Happy Groundhog Day from Colorado Springs! I’m not quite sure why or how this became a national holiday (of sorts) in the United States… but here we are.
(Graph: After being in a strong bear market for greater than one year, bitcoin has finally popped above its 200-day moving average and regained bullish momentum.)
My least favorite part about writing these monthly updates is that they represent a static snapshot of my thoughts, the markets, the economy, and our portfolios. And, for many of my Vailshire clients, this is the last you will hear from me until next month’s update.
For their part (my thoughts, the markets, the economy, and our portfolios), they are fluid and constantly changing. New data is continually flowing in for me to analyze, and as the data changes, so do my opinions… as well as our portfolios.
Case in point
Everything changed in or around October 2022, and it took until the second week in January for Vailshire’s long-term trading system to confirm that the market shift was indeed more than just another bear market rally.
My decidedly bearish January 2023 update to investors was quickly turned upon its head as the vast majority of economic and market indicators flipped from bearish to decidedly bullish. So, too, did our portfolios transition in their composition.
Current Market Conditions
Everything changed in or around October 2022… and this is not hyperbole. Here are some examples of the metrics I follow:
- US and global liquidity bottomed and began to increase for the first time since 2021.
- The mighty US dollar (the $DXY) peaked at just under $115 on September 28, 2022 and is now in a solid downtrend.
- Treasury yields, from two to 30 years in duration, also peaked and have been in a steady downtrend.
- Risk assets, especially beaten-down growth and technology stocks, bottomed and have staged an impressive rally, which continues to this day. On this note, there has been a decided rotation between value stocks, which were previous outperformers, into growth and technology stocks over the recent weeks and months.
- Bitcoin, which is decentralized, apolitical, secure, and permissionless money, bottomed in November 2022 and is already approximately 50% off of its lows.
- High yield bond option-adjusted spreads (OAS) most recently peaked in late September 2022 and have since been compressing; a bullish sign.
- Volatility has steadily diminished and is now in what I consider to be a state of bullish complacency.
I could go on with this list, but these are the data points that I follow most closely to ascertain my macroeconomic views and their associated investment implications for our Vailshire portfolios. Each of the above-mentioned data points is bullish for risk assets.
Jerome Powell, Chairman of the Federal Reserve, did his part to stoke the market’s animal spirits during the February 1 FOMC meeting and subsequent press conference. In short, he signaled that inflation is coming down, as hoped, and the Fed will likely cease hiking the federal funds rate sooner rather than later. Risk assets heard the message loud and clear and turned even more bullish than they were heading into the conference.
Strategies for Vailshire’s Separately Managed Accounts
As I alluded to above, Vailshire’s long-term trading system confirmed the bullish transition (from “risk off” to “risk on” and from “value” to “growth”) during the second week of January. In light of this, much trading and new asset allocation ensued within our portfolios.
Our portfolios transitioned from being highly defensive with heavy cash positions to almost fully allocated in equities over the past few weeks. Personally, I am thrilled that the market has broken out of the sideways, choppy, trading pattern it had been in since June 2022 into a more definable uptrend. As long as the upward trend continues, our portfolios should perform well. And if conditions change and once again turn bearish, each of our positions will hit its respective “trailing stop” and will be converted into cash (earning interest at Interactive Brokers) to weather the next storm.
Here is a summary of our current Vailshire portfolio allocations:
For Vailshire’s Conservative, long-only accounts, we are almost fully allocated. The majority of these portfolios are in a combination of technology and growth stocks, bitcoin proxies, and select equities with high free cash flow yields.
Our Moderate and Aggressive portfolios are allocated in similar fashion to our Conservative accounts, but with a little more volatility to (ideally) capture more upside gains during this current bull run.
Note that if momentum shifts direction in the short term across any or all of our current holdings, then so will our portfolio composition shift. This short-term trading component is designed to add a high degree of nimbleness across all Vailshire portfolios.
Vailshire’s Conservative SMAs have limited (long-only) trading privileges and are currently allocated in the following manner (% base positions):
- 90% LONG select equities and ETFs
- 10% cash
Depending on your financial objectives and individual account investment privileges, Vailshire’s Aggressive and Moderate separately managed accounts (SMAs) are currently allocated in the following manner (% base positions):
- 90-91% LONG select equities and ETFs
- 9-10% cash
If you are a Vailshire Client, feel free to log into your Vailshire-managed account(s) at Interactive Brokers and see how your own portfolios are positioned. (It’s a good idea to log into your accounts at least quarterly, just to make sure your settings and demographics are up to date.)
**Important note: For those “Conservative” clients who wish to be more aggressively hedged against anticipated declines in the equities markets, you will need to log into your Vailshire account(s) at Interactive Brokers and apply for trading privileges in “leveraged or complex exchange traded products.” If you need help with this, please let me know and I will re-send instructions from Interactive Brokers to your email. Also, if you decide to move forward with this account change, please let me know so I can begin hedging your account on your behalf.
Vailshire in the News!
Just in time for this monthly update, I was invited back as a featured guest on Simply Bitcoin IRL on February 1. The show’s host, Nico, did a great job with the interview, which is entitled: “Bullish on Bitcoin.” Here’s a YouTube link to the interview if you’re interested!
Conclusion
I was both surprised and extremely pleased by the market’s decided transition from bearish to bullish since 4Q 2022. Vailshire’s proprietary trading system is designed to maximize profits and limit losses during both bearish and bullish market swings. So, getting through the sideways market chop since June 2022 is a welcome relief!
I take my role very seriously as Vailshire’s (and your) chief investment officer, and am constantly striving to improve my strategies and our performance over the long-run. As such, 2022 was a humbling year for me, but it was also quite educational and enabled me to create and enhance Vailshire’s trading system for everyone’s benefit going forward. For this, I am thankful, as I am quite enthusiastic about our prospects in the coming years and decades.
As always, I am constantly humbled and honored by the trust you have placed in me and in Vailshire to manage your hard-earned savings and investments.
Living well and investing wisely with you,
Jeff Ross, MD, MBA