Portfolio Rebalance / March 13
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.
Following last week’s fundamental analysis of the markets, we’ll put our year-end 2025 price target for the S&P 500 in context. Major brokerage firms continue to maintain a median target of around 6.600, with Goldman Sachs most recently downgrading their growth assumptions and providing an updated estimation of 6.200. Despite short-term market fluctuations, we continue to prioritize our focus on fundamental factors, as these have historically provided the most reliable guidance for future performance.
Signal Sigma’s 6.450 target isn’t particularly bullish as it’s standing at the low end of this range. Our main assumption is that the economy will continue to grow, albeit in a more lumpy manner, accompanied by significant stock market volatility along the way. This view, expressed in early December 2024 did not echo the enthusiasm following Trump’s election and subsequent asset price surge. We’ve repeatedly stated since then that our portfolio did not offer the best in terms of risk and reward — but the market had other ideas and only seemed to go up.
At the moment, we are at the opposite side of this view, as the stock market undergoes a correctionary process. Take the following tweet as a vivid example of very bearish sentiment:
There are times in the market when the price action is the sole driver of further price action until technical exhaustion. We are now in that downward spiral phase, as dealer Gamma Exposure remains overwhelmingly negative.
Overall Dealer Gamma Exposure
Several well followed sentiment indicators seemed to suggest that sellers had become exhausted. The most striking statistic comes from AAII, where bearish sentiment above 55% for 3 weeks in a row had only been previously recorded in 2009, at the lowest point in the Grand Financial Crisis.
Yet our proprietary sentiment indicator has only recorded “Extreme Fear” just yesterday. While this points to an impending (and potentially face-ripping) counter-trend rally, we have to take a measured approach in portfolios. Today’s edition will try to map out a step by step process for navigating markets in the weeks and months ahead.
Asset Class Allocation
Today’s edition will only focus on the Equities asset class.
First of all, it is estimated that retail investors were net buyers during this downturn, according to Vanda Research. Buying accelerated during the downturn, as there is sufficient FOMO over “missing the dip”. The only problem was that the dip kept dipping — and some hedge funds kept selling (according to Goldman Sachs).
For now, this trade looks very “mechanical”, or “technical” if you will. There’s very little hard data to support a valuation compression of this size. Fundamentals have largely remained the same over the past month, and only “fears” of tariffs and inflation are driving the decline.
While the Atlanta Fed GDPNow tracker has fallen to alarming levels, spreads in the bond market are not confirming recession fears. Spreads between junk bonds and treasuries stand at some of the lowest levels of the past decade, despite the recent increase. This doesn’t stop some social media accounts from farming FEAR in order to drive engagement (the graphs below chart the same metric).
In this environment, many are asking:
Where does the correction stop?
and
Should I buy the dip or sell the rally?
And of course, the answer depends on each investor’s previous positioning and specific goals, but we’ll strive to offer a play-by-play analysis.
First of all, no major sell-off process has ever truly “bottomed” without our sentiment indicator hitting “Extreme Fear” readings. We’ve only just recorded “Extreme Fear” yesterday for the first time during this correction. Historically, it takes around 15 days on average for this indicator to trade around or below “Extreme Fear” values. Sometimes, it can take up to one month from the first reading to a definite exit. The good news is that the clock has started ticking on this bottoming process. It’s safe to say that selling is very near exhausted here.
Furthermore, seasonality indicates that stocks tend to bottom around March 12 — another soft indicator that we’re closer to the end of the correction than the beginning.
Going forward, our working thesis is that the market won’t fall off into an abyss with zero reflexive rallies along the way. But just in case it decides to do exactly that, our automated strategies’ exit point is $545 on SPY, the lower limit of the trading channel. Technical trading has served us well, especially in periods of uncertainty, where the market’s next move is anyone’s guess.
Should the market bounce at some point, the first logical “pivot” level is the 200-DMA, former support which could turn into resistance. If the rally fails there, then it’s really bad news for the bulls and a sign we need to de-risk in a hurry as well.
If the 200-DMA is reclaimed, the next Pivot level is the 50% drawdown retracement, currently around $585. Corrections that re-capture more than 50% of the decline usually go on to resolve fully. Given the current economic and political backdrop, we wouldn’t expect this to be the case, or at least not at first. Most likely, the 200-DMA will have to be confirmed as support before further gains can be made.
A summary of all potential scenarios can be seen in the chart below, with the most likely outcome starting with at least a reflexive leg up.
Now for the question of whether to buy the dip or sell a rally (whenever it comes) — Our main asset allocation strategy, Enterprise, is currently in “defensive” mode, almost equally split between treasuries, equities and cash.
This asset allocation is designed to reduce volatility, and is one we would most likely want to emulate in our portfolio as well. Since we are in a “trapped long” position, with 70% equities exposure, we would need to SELL into strength, at both pivot levels, before Enterprise changes its tune. In any case, we would not be aggressive dip-buyers, before support is confirmed at some level.
2. Sectors and Factors for a Bounce
At the current juncture, it’s only logical that whenever a bottom is reached, the sectors that would benefit most are the ones which have lost the most ground in the near term (relatively speaking). These are:
All of the other sectors are relative outperformers, and would not benefit disproportionately from a rebound rally.
3. Individual Stock Selection
Millennium Alpha has refreshed its portfolio on Tuesday, with some notable changes.
Closed Positions:
ALSN
NFLX
LRN
MPLX
CORT
Initiated:
ADP
RL
V
LLY
EXEL
The strategy has now undergone a -15% drawdown, which, though large, is to be expected from a high-risk model like this. Despite the drop, the system is only trailing its benchmark by ~2% over the last 3 months.
Factor exposure is pretty well diversified, with Small Caps and Growth stocks holding the top positions.
5. Trading in the Sigma Portfolio (Live)
After reviewing all of the above factors, it’s time to decide on the actual investing strategy for our real-life portfolio.
Our portfolio has taken a significant hit lately, despite our soft de-risking trading done in late February (we’re calling it “soft” due to not cutting exposure meaningfully, but relying on rebalancing exposures instead). However, all losses are in the rear-view mirror and we will focus on what’s ahead.
We will now increase allocation to growth and tech stocks, which have taken enough of a beating and, as a result, offer the best risk-reward going forward. Overall equity risk allocation will not change meaningfully.
Automated Strategies and Market Outlooks
The Sigma Portfolio (Live)
There will be quite a bit of selling and buying planned for tomorrow, but the overall equity allocation only changes by 5% (we are adding to our risk exposure from ~66% to 71%. The trades are as follows:
BUY Orders:
BUY MELI (Initiate 5.70% Position)
BUY COKE (Initiate 5.01% Position)
BUY LLY (Initiate 4.59% Position)
BUY NVDA (Add 2.33% to Position)
BUY FTNT (Add 2.32% to Position)
BUY APP (Add 2.27% to Position)
BUY META (Add 1.13% to Position)
BUY RL (Add 0.62% to Position)
SELL Orders:
SELL NFLX (Close Position)
SELL MPLX (Close Position)
SELL ALSN (Close Position)
SELL FTDR (Close Position)
The Sigma Portfolio Tracker is available in here.
In total, we stand to gain $25.281 by risking $5.277 if our targets are correct. If there’s any silver lining to this correction, it’s the greatly improved risk-reward equation.
We will adjust Factor and Sector exposure after trading is completed.
If you have any questions, please contact us using your favorite channel. Have a great week everyone, and happy investing!
Andrei Sota