Right on schedule

Toda, I am going to present some thoughts on why we should rejoice the fact that governments, after denying the potential for recession, are finally admitting that its almost a sure thing. This is a big change. The evidence presented in my last blog (Go Johnny, Go) – and todays quick  reminder of the economic/stock market cycle, should give you confidence that a MASSIVE opportunity to deploy your cash back into the market is coming. You HAVE been paying attention to this blog, and holding cash since last spring… right?

Recession reality finally admitted

Government-speak over the last 6 months:

a) low chance outcome 

b) possible outcome

c) it´s almost here now   

Contrarian thoughts for the near-term:  With leading economic indicators down month after month after month, and with XLP (staples) outperforming XLY (discretionary) stocks by nearly 40% YoY, (the most since the 2008 Lehman implosion), it is clear that a recession has been well telegraphed. Not many doubters left.

The performance chart below (sectors relative to the SPX) shows 200 days. There are about 252 trading days in a year – this chart shows us data since the spring of 2022, when I posted the High Risk Alert blog in April, warning you of the bear.

When everyone knows something, it becomes a crowded trade. So, looking forward, the bearish expectations bar is high. If you read my last blog, you know I do feel there is a viable argument for a final market lower low – but its going to take a bigger scare than the recession (I’m thinking Russian action in the winter…but that’s just me talking out loud). In the meantime, any surprises in terms of good news will be met with surges. Bad news will delete the surge. The market is going to be as nervous as a long tailed cat in a room full of rocking chairs, as they say.

Basic Economic cycle (Wash, Rinse, Repeat)

Here’s a basic Economic & Stock Market Cycle chart from Stockcharts.com. The blue line is the economy, the orange line is the market. You can see that the current bear ties very well into this chart. Note that the market leads the economic cycle. It falls before the recession begins – which is where we are now. But when the recession is finally accepted as “real” (aka full recession – left side of chart), the market rises. Again, ahead of the economy.

This ties into the research I presented early this week (Go Johnny, Go!). That blog report covered the socioeconomic events surrounding this cycle. Those socioeconomic events are happening right on schedule – all within this traditional Economic & Stock Market cycle. It also ties into the observations in the performance chart at the top of todays blog. Note that materials, energy, consumer staples did in fact outperform since my April 2022 Bear Call. Note that, right on schedule, the Tech, Discretionary and Consumer Services were the worst performers. These two charts – one presented actual history (above), one presented theory, have been perfectly in-sync!!

Note that, as the recession becomes a reality, sectors to theoretically look at are Financials, Real Estate, Tech, and Discretionary again. In other words, a rotation back into today’s dogs. My only caution in this cycle is towards technology. It may indeed pop, but one has to be more nimble when that happens. Higher inflation, like in the 1970’s, may be a hindrance on the sector’s growth. Tech stocks do best in low rate environments. Yes, recession will drive rates down. That can push tech stocks up, for sure. But if inflation steadies out near 3-4% (vs 2% during the recent bull), we are likely to see lower returns once that initial sharp stock recovery in the sector is played out.

 

2022: A year to limit your risk

ValueTrend’s motto “Limit your risk, – Keep your money” was coined back in 2008. A defining aspect of ValueTrend was our ability to substantially outperform in declining markets – including the 2008 crash. ValueTrend carried forth with that tradition of “taming the bear” of 2022. For context, here are the major NA index returns for the year 2022, along with the gross returns of our Equity Platform. Even after fees, our clients had a positive return in 2022:

TSX 300: -8.66%

S&P 500: -19.44%

NASDAQ Comp: -33.1%

ValueTrend Equity Platform (gross of fees): +2.06%

  • Individuals results may vary. Past performance no guarantee of future returns. VT performance numbers based on the portfolio holdings of Portfolio Manager Keith Richards

How we did it-

Analysis: Trend, Risk, Fundamental rules signaled a probable Bear Market on April 7th 2022– noted on this blog.

Asset Allocation: We began moving out of equities into cash, ultimately reaching 37% cash for the summer.

Position & sizing: We focused on bigger holdings in defensive sectors. We took profits on our overweight positions in oil and metals. .

Hedging: We reduced beta by selling growth stocks.  We focused on low beta sectors such as consumer staples and value stocks. We added unique positions in uranium and gold.

Current Actions- In a nutshell

  • 33% cash in Equity platform.
  • Recently sold most (not all) of our staples.
  • Still holding value stocks, commodity, gold/silver, defensives.
  • Recently reduced our USD exposure.

Beyond trades, we anticipate holding about the same level of cash until we see a washout (again–see my last blog Go Johnny, Go) and then a base/trend reversal.

Do yourself a favor

Markets have entered into a more volatile period, as I suggested would happen in early 2022. ValueTrend was prepared, and has been profiting. Were you prepared?

If you feel your portfolio management strategy is not as well-structured as you’d like, contact us. We’ll explain how we can manage your money as prudently and conservatively as we do for ValueTrend clients. Contact us at [email protected]

 

6 Comments

  • Hi Kieth,
    I’m wondering what your thoughts on energy were going forward, specifically oil and oil producers in general. Many producers have broken through their 200 day but overall appear to have been in a sideways consolidation for most of the year. Also, If I’m understanding the diagram above regarding sector rotation and market cycle, energy appears to be moving out of favour. On the other hand, I know we are moving into a seasonally strong period and the fundamentals appear strong.(I know this is a technical blog LOL)
    Appreciate ya. Blog, Videos, and course are immensly valuable.
    Jeff

    Reply
    • Yes Jeff–its a bit of a mixed bag right now. Seasonally–and fundamentally there is an argument for a move by oil into the spring (Russia possible military push soon, Biden restocking SPR’s after his wasteful drainage of them, and China re-opening demand increase). Technically, its in a downtrend. Support coming in somewhere near $70. But that must not fail. And yes, the recession can dampen energy demand per the chart.
      So–we are still light on oil (one stock position, one pipeline minor postion, both paying a dividend) but will buy more aggressively if WTIC bases and moves. For now, its a wait and see.

      Reply
  • Curious about the health sector. It was neither a dog nor a star. In a recovery scenario will it continue to grind higher. IHF and IHI sideways since April. XBI bounced off the April lows. IHF seems to be fair to a bit high in price, IHI needs hospitals to free up surgery room but XBI looks like it is setting up to move.
    Thoughts?

    Reply
    • Very different spaces than the traditional healthcare stocks. XBI is biotech – we own in the Aggressive Platform–high risk, high beta. Not for the timid. But we think its basing.
      IHF is in a downtrend.
      The ‘traditional” low beta healthcare sector ETF is IXJ (or equivalents)–note the relatively much lower downside during the bear.

      Reply
  • Great post Keith.
    I share you observations re the sector rotation and where we are at in the economic cycle. As you mentioned Energy is a mixed picture at this juncture with bullish supply fundamentals and seasonal influences but bearish from the Economic model perspective. Financials should be bullish but I share your concerns. For your own benefit, one name $CWB.to may be the exception as it does not have the same mortgage risks as the big 5, it is also a way to get more Energy exposure in this economic cycle.
    For what it’s worth…Ron

    Reply

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