Discussion
WOTE US 60/40, WOTE US Long/Short Equity, and WOTE Special Ops is max long across the board at 80/20, 300% long, and 100% invested in SPY May/June $503/$495 calls, respectively.
This positioning is the result of the current bullish outlook across the structural (2 years), cyclical (12 months), and tactical (8 weeks) durations I manage to.
As long as the US economy is outside recession and the Fed isn’t actively pushing to engineer one, the structural outlook will remain bullish, implying minimum equity exposure in WOTE US 60/40 of 60%. The cyclical outlook determines whether 60/40 exposure rises to 70/30 or 80/20. Even with the hawkish shift in FED policy currently underway, the cyclical outlook for equities remains firmly bullish as a result of election year dynamics that ensure Janet Yellen will unleash her $900+ billion TGA bazooka at financial markets at some point between now and Election Day, perhaps starting as soon as the May 1 QRA. For a slow-moving strategy such as 60/40, staying max overweight equities with an eye toward Election Day remains warranted.
But for the Long/Short Equity strategy, ‘at some point’ is the operative phrase with regard to Yellen’s TGA bazooka.
As detailed in yesterday’s Market update, there is a wide open window of weakness for equities between now and May 1…likely extending out to the June 12 SEP announcement. If Yellen does not deploy the TGA on May 1, and on the same day the Fed hints at no cuts and potentially hikes coming in the June 12 SEP, there is clear-cut downside to SPX 4500 by June 12.
Once SPX bounces back to its 20dma in a relief rally early this week, I’ll likely downgrade the tactical outlook to bearish in preparation for a move down to SPX 4700-4800 by May 1 (5100 —> 4800 = -5.8%, warranting a bearish tactical rating).
WOTE US 60/40 will not position for this tactical weakness (per the positioning framework below), but WOTE US Long/Short Equity will, despite the positioning framework recommending otherwise (the lowest Long/Short exposure with a bearish tactical outlook inside of a bullish structural/cyclical set-up is 200% long).
Given the heightened volatility that’s entered the market and the associated trading opportunities that will likely remain in place until June 12, I’m going to temporarily shift WOTE US Long/Short into ‘trading mode’ that will use the WOTE Special Ops positioning framework to manage exposure.
With the tactical outlook bullish for a move back to at least $514 on SPY, and ‘SPX price action’ (a catch-all, black box rating overlay) firing off decisively bullish signals in the form of bullish breadth/CDX divergences, right now I want Long/Short and Special Ops in a maximally bullish position…albeit on an extremely short leash with an eye toward a quick flip to a bearish tactical rating circa SPX 5100-5200 in the coming days.