WOTE Asset Management: January 4, 2024
FED put a knife in the SPX parabola, raising the probability that Treasury issues a hawkish QRA on January 31 to take advantage of the drop in rates. Back to neutral for now while we reassess.
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
The start of this trading year has been a surprise. Indigestion after a big rally is commonplace after a series of big breadth thrust signals, but the fact the Fed came out in the first two trading days to put a decisive fork in the rally was surprising given recent dovish communication. The December 21 WOTE Report (below) flagged the January 3 FOMC minutes as a potential downside catalyst, but did not think the Fed could do much given it appeared the bond market was running the show. We were wrong.
With positioning not as full as we were looking for to get tactically short, but full enough for an uptick in rates and an incrementally more hawkish FED to catalyze a pullback, we want to get into a neutral position that allows us to react to whichever direction the market chooses to take from here. In WOTE US 60/40 that entails getting back to a 60/40 benchmark weight, in WOTE US Long/Short Equity getting back to 100% SPY, and in WOTE Special Ops getting back to 100% cash. YTD performance (below).
Special Ops is an options-based tactical trading strategy that comprises a tiny portion of the overall portfolio, and is thus traded very aggressively, routinely fluctuating +/- 30-50%. For instance, from the time the IWM call position was initially established on 12/19 to 12/27 the portfolio was up 38% before falling back to flat with initiation by 12/31. We had very high conviction we would see the continuation of the blow-off top into January 17, so we exhibited patience with the position and subsequently paid for it with a -49% YTD return out of the gate. This is incredibly disappointing given the set-up we thought was clearly forming to tactically short equities sometime in late January, but it is what it is. Clearer high-conviction set-ups will emerge in the coming weeks and months, so for now we’re sitting in cash while we step back and reassess the landscape.
At the equity index level right now there is no clear set-up to take an aggressive position one way or the other. The bullish flows that were likely to persist into January 17 are still there, and sentiment has pulled back sharply very quickly, so it would not be a surprise to see another push higher before a larger correction post-January 17. As such, we don’t want to short/underweight equities right here, especially given the Yellen/Brainard “put” that sits beneath this market. Typically a topping process entails an initial leg down followed by a bearishly divergent rally that sets up the more forceful flush lower. We would look to get short on that rally. But if instead the market continues lower from here, once a fully oversold sentiment condition develops we would look to go overweight equities in size because of bullish election year dynamics.
Given the surprisingly hawkish pushback from the Fed, the January 31 QRA is a MAJOR wildcard here. If we are in fact wrong that policymakers want markets well supported and much higher than current levels as a result of President Biden’s poor polling numbers, then there is a very high probability that Treasury takes advantage of the drop in rates and ramps up coupon issuance. In that case a trip back to SPX 4000 in 1Q24 is firmly on the table, and we will position accordingly.
From a sector standpoint we are pleased with the current positioning of WOTE US 60 and its appropriate mix of fact exposures, but we are eyeing a more defensive allocation funded by the 60% RSP position given the unfolding correction. We do not want to chase defensive sectors here, as it’s likely still very early in a move higher, but we’ll have more on this in an upcoming SPX Sector Report.
Current Positioning
WOTE US 60/40: 60% SPLG, 40% BIL (down from 70/30)
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) [no change]
WOTE US 40: 100% BIL (no change)
WOTE US Long/Short Equity: 100% SPLG (adjusted from 100% IWM)
WOTE Special Ops: 100% cash