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Estimated read time: 3 minutes and 15 seconds
In this week’s newsletter:
Market recap
Skills & data used this week
Top holdings: what I am buying & selling
Market Recap
YTD returns:
S&P 500: -16.22%
Nasdaq: -27.62%
Russell 2000: -15.96%
Top holding position US Dollar ($UUP): +11.74%
On Thursday we received the CPI report (inflation) for October. Prices rose 0.4% MoM September, but fell 0.2% YoY from 7.9% to 7.7%.
Markets abroad reacted bullish to this news as it showed inflation cooling, a signal that the Fed could ease rate hikes in the coming months.
So the Fed, who has raised rates by 375 bps since March, has inflation...right back where it was?
Recall that the Fed is trying to get inflation back to their 'beloved target' of 2%....we just clocked in at 7.7% YoY.
And while their rate hikes may have helped form a peak in inflation back in June (when it was 9%), it's still grossly high compared to where they want to be.
S&P 500, Nasdaq, and Dow had it largest one-day gain since April 2020.
Again..on what? On inflation being "lower than expected"?
Expectations in the market are narrative driven; it's the same song and dance for when companies report earnings (and sugarcoat/lie about "expectations" to save face).
In reality, inflation is still high. HISTORICALLY HIGH.
And in order to tame inflation, the Fed will have to raise rates. There will be no beloved "pivot". Powell has stated time and time again that he will do whatever it takes bring inflation back to 2%.
And since 375 bps of rate hikes since March has only brough us back to where inflation was...in March...
We've got more hikes coming our way...as we continue to see economic growth & demand slow (hint: when both of those things happen simultaneously you better have something to hold onto)
Skills & Data Used This Week
Bear market rallies
They often rally harder than what we would ever see in a bull market. Think about that.
They are quick and fast, like ripping a band-aid off. But if we take a look at the larger picture, they are quickly forgotten.
For the record, Thursday's move in the S&P 500 (+5.54%) didn't even crack the top 20 moves all time, yet you would have though Christmas came early.
Anyone else see the similarity in both sides of this graph? What years show up with both the largest gain AND declines?
1930s (Great Depression), 2008 (Great Recession), 2020 (The Great...?)
These time periods were some of the most catastrophic and life-altering eras for our economy. At the end of the day, the losses far outweighed the historic gains. Because that's what bear markets do.
Oh, and don't forget the Dot Com bubble (early 2000s)....
Sorry it's blurry, but you don't need glasses to see that most of these historic rallies (16/20) happened during bear markets.
Because in bear markets volatility increases...uncertainty increases...and the dollar increases.
You shouldn't need glasses to read that one correctly....
In The Account | my top holdings
$UUP - US DOLLAR
Take a good look at the chart in the last section - yes, there are periods of times when the Dollar goes down. Just like bear market bounces, things in bull markets will correct. Dollar has gotten absolutely smoked over the past month, so we should just cut our losses...?
In bull markets you BTTD on bullish trending things. $UUP back to max position (12%).
On The Radar | positions I want to build / sizing up
While I missed the boat on this 'epic' rally, I sure as hell do not have FOMO to pile into something AFTER they move up.
If the VIX holds below 30 there are investable things based on where the economy is headed...
HEALTHCARE - $XLV, $PINK
STAPLES - $XLP, $PBJ, $STKL
GOLD - $GLD
WHEN the 10yr rate starts to sniff out slowing growth, we should start to see real rates decline. This is bullish for Gold, and in general its a core holding during economic uncertainty. It hasn't been investable this year as real rates have gone rampant - let's see if that changes.
Off The Grid | removed positions / short selling opportunities
TECH - $XLK, $QQQ
FINANCIALS - $XLF, $KRE
BASIC MATERIALS - $XLB
INDUSTRIALS - $XLI
RETAIL - $XRT
HIGH BETA - $SPHB
CRYPTO - $BITO, $MSTR
HIGH YIELD - $HYG
You pretty much got the opportunity to add back to the short side in almost everything on this list. These opportunities do not come often in bear markets.
As for the crypto crash, I'll let my colleague fill you guys in on Monday; but this is a friendly reminder of why you should have MAX position sizing based on the VOLATILITY of assets.
Until next week....
-BW
DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.