Portfolio Rebalance / April 09
Following the Signal Sigma Process
The approach to this article follows the step by step process described here. All visuals are sourced from various instruments available in the platform. If you are using the Portfolio Tracker, you’ll be able to see how we set it up for our own portfolio at the end of this article.
Note: The Sigma Portfolio Tracker has a new home in the pre-release version of our new app! You can access it here.
In today’s article, we will focus on the process driving our investment decisions in the next period. While it’s easy to get swept up in all of the tariff drama and the market drawdown affecting everyone’s portfolio, we would like to pint out a couple of things.
First of all, investors are near a short term capitulation phase. This is supported by a multitude of indicators and behavioral patterns. Note that on Monday, the market rallied +8.5% in 30 minutes on the back of an unofficial tweet stating that a 90-day pause to tariffs is on the table. Then, despite this news being debunked, the market did not entirely give up all of its gains.
We would like to make 2 points here:
ANY piece of good news will send the markets screaming higher, in crypto-like fashion; investors are starved for any sliver of optimism;
The market did not decline any further despite China announcing an 84% tariff rate on U.S. imports in response to the 104% levy on imports from China by the U.S.
At these rates, trade is already frozen. Even if reciprocal tariffs go to 500%, it is not really going to make a difference from here on out.
Furthermore, there is some evidence of under-the-surface improvement coming from institutions and market makers. These have already been noted in our Daily Briefing, but we’d also like to bring them to attention here.
For the top 20 S&P 500 stocks, Dark Pool buying is still bearish (44.9%), but it’s an improvement from Monday’s dismal 37.8% average reading. Note the stocks being bid - besides “stable” earners Walmart (WMT) and Costco (COST), we find semiconductor makers Nvidia (NVDA) and Broadcom (AVGO). Both of the latter names are high risk plays.
SPY’s GEX — very telling as far as dealer gamma exposure goes — has just flipped positive. This is also the case for QQQ, a high-risk ETF comprised mostly of growth, tech and momentum stocks. Positive gamma exposure, as long as it lasts, is indicative of market makers buying dips and selling rallies, which would compress volatility and push prices higher — all things being equal.
The last time both SPY and QQQ had a positive GEX value was March 25’th. Since then, SPY has lost around -13%.
Sentiment is deep in extreme fear territory, on multiple metrics. 795/1000 top stocks are now “oversold” on a medium term horizon.
Additionally, hedge funds, CTAs and macro products have sold stocks at the most aggressive rate on record.
All of this is not an argument for dip-buying. It’s simply to say that probably dumping a stock portfolio indiscriminately is not the wisest decision one can make at the moment.
The proper way to proceed in this scenario is to screen a portfolio, position by position and evaluate each holding based on its own merits for inclusion. We’ve done just that today, and we’ll empower you to follow our process and apply it on your own.
First of all, we’ve set up a Watchlist specifically to screen for certain metrics within our portfolio. You can access the watchlist template here and link your own portfolio to it once you duplicate it on your profile (Actions > Duplicate ; then Actions > Link Setup > Your Portfolio).
The first view describes Dark Pools data, aggregated for 1 day to 1 month periods. We’re mostly looking at the 1M value, as this holds the most predictive power, but the trend of data is also important.
The average 1M Dark Pools index for our holdings is 54% (pretty good, everything above 55% is bullish), with only a single stock (BK) consistently below 45% (a bearish indication).
Note the declining trend in GDX as well, the weakest component in 1D data.
Next up, we’ll scan the options market for call and put walls, as well as GEX values. From this perspective, BK seems to have more reward than risk, while NVDA looks too balanced and risky for our liking. Overall, the portfolio looks poised to lose -9.3% or gain +20.8% in the next weeks according to the options market. The risk-reward is certainly encouraging.
The other interesting development is the action in the bond market. As we speak, yields are spiking. The 10-year yield is sitting at 4.43%, while the 30-year is pushing 4.9%.
This is a much more concerning development overall, as higher yields are more likely to cause a credit related event than a 20% drawdown in the S&P 500. We interpret the move as liquidation events in various funds which are forced to sell the assets that they hold as collateral in order to make good on their margin calls.
Sooner than later, the Fed may also intervene to calm down this situation, as an unraveling of the bond market is not what the current administration wants. Trump has already pressed Powell for rate cuts, so this new development in the bond market is really not what he wants to see.
That being said, we are under-allocated to bonds, and the current sell-off in TLT is a great time to add (slowly).
We have adjusted Price Targets and Stop Targets for all positions in the Sigma Portfolio to align with current realities. Besides chart levels we have also used the prices displayed in the Call Wall / Put Wall section, to help in identifying risk levels for each position.
The risk / reward ratio is not amazing, as we have dramatically reduced the theoretical upside to “bounce” levels for every stock. That is — the level where we think each position might find technical resistance and where we are inclined to sell.
The Ultimate Goal?
For now, the goal is to reduce downside potential in our portfolio, but also be aware of developing opportunities (like the long-bonds trade, which has very little risk associated). We are highly concerned about a potential recession, but simply selling stocks in a hole makes no sense today. Eventually, we aim to drastically reduce equity positioning, similar to what Enterprise is showing (zero allocation if necessary). We also take full blame for not heeding the warning of this model earlier — it was showing reduced exposure since early February.
Today’s trading will aim to achieve our goals, by closing the position in Gold miners on the rally, while simultaneously adding to bonds. At today’s market close we will execute the following:
Also, a big part of today’s process was setting exit targets for all of our equity positions. Normally, simply as a function of market dynamics, a rally is more likely than not (and a violent one at that). When it eventually arrives, for whatever reason, we will be sellers.