WOTE Asset Management: December 14, 2023
Flash update across strategies in the wake of the Powell Pivot.
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.
Equity View Update
I have said ad nauseam that the biggest threat to the structural bear case for equities was the Powell Fed not adhering to the anti-Burns reaction function it has communicated and adhered to since June 2022. I have also said ad nauseam that a 50dma thrust signal would officially mark the end of the SPX bear market that began in January 2022 from 4818.62. Yesterday the Powell Fed abandoned the anti-Burns reaction function and barring an intra-day collapse in equities today we will more than likely get the 50dma thrust signal. To use a hunting analogy, yesterday’s FOMC meeting and press conference was a shot to the lungs of the bear case, while the upcoming thrust signal is the final shot to the head.
Conclusion:
I am upgrading my Structural Outlook from Bearish to Neutral. I am not moving it up to Bullish because equity market valuations and corporate margins remain too high even assuming a better economic outlook for 2024. Further, due to persistent 5-10% fiscal deficits and still-sticky supercore inflation, it is highly likely inflation becomes a problem again in 2025.
Clearly, with the benefit of hindsight financial markets have been front-running this latest Powell Pivot for months now. I’m still in shock that the 50dma thrust signal waited this long to confirm, but it is what it is. With a 50dma thrust signal in place, the UST curve collapsing, CDXs collapsing, risk-on areas of the equity market ripping, and the “Policy Put” sitting beneath the economy and financial markets (i.e. rate cuts, RRP/TGA QE, and moar fiscal stimulus), the weight of the cross-asset market evidence is DECISIVELY bullish for equities on a cyclical basis looking out over the next 2-12 months.
The tactical outlook is a bit more nuanced, but not by much. There are too many macro/FED bears like me that took Powell at his word about the anti-Burns reaction function and now need to adjust for equities to fall more than -5% from current levels in a seasonally bullish time of year. But two things: 1) OPEX is tomorrow, and it’s a big one. So, with everyone and their brother chasing this market higher to get into position for a bullish cyclical move in stocks, there is a micro-time frame set-up here for a modest pullback over the next week. 2) The history of 50dma thrust signals is that the market ALWAYS consolidates post signal, it’s just a matter of how and for how long. In May-June 2020 SPX went parabolic post-signal, but then sharply corrected back to the signal level before moving significantly higher; whereas in February 2012, January 2013, and March 2016 SPX consolidated for 1-4 weeks before moving higher. In 2012 and 2016, like 2020 SPX ultimately pulled back to around or slightly below the signal level, but only after first moving to new highs. In 2013 SPX never looked back.
As bullish as the cyclical outlook is for 2024, my assessment remains that the economic backdrop is weaker than it appears (which is likely a big reason for the Powell Pivot so soon after a decisively hawkish communication package), and this is likely to keep the post-50dma thrust environment relatively choppy, ala mid-2016.
Positioning Update
Adding it all up: With the Structural Outlook rated “Neutral”, the Cyclical Outlook “Bullish”, and the Tactical Outlook “Bullish”, my positioning framework calls for a strategic 60/40 equity weight of 70% versus the 60% benchmark weight (the WOTE US 60/40 benchmark is 60% SPY, 40% BIL), and a strategic long/short equity weight of 200% versus the 100% benchmark weight (the WOTE US Long/Short Equity benchmark is 100% SPY). Given the very near-term tactical dynamics discussed above, I will not move to those strategic weight targets until there’s a pullback or a multi-week consolidation. As much as it *feels* like the market will never pull back again, when the macro is this choppy ala 2016, it pays to be patient. So, for now I am moving the WOTE US 60/40 and US Long/Short Equity strategies to neutral (60% SPLG for 60/40, and 100% SPLG for Long/Short) so that I can allow the market to settle out here in the coming weeks without taking performance risk in either direction. If the market rips from here in a June 2020-like parabola that presents an opportunity to tactically underweight equities, great. If the market immediately corrects 5-10% and allows me to load up, great.
Back on December 4, in the WOTE US 60 strategy I started legging into the equal weight trade I believe will dominate the market in 2024. I thought Powell would push rate cut pricing into 2H24 and that pushback would provide an entry point for the rest of the equal weight positioning, but clearly I got that exactly wrong. Instead, the equal weight position has rocketed higher on the back of aggressively dovish FED policy easing. Unlike the broader market here where I think there is a tactical opportunity to manage around the consolidation, given the aggressiveness of FED policy easing I do not want to get cute with my positioning within WOTE US 60. As such, I made the following changes today:
Brought KBWB and RSPF up to a max weight of 5% each (10% max weight per sector)
Initiated a max 10% position in Energy via RSPG
Initiated a max 10% position in Real Estate via RSPR
Initiated half positions of 5% each in Discretionary (RSPD) and Healthcare (RSPH)
Healthcare is the only defensive sector I want to own here, as I believe 2024 is going to trade very risk-on from a sector perspective. Equal weight Healthcare is just so oversold that it should perform well regardless of macro, especially if there is a bit of a growth scare in 1H24
Sold SPLG entirely (was at 50%) and brought the RSP position up to 60% from 45%
I want to sit on the RSP position while I wait and watch how the various equal weight sectors trade. Tech looks very good and could be my next position, but is too overbought to initiate here. Industrials look meh, Utilities and Staples are very weak, Materials are so-so, and Communication is a mixed bag. My preference outside of Tech is to add to RSPD and RSPH on pullbacks.
Current Equity View
Structural Outlook (1-2 Years): Neutral (upgrade from Bearish)
Cyclical Outlook (2-12 Months): Bullish (upgrade from neutral)
Tactical Outlook (4-8 Weeks): Bullish (no change)
Current Positioning
See December 7 note for prior positioning.
WOTE US 60/40: 60% SPLG, 40% BIL (up from 55/45)
WOTE US 60: 10% Financials (5% KBWB, 5% RSPF), 10% Energy (RSPG), 5% Healthcare (RSPH), 5% Discretionary (RSPD), 10% Real Estate (RSPR), 60% RSP (equal weight SPX)
WOTE US 40: 100% BIL (no change)
WOTE US Long/Short Equity: 100% SPLG (up from 50%)
WOTE Special Ops: Modest sized 12/22 SPY $470p position.