Let’s start a little differently this week, with a bias-free look at price and nothing else. No moving averages, no indicators, no candlesticks, and no framing anything except to show different time periods for context.
Here’s the S&P on a daily close basis over 6-months, 1-year, and 5 years:-
What do you see?
For me, the last few months have not been pretty by any means, but after a ‘short, sharp, shock‘ the market appears to be resuming its longer-term trend and currently sits just 1.5% below its all time high.
It doesn’t matter what payrolls were, what the latest rig count is, what the Fed said, or who becomes President. You can’t trade those things. You can only trade price, so you might as well observe and follow it, and make that the basis of how you manage risk.
Alpha Capture Portfolio
Our Alpha Capture portfolio climbed a further 1.1% this week vs 1.0% for the S&P. That’s now the third straight weekly gain of over 100bps and takes it to +1.7% YTD vs +2.0% for the S&P.
Our equity curve as shown on the Marketfy site below, highlights some important aspects of our methodology during market conditions like we’ve witnessed recently. The blue line is Alpha Capture, the green line is the S&P.
The correction in late-August was quick and severe enough to significantly impact our performance, but it’s equally important to observe what’s happened since. Having diligently taken our exits, ultimately reducing our portfolio to a single position and over 90% cash, our performance stayed flat to slightly lower as the market continued to fluctuate wildly.
Had the market have continued to move lower we would have already been well protected from further downside. Instead the market bounced sharply higher and has continued to do so for 6 straight weeks. Having little to no exposure in that environment is hard to deal with mentally, but that initial shortfall between our own performance and that of the market when it rallies sharply is the price you pay for protecting against the risk of further downside.
And it’s a price worth paying. The difference with this approach to others is we don’t use the market as our proxy, but instead continue to take new opportunities in individual stocks as and when they present themselves. Accordingly, as the market improved, slowly but surely more and more stocks were making new highs well before the market attained its current levels, allowing us to again participate in some strong trends.
There were no fresh signals for our portfolio this week, but further strength allowed us to trail several stops higher and add to some positions. Five of our twelve positions finished the week at fresh highs, six are just below their highs, and we have just one near its stop after a disappointing post-earnings reaction. We also have 11% in cash, which will likely be used to increase existing positions should we be able to trail other stops higher.
Consumer sectors are no longer dominating in the way they have in previous months. This week saw Consumer Staples ($XLP) give back further ground, and Consumer Discretionary ($XLY) give up their number one spot to Technology ($XLK), with Financials ($XLF) getting closer in third.
Industrials ($XLI) also improved further to close above the 200-day MA for the first time since June.
Then comes Consumer Staples ($XLP), followed by Healthcare ($XLV), Energy ($XLE), and Materials ($XLB), with Utilities ($XLU) bringing up the rear.
We’re seeing more Financials, Industrial and Energy names screen for us giving us the broadest watchlist for many months. Here’s a sample from the full list of 30 names:-