Q4 2023
December 20, 2023
We’ve been taking profits in the month of December, and are running slightly below target on both the equity and treasury side. For now, there’s no reason to be more aggressive with the selling, but we do need to cut one more position this week - the price target has been reached for Eagle Materials Inc (EXP). By adjusting its technical chart accordingly, we can understand there is little upside left (this method also helps a lot with FOMO).
Executing the following order at today’s market close:
SELL 100% EXP (Close Position)
December 15, 2023
The rally in equity markets is getting long in the tooth. It is time to take profits on those positions which have limited upside and rotate into the most attractive opportunities.
At this juncture, that means selling most of our QQQ position and deploying some capital to our Energy related names: XOM and RRC, which exhibit an attractive risk-reward profile.
Overall, the equity exposure in the Sigma Portfolio will drop by 8% to around 56%, slightly below the usual target (60%).
Executing the following orders at market close for the Sigma Portfolio:
SELL 65% QQQ (Sell 65% of Existing Position Size)
BUY 1% XOM (Add 1% to Existing Position)
BUY 1% RRC (Add 1% to Existing Position)
December 13, 2023
It appears that our thesis laid out in early September is playing out almost as anticipated (back then we set a 2023 year-end price target of $477 and have since moved it 10 points lower, on fundamental grounds).
Automated models are as bullish as possible (98% system exposure) and greedy sentiment is making our palms sweat in the short term. Profits need to be booked at some point, but we also don’t want to miss out on further gains.
We need to balance 2 distinct time frames: a 1-year perspective (longer term view - laid out in this article) and a short-term perspective. There is nothing to indicate that we need to become exceedingly defensive just yet, but we can calculate risk/reward in the equity market relative to treasuries.
If one believes that fair value for SPY at year-end 2024 is $470, then it makes no sense to invest in equities at the moment, with just 1.27% upside available for the whole of next year. In an alternate “bull market scenario”, where SPY runs up to $508, then 9.46% can still be realized in potential gains.
However, there is substantial risk involved in getting that 9% return. 1 Year US treasuries currently yield 5.14% risk free. The equity risk premium sits at 4%. Therefore, an investor should require at least a 9.14% potential return in order to justify owning stocks over bonds (5.14% + 4%). Given that we arrived at a $508 target for SPY by making optimistic assumptions, there is also a substantial possibility of disappointment involved.
As we said earlier, it’s time to take profits and move closer to our target allocation (60% stocks - 40% bonds). Let’s review our present positioning:
The Sigma Portfolio contains a couple of key major sub-components (All ETF positions are classified as medium risk due to the diversification they offer):
CLICK HERE TO SEE THIS PORTFOLIO SET UP IN THE TRACKER WITH RISK-REWARD AND CORRELATIONS
EQUITIES (70% total weight):
HIGH RISK (23%):
NVDA
NOW
MSFT
GWW
MEDIUM and LOW RISK (39%):
EXP
QQQ
MTUM
IWM
LLY
PRGS
AMGN
HEDGE - Energy (8%):
XOM
RRC
BONDS (25% total weight):
TLT
HYG
SHY
GOLD (5% total weight):
GLD
We can determine the statistical risk-reward for each position using the Portfolio Tracker. Click here to access our own tracker for the Sigma Portfolio and understand how the positions contribute to the overall exposure profile.
In total, we stand to gain $12.922 risking $9.073 if our targets are correct. Positions that require attention are RRC (exceeding a stop to the downside and getting highlighted) and NOW, where potential reward exceeds potential risk.
Correlations to Factors and Sectors can be found on the next tabs:
As can be seen, correlation to Nasdaq (QQQ), Momentum Factor ETF (MTUM) and Growth Stocks (IVW) is high on the factors side, while Tech (XLK) and Consumer Discretionary (XLY) have high readings. This leaves our portfolio prone to a rotation trade, as some factors have had a great run so far.
In order to improve risk / reward and reduce some QQQ and XLK correlation, we can take profits in NOW. We will use the proceeds to further bring our portfolio more in line with our 60-40 target and buy shares in low risk SHY (iShares 1-3 Year Treasury Bond ETF).
Executing the following orders at today’s market close:
SELL 100% NOW (Close Position)
BUY 6% SHY (Add 6% to Existing Position)
Here’s the updated asset class allocation after the trades go through:
December 11, 2023
At today's market close, we are taking another defensive action in our live portfolio. 2 single stock positions (AMD and MCD) look to be nearly priced for perfection and offer little further upside. We like both companies, but we'd rather wait for a better entry point in 2024 to re-initiate exposure. For now, it is time to take profits.
To partially offset the loss in equity risk exposure, we are adding 2% to our position in IWM, which still has technical upside, despite being overbought.
In any case, swapping concentrated stock exposure for a broad market ETF reduces the overall risk in the portfolio while still maintaining upside for the year-end rally. A similar effect can be achieved by selling covered calls on existing positions.
We carried a slight 4% leverage which will now be eliminated. On a macro level, our asset class allocation will shift to 70% equities, 16% Long and Mid Term Bonds, 5% Gold and 9% Short Term Bonds (cash equivalent).
Executing the following orders at market close for the Sigma Portfolio:
SELL 100% AMD (Close Position)
SELL 100% MCD (Close Position)
BUY 2% IWM (Add 2% of Portfolio Value to Existing Position)
December 5, 2023
In Monday's newsletter, we wrote:
"We will slowly scale out of positions that have reached their fundamental price targets. As a replacement to these positions, we will add to short term treasuries and broad market ETFs with as little technical downside as possible."
Executing the following orders in the Sigma Portfolio at today’s close:
SELL 100% FICO (Close Position)
BUY 3% SHY (Add 3% to Position)
BUY 4% IWM (Initiate 4% Position)
As reference, here is FICO's adjusted chart, justifying the SELL for the time being. Booking 33% profits on this position.
November 14, 2023
With the mellow CPI print behind us, SPY is trading right up to our isolated resistance level of $449.
While we are fully allocated to "risk-on" names, there is a very interesting -10% dip in one of our energy picks that we'd like to trade opportunistically - RRC (Range Resources).
We are also slightly increasing our bond duration by swapping 2% from SHY (1-3 yr bonds) to TLT (20+ yr bonds)
Executing the following orders in the Sigma Portfolio at today’s close:
BUY 2% RRC (Add 2% to Position)
SELL 2% SHY (Sell 25% of Position)
BUY 2% TLT (Add 2% to Position)
In aggregate, our positions now have a balanced risk-reward profile. As the market rises further, we will be looking to book some profits.
November 7, 2023
In order to better align our portfolio with the Enterprise strategy and considering our outlook for the next 6 months, we are executing the following orders at the close:
BUY 5% TLT (Add 5% to Position)
SELL 10% GLD (Close 66% of Position)
We are inclined to add even more long-term bonds exposure on a confirmed breakout. For now, this remains just a trade. We’d like to see the USD break down lower before committing more aggressively to bonds.
November 1, 2023
Let’s review the make-up of the Sigma Portfolio before discussing today’s changes. We have a fully allocated portfolio, with minimal leverage employed. Our Asset Class allocation is:
73% Stocks
17% Bonds
15% Gold
-5% Cash (leverage)
We do not own any commodities. For the Equities asset class, the breakdown for the 12 positions is as follows (percentages of total portfolio value):
QQQ - 20%
MSFT - 8.4% (millennium position)
MTUM - 6%
NOW - 5.4% (discretionary position)
FICO - 5% (millennium position)
NVDA - 5% (millennium position)
LLY - 5% (discretionary position)
XOM - 4% (discretionary position)
MCD - 4% (discretionary position)
GWW - 3.45% (millennium position)
RRC - 2.2% (discretionary position)
AMD - 1.8% (discretionary position)
In total, we are holding 26% ETF exposure, 22.4% single stocks selected on a discretionary basis, and 24.6% single stocks selected from our automatic systems.
In order to get more aggressive during this drawdown and increase risk, without commiting much more capital, we will start rotating away from the broad ETF exposure to more focused single stock positions. As such, we will cut QQQ to 14% from the current 20%. We will revisit our investment in Progress Software (PRGS), using a nice entry point at ~$50 and offering 18% upside to our $60 Price Target. AMGN is one of the stocks from our screener session earlier that is also found in Millennium Alpha’s portfolio, so we will initiate this position as well.
SELL 6% QQQ (Reduce Position Size by 30%)
BUY 3% PRGS (Initiate 3% Position)
BUY 3% AMGN (Initiate 3% Position)
We would also like to re-initiate our position in EXP, which was stopped out last week. Since then, the stock has risen back up above the stop level.
BUY 2% EXP
Overall, our equity exposure will rise to 75% from 73% currently. We are broadening our portfolio by adding 3 positions in anticipation of the fact that market breadth will improve, and concentration in the top names will be less intense. We are looking to offload Gold and add treasuries as soon as it’s technically feasible.
October 25, 2023
We've been giving the market the benefit of doubt for the past couple of sessions. While we need to avoid panic selling when markets are extremely oversold (like they are now), we also can't ignore our own stop loss levels.
Several positions have hit these levels and we are going to close them. Expect to see them added back again when the market rebounds. GWW is also a position that we can add to, given it's in better technical shape. Overall, our equity exposure will come down by 7%. Bonds exposure will be reduced by 5% as well, since TLT has been trading below the stop level for a while.
Executing the following orders in the Sigma Portfolio at today’s close:
BUY 2% GWW (Add 2% to Position)
SELL 100% EXP (Close Position)
SELL 100% ZION (Close Position)
SELL 50% TLT (Reduce 50% of Position)
There is about 2.5% of downside left on SPY to the next level of support ($408). QQQ is sitting on support ($349) as we speak. The whole risk-off move today appears systemic and not fundamentally warranted.
October 24, 2023
Today’s drop in Fair Issac (FICO) presents us with a buying opportunity. But in order to not change the overall make-up of the portfolio, we’ll sell MTUM to make room for the extra shares. FICO is correlated to MTUM primarily, so that’s why we’re making this replacement.
We will execute the following orders for the Sigma Portfolio at the close:
SELL 2% MTUM (Reduce Position Size by 25%)
BUY 2% FICO (Add 2% of Portfolio to Position)
October 12, 2023
In The Sigma Portfolio, we are adding 1% to our position in XOM, bringing the total equity risk exposure to 80% after the trade.
Executing the following trade at the market close:
BUY 1% XOM (Add 1% to Position)
October 10, 2023
At the end of today’s session, we will again add to equity exposure by expanding our position in the Momentum Factor ETF (MTUM). This will take our overall equity risk allocation from 75% to 79%, nearly completing our desired positioning for the next 6 months.
Executing the following orders in the Sigma Portfolio at today’s close:
BUY 4% MTUM (Add 4% to Position)
October 5, 2023
In The Sigma Portfolio, we are adding 2% to our position in MCD (McDonald’s Corporation) and initiating GWW (WW Grainger Inc) with a 2% allocation as well. These trades will take us from 71% equity risk exposure to 75% exposure.
Executing the following trade at the market close:
BUY 2% MCD (Add 2% to Position)
BUY 2% GWW (Initiate 2% Position)