Continue to Profit, but Prepare for Volatility
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Continue to Profit, but Prepare for Volatility
April 2023 monthly edition
Hi Antagonist community! Welcome to the April 2023 monthly edition.
Here’s what we’ll cover today:
March Performance: Rally Time
2 sectors were the “rising tide.”
1st-Quarter Performance
Ultra-hot tech stocks.
3 sectors are carrying the market.
April Outlook
History and conditions give us conflicting information.
A key leading indicator points to volatility in the near term.
Plan for April
Upcoming: A Strategy for You and Your Kids
March Performance: Rally Time
The big stories in March were the collapse of Silicon Valley Bank and Signature Bank, the second and third largest bank failures in U.S. history, respectively. Credit Suisse was also on the brink of failure, but UBS swooped in to acquire it.
Investors, however, shrugged off those events quickly. After pulling back in the middle of the month, U.S. stocks ripped back. All 3 major indexes finished positive with the NASDAQ leading the way.
March Performance
NASDAQ +6.7%
S&P 500 +3.5%
Dow Jones Industrial Average +1.9%
Small caps were the exception as the Russell 2000 finished down 5%.
Crisis hedges were also big winners with gold gaining 7% and silver rocketing 16%.
Crude oil appears to be bouncing back in a big way. It lost 3% on the month but has soared 13% since March 17.
2 sectors were the “rising tide.”
I explained in the March 25 edition of Over the Weekend that in a remarkably odd twist, tech stocks became investors’ safe haven as they fled from banks.
The technology sector jumped almost 11% while financials experienced a near double-digit drawdown.
This table includes the performance of all the sectors of the S&P 500 in March:
A closer look at the S&P 500’s gains
Regular Antagonist readers know that I don’t like how top-heavy the S&P 500 has become. Among other problems, its market-cap weighting provides a distorted view of the overall market. For more details on why I feel this way, see this article, Saturday’s Over the Weekend, and this tweet.
The following chart is a good visualization of what’s actually driving the market. It shows each sector’s March performance compared to the S&P 500.
Please note that this is a relative, not absolute performance comparison. For example, Technology (purple column) was up almost 11% last month, which was 7 percentage points higher than the S&P 500. That difference is what’s reflected in the chart.
Even though 8 of the 11 sectors were positive in March, technology and communication services were the proverbial rising tide that lifted all boats. Only those 2 sectors performed better than the overall increase of the S&P 500.
1st-Quarter Performance
CNBC provided a nice summary of the first quarter (January-March):
The S&P 500 concluded a topsy-turvy — yet winning — first quarter of 2023 on Friday, overcoming a shock to the U.S. banking system in March to rise around 7%. The tech-heavy Nasdaq Composite proved to be the real standout, soaring nearly 17%. The 30-stock Dow Jones Industrial Average, meanwhile, eked out a roughly 0.4% gain.
As in March, Technology was the big winner for the quarter. Here are some noteworthy performers:
Nvidia (NVDA)
Chipmaker Nvidia (NVDA) was up an incredible 90% in just 3 months. The explosion of artificial intelligence has been a massive driver for the stock as both its hardware and software are a key part of AI adoption. For example, ChatGPT was trained on a Microsoft-built supercomputer that used Nvidia chips.
Meta Platforms (META)
Meta Platforms (META) has soared 76% so far in 2023. In response to slowing revenue growth, the company has sharply cut expenses, most notably by reducing staff. It laid off 11,000 people in November and announced in March that it will cut another 10,000 jobs. That’s terrible news for employees, but investors love the company’s emphasis on efficiency.
Advanced Micro Devices (AMD)
Another chipmaker is also flying high. Advanced Micro Devices (AMD) gained 51% in the 1st quarter as the company continues to take market share from Intel (INTC).
Also, similar to NVDA, the company is benefitting from AI adoption. CNBC reported, “In the second half of this year, AMD is expected to launch its next-generation supercomputer processor, which can be used for large language model applications.”
3 sectors are carrying the market.
The rising-tide trend we saw in March holds true for the quarter as well. Here’s a look at each sector’s 1st-quarter performance:
While 7 out of 11 sectors are positive on the year, it’s really just 3 that are driving the market. Only Technology, Communication Services, and Consumer Discretionary are beating the S&P 500’s overall returns—and they’re accomplishing that by a significant margin.
The chart below shows each sector’s first-quarter performance compared to the S&P 500. Like the chart in the previous section, it shows relative, not absolute performance. For example, Tech (purple column) is up almost 22% on the year, which is 15 percentage points higher than the S&P 500.
As I mentioned in Saturday’s Over the Weekend, I’m writing an article about ETFs that don’t use market-cap weighting like the S&P 500 does. If you’re not an Antagonist subscriber, be sure sign up now so you don’t miss it.
April Outlook
The big question for April is if U.S. stocks will to continue to rally, even if they cool off a bit.
It’s impossible to answer that question with absolute certainty. The best we can do is look at history, current conditions, and leading indicators.
History and conditions give us conflicting information.
While past events are no guarantee of future performance, the stock market is cyclical. Therefore, history can provide helpful clues on what we can expect.
On the positive side, we’re in a presidential election year, and that tends to be bullish for stocks.
According to the 2021 Dimensional Funds report, the market has been favorable overall in 20 of the 24 election years from 1928 to 2020, only showing negative returns four times.
(Source: The Balance and Matrix Book 2021)
Of course, there’s much more happening right now than an election. When we look back at times when the stock market exhibited similar conditions to our current one, history isn’t so bullish.
In the March 30th edition of his Lead-Lag Report, award-winning financial researcher Michael Gayed explained why current market fundamentals are concerning.
Gayed also pointed out that big rallies, like what we’ve seen so far in 2023, often mark the finale before a drawdown. Here’s what he said:
There’s a long history of equities demonstrating one last big burst of optimism and risk asset buying before the party finally comes to an end. I’m watching for something similar to happen in 2023.
On a side note, if you’re not subscribed to Gayed’s Lead-Lag Report, you are missing out. His content is like a master class on finance and investing. I’m not compensated in any way for saying that either. I’m just a huge fan of his work and have benefitted greatly from it.
A key leading indicator points to volatility in the near term.
Gayed is also the master of leveraging ratios as leading indicators. One of his award-winning papers discusses how the ratio of lumber to gold informs us when to be aggressive and when to be defensive.
Here’s Gayed in his own words:
Lumber’s sensitivity to housing, a key source of domestic economic growth in the U.S., makes it a unique commodity as it pertains to macro fundamentals and risk-seeking behavior. On the opposite end of the spectrum is Gold, which is distinctive in that it historically exhibits safe-haven properties during periods of heightened volatility and stock market stress. We find that the relationship between Lumber and Gold helps to answer the critical question of when to “play defense” and when to “play offense” within the context of active portfolio management.
That lumber-to-gold ratio is now signaling that volatility is approaching. Check out the weekly chart below, especially the highlighted box in the bottom right.
When the lumber:gold ratio is rising, it means that lumber is stronger relative to gold. When it’s falling, the opposite is true.
Since the lumber:gold ratio is now in a downtrend, you should consider being more defensive in your portfolio allocation. Gold is the most common way to do that. Investors flee to the metal for safety when stocks become too volatile. This is also known as “risk-off” behavior.
Plan for April
If your portfolio allocation doesn’t include any chaos hedges, you are at risk of significant losses during a market correction. This is especially true if you are 100% invested in stocks via index ETFs or mutual funds. The latter is common in employer-sponsored retirement plans.
One of the premises of The Antagonist is that leaning exclusively on a buy-and-hold strategy will cause you to miss out on profits and leave you helpless against a sharp drawdown.
Employing other tactics alongside buy-and-hold will not only supercharge your returns during bull markets, but it can also generate profits during bear markets (or at least reduce the losses you would otherwise experience).
The Antagonist’s model portfolios provide live examples of how to do this. Here’s a brief reminder of their strategies and how I’ll manage them in April.
Challenge Portfolio
Our aggressive Challenge Portfolio leverages a basic options strategy to generate short-term returns and hedge against risk and volatility…and even profit in those conditions!
In April, my plan is to select spread options that expire in 5-14 days. With volatility likely on the horizon, my goal is to catch the trend, hit a quick profit, and get out. I’ll also employ strict stop losses to minimize the damage if a trade goes against us.
Blend Portfolio
Our long-term focused Blend Portfolio uses a growth-at-a-reasonable price (GARP) strategy. It holds stocks and ETFs that you can easily trade without commissions through the major discount brokers (e.g. Fidelity, Schwab, Vanguard, etc.).
The Blend Portfolio also includes hedge positions to reduce risk while maintaining high profit potential. These have performed very well since we added them.
Our other positions align with macro trends that are developing now and will provide strong tailwinds for years to come.
In April, I’ll continue this approach and announce new stocks/ETFs on the third Sunday of each month per our schedule.
Both the Challenge and Blend portfolios are designed to profit under any market condition. You can gain full access to all their current positions, dashboards, and future recommendations by becoming a premium member. Try it for free!
Upcoming: A Strategy for You and Your Kids
Next week, I’ll detail a fantastic ETF strategy that’s completely free to use, takes only 10 minutes per month to execute, and is so simple that a child can learn it…and I mean that literally. My 4 kids all use it in their own accounts.
Both backtesting and real-money portfolios have shown that this strategy handily beats the S&P 500 over a full market cycle (bull and bear market).
I’ll provide the full details in the article, but I’ll say this for now. This strategy’s success stems from minimizing losses during a bear market, which is where a buy-and-hold approach fails.
If you’re not yet a subscriber, sign up now so that you don’t miss the article.
That’s it for this monthly edition. Thank you for reading and for choosing to be part of The Antagonist community! I’m grateful to have you here.
Sincerely,
Jason Milton
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Disclaimer: I’m not a stockbroker or financial advisor. I cannot and do not provide personal investment advice, and The Antagonist should never be interpreted in such a way. The Antagonist is an online financial literacy resource. All materials from The Antagonist are intended for informational and educational purposes only. They are not, nor are they intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested.
My recommendations represent the actions that I plan to take or have made based on my analysis and what works for me. The information contained on this website has been prepared based on publicly available information and proprietary research. The author does not guarantee the accuracy, reliability, or completeness of the information provided in this document. All statements and expressions herein are the sole opinion of the author and are subject to change without notice. I will not be liable for any losses and damages in connection with the use of my content. Any investments that you make are your responsibility.
Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. The Antagonist is not in the business of transacting securities trades or an investment advisor. Therefore, it is imperative that you perform your own due diligence before replicating any of my trades. Also, options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. You must read Characteristics and Risks of Standardized Options carefully before investing in options.
Continue to Profit, but Prepare for Volatility
I’m gonna have to google “Chaos Hedging”
Lumber to Gold ratio sounds interesting