocks, which we are finding to be simple to manage and reasonably good results from our model. We have those portfolios identified. In short, this is why we are suggesting the market is RISK-OFF this week. A savvy investor looking to balance risk and return to find an edge has to work much harder, hold significantly more stocks, and take less risk. CQNS Down Run: The 809 stocks that passed data validation for our CQNS Down run (stocks to potentially avoid) have an all stock variance of 8.0 x 10-4, and this compares unfavorably to the S&P 500 Index ETF (SPY) variance of 2.3 x 10-4. Liquid stocks of unprofitable, US-listed companies (this group) have 3.5x the variance of the S&P 500 index ETF. There are many biotechnology firms at the 'top' of our CQNS Down stock list, at least half of the top 50. The others are downtrodden names, MEME stocks, and a few fresh new faces that we have not seen in the list, and are potentials for shorting, or at least avoiding. They have variance that outweighs their market-following direction, or BETA. The #1 stock to avoid is ALLK, and that stock can be put together with many other individual CQNS down stocks to provide a terrible risk-return trade-off portfolio of two stocks. These would be heavily biotech, but we see a few non-biotech MEME-like names to match up with ALLK. This run is interesting for having 30 stocks with a BETA of 2.50 or higher, and the highest BETA found is AFRM. These stocks will move with the markets, and are unprofitable, so likely 3.5x more risky than the market. Fasten your seat belts. There are three negative BETA stocks. These stock are moving in the opposite direction as the SPY. BRK.B Berkshire Hathaway Inc. -0.12 SPRY ARS Pharmaceuticals Inc -0.04 VERU Veru Inc -0.86 CQNS Up Run: The risk of this portfolio of 1,710 profitable stocks is 2.6 x 10-4, which compares favorably to the SPY with a variance of 2.3 x 10-4. The risk of holding a large, diversified portfolio is 1.13x the SPY, which is insignificant. We see a few anecdotal things in the data, as follows: 1. The 50 stocks with the smallest volume on Friday compared to last year have very small volumes, all at or below 14.1% of last year's volume. However, the 50 stocks with the largest volume traded at or above 81.7% of last year's volume. Four stocks traded above 205% of last year's average volume. 2. There are stocks that have gone up in price, and stocks that have gone down, also at relatively extremely level (down 3/4 or up 2x as compared to the average over the past year). So, there is movement in prices. 3. There are high and low BETA stocks, at the extreme ends of the spectrum (0.1 or below, and 2.5 and above). So, there are stocks that are moving at extreme levels of correlation (or even leverage) to the market, while others are largely independent of market moves. 4. The best 15 CQNS UP portfolios found are all within one tick of each other, and vary from 18 to 23 stocks. To retain 37% of the edge, you can hold a 7 stock portfolio that includes QQQ, SPY, SHY, and four individual common stocks. There are negative BETA stocks that were identified. These are not included in our run, and we present them to you for informational purposes. CPK Chesapeake Utilities Corp -0.646 SQQQ ProShares UltraPro Short QQQ -3x Shares -3.800 TZA Direxion Daily Small Cap Bear 3X Shares -3.259 UUP Invesco DB US Dollar Index Bullish Fund -0.185 UVXY ProShares Ultra VIX Short-Term Futures ETF 2x Shares -3.604 VIXY ProShares VIX Short-Term Futures ETF -2.443 Our previous managed accounts had around 12 stocks, so these are larger portfolios. Again, we call this a risk-off portfolio as we are further spreading out investments to gain the best edge we can, and that edge tends to be smaller along with the return from market risk. There is one more thing... We run our model now against two baselines. One is the SPY and the alternative is the QQQ. We do this to get a 2nd look or alternative view of the best portfolios. The answers are always different, and we do learn a great deal. What we learned today is that you can hold three stocks (ETFs actually) evenly, and hold 82% of the benefit of a fully-sized 34 stock portfolio. There are a few additional portfolios of four stocks that close to 80% of the alpha, and are surrounded by portfolios of ~100 stocks. This is important information if you want to beat the performance of the QQQ. The same results are not available to beat the SPY (our base case run is harder to beat this easily). Good luck to all. Jeff By Jeffrey Cohen US Advanced Computing Infrastructure, Inc. The consumer price index data came in this morning. It was lower by a tick, nothing more. All of a sudden, bond yields are crashing (10-year UST yield down 21.3bps). Stock index futures are up ~2%.  There is a lesson to be learned here, but we are not sure what it is.
Here are some thoughts: 1. Don't trade in a market like this, where liquidity is down and moves are aggressive. You will lose your 'alpha' or edge in transaction costs. The pre-market spread for two stocks we own is 7% and 30%. There are significant bets being made (likely by multiple trading desks and portfolio managers) in the same direction. Huge bets in pre-market on UST-10 year (long) and US equity indices (long). As a retail investor, you will likely pay more in transaction fees, and the moves are so great you may lose more than your money...but also your nerve. This is like riding a tsunami on a surfboard. 2.We are 'stuck' with our stock portfolio as-is, until markets settle down. We have 19 longs, 3 shorts, and have a short SPY position. One long and two hedges (to track performance). Our CQNS Long portfolio wanted us to go 'Risk On' this morning, but we are too late due to the pre-market moves already made. There are significant sells of low-beta stocks and significant buys of high-beta stocks. The ideal portfolio for the SPY-based run is 11 stocks, and the QQQ-based run is 14 stocks as compared to our current 19-stock portfolio. We will ride out the storm until liquidity returns. 3. We will try to make a few position changes this morning to take advantage of the rising stock prices. However, if we only sell and don't buy, we will be in a > 1.0 hedged position. We will report back our progress. Ok, markets open 90 minutes. We sold > 50% of our CQNS long positions, the ones that were not in our CQNS Long portfolios as they read today. Those tended to be some of the in/out tech stocks, and the main street low BETA stocks. Those are now liquidated. We also reduced our hedges by around 20%. This means we are over-hedged for a few days while we wait for a chance to buy into our new longs (maybe Monday). This is a risk, but seemed a shame to miss a chance to sell into strength. The markets are acting strange today. US Treasury bonds yields are down 20 to 33 basis points, depending on the duration. Stocks are up 3% to 6% depending on the index. Crypto has made a recovery today Copper is up significantly, and carrying forward a recovery rally (up to $3.77/oz). Silver is up to almost $22, and even crude oil now is green. The US Dollar is weaker. It was like everyone saw a ghost. Everyone turning bullish, globally. Belief in a FED FOMC pivot. Crazy, actually...and we don't buy into the narrative. So, our CQNS Smart Volatility model portfolio is under-invested this morning after taking gains, and over-hedged by stonks and the SPY. By Jeffrey Cohen
US Advanced Computing Infrastructure, Inc. Good morning! Today went from red to green in the US equity futures. The US Equity Futures are drifting back to a flat (to up) open. There is movement in our CQNS Long (or up) model portfolio this morning, as stocks prices (but not volume) look like they have done a day's trading...and all by 7:34am CT (or about an hour before market open). Pre-market for a few select industry groups:
The Vix is red (which means lower cost of protection), and bonds are trading this morning mixed and higher. Energy is down, and the US Dollar is weaker. Seems like a great setup for US equities to rise. However, while we were watching the Level 2 order book in Nasdaq (all exchanges) for $SPY, we saw a big trade go through. Nothing dramatic, but about 29,000 shares were sold in one order. This reminded me that there are forces moving the equity markets up, and there are opposite (but not quite equal) forces moving them down. Crypto, especially Bitcoin, has been range bound for months. BTC/USD is trading now at $20.8, which is around the $20k mark. Currencies are setting into a trading range as well, with the Euro at $0.9993, GBP at $1.1472. It takes 146.19 Japanese Yen to buy a US Dollar, and it takes 1.3468 Canadian Dollars to buy a US Dollar as well. In terms of overall market breadth, on Friday there were 67% advancers and 28% decliners, and ~ 3:1 new low to new high ratio (437 lows to 155 highs). For US Corporate Bonds, the the A/D ratio was similar, but there were many more new lows than highs. There were 5,024 advancers to 3,584 decliners, and there were 631 new lows and 38 new highs, for a ratio of (17:1). Good luck today. We are watching the markets whipsaw today. Interest rates are rising across part of the yield curve. Stocks are up, down, up, down all day. Made a video sharing transparency: https://youtu.be/FCFuD25wQZk |
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November 2024
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