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By Jeffrey Cohen, Investment Advisor Representative, May 5, 2022
Pre-market video was pretty balanced. We discussed how the model analyzed the markets before they opened. I don't think we saw the falloff today coming, but you can be the judge.
We did see that the 'edge' of the CQNS UP Model was smaller, and it took holding from 10 to 25 stocks today to give you a 4 x 10e-4 edge over a fully diversified portfolio of positive net income stocks (or the $SPY, $QQQ or $IWM). Only 2 individual stocks $LSCC and $NVDA scored better than the fully diversified market. Individual stock edges have largely disappeared in this market. There were no dividend stocks which passed our strict criteria. For money losing companies, only two common stocks scored the same or better than than the overall market. $TU and $MRVL. Given the increased risk of these stocks (tends to be ~2.5x more price variance than profitable stocks), the SPY and QQQ scored better than holding a diversified portfolio of all money losing company stocks, by 1 x 10-4 (the tiniest of edges). How do we understand these results? 1. It is not a stock picker's market, and is better to invest in the indices. We think the large investors and money managers realize this, and this is why the 'action' is concentrated on the indices. 2. Money losing stocks are much more risky than the market right now. We saw something else this week. The CQNS down run is giving us dramatically inefficient scores for the worst, or most inefficient stocks. These are stocks that move without direction. In the market this week, these have moved up and down dramatically as a result. We have a list of shorts based on the CQNS down run in our desktop notepad, and many of them had breathtaking losses. When markets fall and liquidity continues to dry up, it is harder for these stocks to keep up their charade, and they fall towards their underlying valuations. On a more fundamental level, we have seen some stocks fall hard this week. Stocks like $TUP or Tupperware Brands. We did some quick DD on these stocks, looking at their most recent SEC filings, and notice a trend. Some stocks are falling because their sales and gross profits are falling. Others are falling because their sales are falling, and cost of goods sold are rising, which puts double pressure on their business. If or when a recession hits due to fiscal and monetary policy shifts, and the potential war with Russia, and supply chain shocks, these and other related stocks will lose their profitability. We see stocks beginning to be priced levels that partially assume a recession. If one hits in the US, then stocks will fall to the valuations that assume 100% recession, and that means further falls. We have another index we like. Money manager and asset manager stocks. These companies (like us) make money if they manage more money, and if they successfully grow their assets under management. When times are good, they seem to print money, and pay healthy dividends. When times are bad, performance slips, pink slips sail, and investor money bails. In other words, money managers are a leading indicator on stock markets. We have watched money managers fall to levels of increasingly attractive levels and dividend yields, and think this is due to recessionary and asset bubble popping fears. It isn't just US Equities, but fixed income and real estate concerns as well. We also have a hypothesis that stock market returns are autoregressive. In other words, previous returns impact future returns directly. This happens when returns are greater than a certain percentage, as they impact liquidity and expectations of future returns. More to discuss. We find leptokurtic stocks that seem to be safer in this market. They are in that they fall less when markets fall, and rise less when markets rise. They deliver their mean results more often, and all results are closer to the mean. Today's results validated this hypothesis. Platokurtic stocks are fat tailed, and deliver a wider range of returns around their mean return. So, as Forest Gump said, "Life is like a box of chocolates, and you never know what you are gonna get." These stocks can go up and down dramatically around a mean. We further augment this group of stocks by picking those that have extraordinarily high price variance. Well, today validated this approach and these stocks had dramatic moves downward intra-day. What do we recommend you to do in this market? It depends on your objectives. If you are a gambler, then enjoy this period of higher and increasing volatility. Bet to the downside given current monetary policy shifts, supply chain challenges, and our current political leadership. You can buy and sell ETFs like $TNA $SQQQ $TQQQ $VIXY $UVXY and others. This is not a buy and hold strategy, and this is not for anyone that has to live on the money being invested. If you are an investor that must be in the market, I would stay with the tried and true value stock methodology. Find stocks that are trading well below book value and that have defensible and attractive economics and market positions. We found three of these for our own portfolio, and despite a 40.5% drawdown are holding strong. If you are an investor with a choice, I would stay out of the market for now. It is too early to buy the dip or call the top or bottom. The indices have not confirmed their reversal, and may still resume their upward run. I have coined a phrase for this market. FOMO is a cost effective strategy. It is not expensive to wait before you buy a downtrodden stock. It will likely be cheaper next week. Good luck to all this week. God bless you and your loved ones.
By: Jeffrey Cohen, Investment Advisor Representative, US Advanced Computing Infrastructure, Inc.
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