Three investment strategies for the final quarter of 2020.

October 28, 202013 Comments

Two weeks ago, I noted on this blog that we were buying volatility (VIX) ETF’s to play the potential for a renewed spike in volatility. This, after a period of retail investor complacency and a bearish smart/dumb money signal – noted here. After a couple of days of market downside this week, it appears that my call on a spike in the VIX was correct. The chart below is one I update regularly. Note the top pink horizontal line. That is one of my sell levels for the VIX. The VIX had moved off of my mid-point buy line (dashed gold horizontal line) and was hanging around the 27 mark when I bought the volatility ETF in our ValueTrend Aggressive Strategy. Today, the VIX moved above the top pink line. So I sold. We made solid a double digit return on the trade in 2 weeks. We may re-enter it later, but that’s another subject.

I mention the VIX trade only to illustrate the value of having an action plan.  Note that we do NOT take on aggressive strategies like VIX ETF’s, inverse ETF’s, or high beta stock/commodity plays in our larger ValueTrend Equity Platform. As such, our conservative platform might have similar objectives that you may have in your own portfolio. Hopefully today’s blog, which highlights 3 strategies we are following in our conservative platform, will offer ideas on things you should be watching over the coming weeks.

Some things to watch for over the coming weeks

  1. Strong support lies between 3150 – 3200 on the SPX: I’ve blogged a few times about the divergence in momentum indicators – which gave us a heads up to the volatility we are seeing this week. Its my opinion that we will see more up/down chop ahead – probably with a bit more bias to the downside. At least until after the election. With this in mind, we raised about 30% cash a week ago, up from around 20% previously. So far, so good. Our view was, and still is, to redeploy that cash after the election. However, one key support level on the S&P 500 near 3200 would likely inspire deploying some of that cash prior to the election. If we see a confirmed test and bounce off of 3200, we will buy. If 3200 fails, a test of the 40 week (200 day) SMA near 3150 with no violation of that level will inspire us to buy some new positions. It is our opinion that, short of a black swan event, one of these two levels are highly likely to hold, no matter what the market noise is in the near-term.

2. Opportunity in the re-opening & value stocks: Yes, yes, I read the news too. COVID, the sequel, has arrived at a theatre near you. But its only a matter of time for retail, entertainment, travel and energy usage to pick up again after the inevitable production of faster testing procedures and a vaccination program. This will take time, but markets look forward by many months. Meanwhile, the stay-at-home stocks are ridiculously overvalued and technically overbought. You have to make a choice here. Do you hope for the hype to continue, or do you play the contrarian, but less hyped stocks when you go back into the markets (assuming you hold cash, like me)? The AMZN chart below displays the typical profile of many of these high flying stocks, which are showing signs of overbought momentum finally rounding over along with moneyflow momentum declines. Meanwhile, value stocks, as noted in this blog, are showing positive technical developments, along with compelling valuations. Market index plays are not likely the best place to be if we see a rotation into the reopening stocks. Indices like the SPX are vastly overweight the technology and “stay at home” stocks. If they take a back seat to value, the index investor will underperform.

3. Don’t be afraid to be a contrarian: Recall Sir John Templeton’s advice – “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude.” I’ve noted recently that oil is, in my opinion, the next great contrarian trade. I believe there will be more downside into year-end on this sector as tax loss selling adds to the despondency. Take a look at the chart below. Support for WTIC lies near $35. Oil will hopefully land there by year end. It is at or near that level that oil and the producers (which correlate to some degree in activity to the commodity) will hopefully find support. There will be opportunities on beaten down sectors like energy that will benefit from an eventual re-opening after the COVID Sequel. Keep an eye, and hold your discipline as these opportunities present themselves.

13 Comments

  • Keith;

    A very informative blog today!
    With regards to both ideas #1 and #2, I’m also sitting on a bit of cash, waiting for the current market ‘noise’ to abate and for confirmation of one of those S&P support levels holding.
    I agree that the ‘Growth’ stocks that have overtaken the headlines this year are still overbought, but rather than buying ‘Value’ when the time is right I’m looking at purchasing a ‘whole market’ ETF, such as VUN.TO from Vanguard which won’t overweight my exposure to the 800-pound gorillas.
    Your opinion on this?

    Reply
    • Smart move Steve. Personally, I like the SPX equal weight ETF –it trades on US exchanges–Both are fine. But the equal weight ETF (RSP-US) gives you more exposure to the value stocks simply by assigning equal weighting to the entire 505 stocks (yes, the SPX index is actually made up of 505 stocks) that comprise that index. Note that its chart looks less like the SPX index and more like the value index, whereas VUN looks a bit more like the SPX despite its wider diversification.
      Having said that, both are very good alternatives to the cap-weighted SPX indices, in my opinion.

      Reply
  • Keith – I love your write up – 3 very actionable and practical actions steps. Oil has hit your target already! Will you begin legging in now or are there other indicators you would first look for as confirmation? Thank you for your wonderful work!

    Reply
    • Jim- we’re not quite at $35. Its my opinion that we may even overshoot that a little (possibly as low as $33!) – More importantly…I am just as focused on the year-end tax selling pressure as I am on that technical support zone. As such, the answer is, no I have not begun to leg in. Actually -I do hold a position in a pipeline (which has been the dogs breakfast so far), but its the only allocation I have to an oil related security at this time, and it was bought pre-COVID crash at a much higher price (doh!). I’ve held it simply because it pays a high dividend and it represents very little of the portfolio, so I figured I can wait it out. Perhaps if oil falls to $35 (its just under $36 as I write – this is the live quote of the spot price on my screen) it may be worth a 1/3rd entry in traditional oil stocks or a commodity ETF mimicking WTI. So, if you anticipate holding 6% in oil, leg in by a 2% position. But I’d wait for a positive support off of $35 for that.
      I’ll play it by ear. As I said, the year end selling may influence me delaying a purchase, but its in my mind.

      Reply
      • Super clear points Keith – I like your strategy and agree, we may have more downside near end of year that may make for even better bargains. THANK YOU!

        Reply
  • Hi Keith,

    On TV, a lot of portfolio managers are saying that the SP500 will possibly go down 5% but unlikely to go down more, and that worries me. With all that confidence, we could have a replay of February when averages cut through all its strong support like a knife through butter. On the TSX, there are lot of popular stocks sliding and sliding, like Enbridge, Bank of Scotia, most REIT(s), and now even our technology companies (other than Shopify) and below their big averages.

    My bet is the market makes it hard for everyone and does a trip to 2900. That would scare the life out of most of us right on time for Halloween!

    Have a good end of the week,
    Matt

    Reply
    • This is exactly why I started the blog talking about a strategy, or plan. You and I don’t know what will happen. So, we can only have a plan for entry and exits. My plan is, hold some cash, wait for support to hold then put a wee bit back in. Wait and leg in accordingly. Sell in legs a bit at a time if the 200 day SMA breaks for more than a few days. No guessing, just letting the market tell me what to do.

      Reply
  • Hi Keith- Just wondering if you think that apartment REITs are a buy after the US election has been finalized. They are all down in the 30% area.

    Reply
    • Randy I haven’t studied the sector at all, so my comments will be pretty basic here–I took a look at a few of the names in that group (although not at all comprehensive) and many have broken longer termed support. I’d prefer to see a bounce off of that support, not a break. I’d avoid the sector until I saw technical strength, and I’d want to know how the REIT is dealing with defaults. Sorry I cant offer more on the sector.

      Reply
  • Energy has been taking it on the chin lately. However I noticed yesterday that energy stocks rebounded somewhat. This may be a bullish sign for energy.

    Reply
  • Hi Keith, do you use HUV for one of the VIX ETF ? Which ones did you buy (and sold last week)? I heard that VIX tracking via ETF is pretty hard to match. For short term VIX plays (hedging), do you use the C$ hedged version ? In addition, if one has a portfolio of $60K stocks, and wishes to hedge 50% (ie.. $30k) using VIX, would it be appropriate, instead of buying $30k VIX, just buying $10K UXVY (3x VIX)? Thanks.

    Reply
    • Excellent question(s) Carey
      You are correct that VIX ETFs don’t match the movement of the VIX –I bought the HUV. The VIX went from 25 to 40 over the time of my trade. That’s a 60% gain!!! The HUV went from $43 to $50 for me. That’s about 16%. Huge difference!!!
      But, its the only thing that offers the play, so we use what we can..The VIX must move pretty big for you to make any money on HUV. We were convinced it would be big so we went with the trade, even knowing we cant make the full profit of the underlying. You could trade a futures contract but that’s a different game.
      I don’t know how you could calculate using the VIX to hedge the portfolio. You can use an Inverse (single) to hedge by using some math, as they tend to have pretty close negative correlation to the market. So you can calculate the amount you wish to offset fairly easily, assuming a beta 1.0 portfolio…

      Reply

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