November 28, 2023
November 28, 2023
The latest research, market indicators and trade summaries from Sungarden Investment Publishing
ROAR Score
(Return Opportunity and Risk)
If my choices are stocks and cash, what % would I have in the stock market right now?
Market in a Minute
Did you see it? Seriously, did you see it? I saw it. But that’s my job.
What the heck am I talking about? The sudden decline of intermediate-term US Treasury rates. With all the hype about “The Fed is done, rates are coming down,” that usually refers to long-term bond rates (10-30 years to maturity). Ironically, the Fed doesn’t control those. But that’s where the sex appeal, er, volatile price action is in ETFs like TLT (20-30 year US Treasuries).
I refuse to believe that most of the money that has paraded into long-term bonds is meant to be a long-term investment. I see it as an attempt by people to catch the bottom in long-term bond prices. It might work, but I’m not a risk taker like that. Not when a bit further down the curve lies a better reward/risk tradeoff.
I chart this picture below, but the bottom line is this: after a Thanksgiving week and a current week that brought little to chew on besides turkey for one day (or two, or three for the leftovers), this is something that may just set up to be the “happy medium” for risk-managed portfolios, at a time when the stock market is simply treading water when a strong market should be rocketing higher into the year-end. So we look more closely at bonds.
There, we find that there are two very attractive parts of the yield curve:
T-bills still yield 5.25% or higher
5 year bonds yield about 4.4% and falling, which means profit potential from a low-volatility asset class. Sort of like in the old days when retirees bought utility stocks for their high yields, and at times would enjoy a bonus when their prices popped up for a little while. I like this setup.
So that’s where my eyes are drawn to this week. The stock market is still a case of volatility that leads nowhere. Since exactly 2 years ago, the S&P 500 (SPY) is up 2% total, including dividends. The Nasdaq 100 (QQQ) is up 1%. 2023 has been about 2 things for stocks:
Proof that panic buying and optimism in the face of major risk is still a thing
Proof that the math of investment loss is not top-of-mind for many investors
A generation of near-zero interest rates made that possible. But now, as consumer financial health indicators start to fade, tactics are more important than clinging to old rules about 60/40 portfolios and buy-and-hold forever.
The plan:
Look to increase Treasury maturities, to capitalize on the rare combination of stable T-bill rates and a total return opportunity in intermediate-term bonds.
Keep equity allocations light versus whatever one considers to be “normal,” and keep searching for needles in the stock market haystack (e.g. sectors, industries, geographies that represent good reward/risk tradeoffs).
Our ROAR Score remains at 25 for the third straight week. Our 2-ETF model portfolio is 25% in SPY (S&P 500) and 75% in BIL (1-3 month T-bills). This super-simple balanced risk portfolio, using only 2 ETFs, is up 5.7% this year, which is above the YTD return of the average S&P 500 stock (RSP). Since its 1/1/2022 inception, that model portfolio is up 3% versus a loss of 7% for RSP, and ahead of both SPY and QQQ.
More investment strategy notes and thoughts are in the premium subscriber section below, with charts and additional commentary. What everyone should realize about the possibility of bond rates falling hard from here, and the Fed lowering rates: if that happens, it is more likely because we have a dire credit market event, not because the Fed slayed the inflation dragon. In late 2007, the setup was the same and it turned out that the Fed didn’t time everything right. Because they never do. Maybe there’s a first time for everything, but risk-management means using balanced perspective over hope.
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S&P X-Ray
The S&P X-Ray tracks our latest projected trading ranges
for the S&P 500
(Updated weekly on Tuesday, as of Monday’s market close)
