Disclaimer
In no way, shape, or form should my views and positioning be construed as investment advice. They are strictly for informational purposes only. I publicly document my personal investment process to apply as much pressure on myself as possible, not to convey advice to others, as everyone’s individual financial circumstances, portfolio positioning, investment process, strategy, etc are extremely unique. Every single piece of information communicated publicly and privately via The WOTE should be viewed as exactly that: a piece of information.
Discussion
As discussed earlier today in The SPX Sector Report, it is very clear from observing the relative strength trends within the Cyclicals Group that economic weakness is forthcoming, but this forthcoming weakness has yet to be reflected in the Defensives Group, likely due to the fact economic data have yet to move from “soft landing” to “hard landing” status, defined by me1 as the YoY rate of change in the 4-week moving average of initial jobless claims breaking out above 20%. This soft landing backdrop is the perfect storm for the NDX Group as the economy slows just enough to bring down P/E-compressing long-term interest rates; but once hard landing data start to hit, the rotation into the Defensives Group could be a bit rapid given the intense crowding into NDX as illustrated below.
I’m still in the process of fleshing out my 2024 outlook, but my conviction is quickly building that THE trade of 2024 will be long RSP/short QQQ, while the trade within the trade will likely be long the Defensives Group versus short QQQ. RSP is safer because it includes the impact of the Cyclicals Group in the event the economy outperforms to the upside, but either way I believe the probability is high that QQQ underperforms the rest of the market in 2024 and even a bombed out Defensives Group will catch a sturdy relative bid.
The Portfolio
For reference, the WOTE US 60 portfolio is a fully invested equity portfolio with an S&P 500 benchmark, and as discussed yesterday it is 100% allocated to SPY as I wait and stalk. As outlined in detail by Cem Karsan, the NDX Group is likely to remain well-bid into year-end and early 2024, so there is a very good chance RSP continues to underperform for awhile. However, I know I will not catch the bottom here so over the course of January I will look to start averaging into a combination of RSP, RSPH (equal weight Healthcare), RSPU (equal weight Utilities), RSPS (equal weight Staples), KBWB, and KRE. Preliminarily, I would like to see the following portfolio composition (max sector allocation: 10%) into the late January/early February blow-off top:
Defensives Group Basket: 30% (10% each in RSPH, RSPU, and RSPS)
Bank Basket: 10% (5% each in KBWB and KRE)
RSP: 30%
SPY: 30%
I’m still mulling this over. I’ll likely be quicker to build out the Bank basket, as I believe that trade is ready to move day 1 of 2024; but I’ll be slower with the Defensives Group, as relative strength is very poor here and will take some time to repair barring an immediate rolling over of the US economy. I’d like to be 60% RSP at some point, but I don’t fully trust the trade at this point and want to see it prove itself before I allocate the 30% that will sit in SPY. But that’s just my current thinking and it’s likely to change over the next month.
Exhibits
The equal weight SPX Index (SPW) only goes back to 1990, unfortunately, but as illustrated in the chart below SPW goes in waves of out- and under-performance. Even if this is 1995 or 1997 on the way to even greater underperformance, there is still a trade to be had in the near-term. More likely, IMO, given the macro backdrop this is more akin to the 1999/2000 period where SPW makes a significant multi-year bottom here in the next 4-12 weeks.
Discussed in detail in the October 15 WOTE Report.