- Capital Contrarian
- Posts
- The RoC
Estimated read time: 4 minutes and 10 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: -15.53%
Nasdaq: -27.97%
Russell 2000: -16.75%
Top holding position US Dollar ($UUP): +11.51%
Numbers > Narratives
It's often the first thing I remind people who are either new to investing or typically do not pay attention to it on a regular basis.
Our financial markets depend on routine data signals to give investors a glimpse of how our economy is performing. Are we growing or slowing? Is inflation rising or falling? And, how fast in either direction is all of this happening.
In the industry this is all known as the Rate of Change (RoC)
If we take a look at the RoC for GDP vs. movement in the S&P 500, we can see how the market reacts in tandem with the data.
2019: every quarter the RoC for GDP was positive; from Q1 to Q4 the economy was growing sequentially (spoiler alert: investors like this!)
2020: Q1 saw it's first negative RoC in a while - S&P followed suit
2021: The mother of all investing years. GDP RoC was positive in every single quarter, in some cases growing 5-6% quarter over quarter (QoQ). That's unprecedented growth. But hey, the S&P tipped it's cap and say let's go on the ride of your life...
2022: The "back to reality" year: GDP growth went negative QoQ in Q1 and has stalled since. We went from peak RoC growth to...nothing. The market reacted accordingly.
So where are we headed in 2023?
GDP forecasts are expected to continue declining, on a RoC basis, through Q2 of next year. In layman's terms, we are not out of the woods just yet...
Skills & Data Used This Week
Crypto.
Ok, I've waited long enough on discussing this so here we go.
Let's get a few points out of the way first:
I believe in the fundamentals of crypto for long-term investing. It's legit.
I invest based on current and future macroeconomic environments
I sold all of my crypto equity exposure ($GBTC/$ETHE) in December 2021
I still own physical coins at a fraction of my net wealth (<1%). Call me a "HODLER".
Bullet #3 - I felt like an absolute idiot selling my $GBTC/$ETHE positions (so not physical crypto coins, but equity exposures that was correlated to the price of Bitcoin and Ethereum) after they had just "crashed" ~15% from their high in November 2021.
It never feels good to panic sell - but was this panic? What prompted me to cut things loose at that moment?
Take a look at that GDP chart again in the first section. I saw decelerating growth (before it was made public).
Crypto does not perform well during periods of slowing growth; it likes rapid, accelerating growth (see 2021 performance).
Not sure why this picture is so large but I kind of like it...I'm trying to make a point!
Bullet #2: No matter what I "think" about the fundamentals or long term setup of a security, the macroeconomic signal is going to ultimately influence my decision to invest in something. I have no feelings or ties to something just because I "like" it. I like making money and can accept pulling my chips off the table if I know something is approaching a macroeconomic headwind (i.e. crypto in a slowing growth environment).
Bullet #4: A great lesson learned in investing - always define your max positions in a security. For crypto, my max position is 4%. Yes, even at the height of 2021 where everyone thought they were the next crypto millionaire, my max holding was 4%.
And now, it's <1%. And it has been since December 2021. My personal wealth was not affected by a 65% drawdown. But unfortunately those who do not define max positions and put 50%+ of their wealth into Crypto just wore one on the chin...
Oh and by the way, if you are wearing a -65% loss in crypto right now you need to be +222% from here just to breakeven. It's math.
Bullet #1: Trust me, I'll scream from a mountain when it's time to start putting money back into crypto. Will we see that next year? Only time (and RoC) will tell...
And if you want to ignore me because you think I’m a moron and it’s Bitcoin to the moon, I have no problem with that. You do you, pal.
But I bet my friend back in July is thanking me.
In The Account | my top holdings
$UUP - US DOLLAR
A nice rally to start the week so I took my position from 12% to 10%. And then took it back up to 12% when it corrected intra-week. See what I did there?
$GLD - GOLD
Ah shit, here we go again. With longer term rates (10yr, which Gold inversely correlates to) showing signs of potentially falling, I'm back on the long side of Gold. Fundamentally, it's a core asset in this macro environment. Signal wise, we really haven't gotten a buying opportunity until now.
$GVZ, Gold volatility, has fallen drastically. I like to invest in assets that have falling volatility.
On The Radar | positions I want to build / sizing up
HEALTHCARE - $XLV, $PINK
STAPLES - $XLP, $PBJ
LOW BETA - $SPLV
HIGH DIVIDEND - $HDV
All 4 of these are overbought, which is great because I can see a buying opportunity coming after a long overdue correction. These are all core assets to be long of when the VIX is <30.
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
Anyone else been following the layoffs in the Tech industry? They're not bullish btw...
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.