It’s hard to believe that Thanksgiving and Christmas are just around the corner. I hope each of you is doing well as winter approaches us in the northern hemisphere.
(Graph: The S&P 500 remains in a strong bearish downtrend this year.)
Current Market Conditions
The financial world is holding its breath on the eve of the November 2 FOMC meeting… which is a bit sad. The Federal Reserve (the “Fed”) is expected to raise the federal funds rate by another 75 bps, to 4.0%.
More important than the rate increase, in my opinion, is the accompanying FOMC statement and rhetoric by Fed chair, Jerome Powell. Many market participants are anticipating a dovish tilt with a resultant mini bull market in risk assets. I, however, remain decidedly bearish and believe that the Fed will remain quite hawkish.
For starters, the bond market continues to signal an inevitable recession. And the recent inversion of the 10 year minus 3 month Treasury yield curve suggests that said recession is now imminent. Historically, risk assets tend to perform quite poorly in the early stages of economic recessions.
Inflation, for its part, remains sticky high. As long as CPI and core PCE (the Fed’s favorite metric) remain highly elevated, they are likely to remain sticky hawkish. This is not good for risk assets.
Despite the impending recession, unemployment remains at historically low levels. Though it is a lagging economic indicator, this economic “good news” is actually “bad news” for those market participants hoping that the Fed will turn dovish sooner than later. A strong economy simply means that the Fed can keep tightening the screws for a longer period of time to (hopefully) tame inflation.
In short, as I’ve been saying and writing for several months, it is still going to get worse before it gets better.
This is no time to be asleep at the wheel with our investment and trading decisions.
Strategies for Vailshire’s Separately Managed Accounts
As you have probably ascertained, Vailshire’s proprietary long-term trading system remains unabashedly bearish. Perhaps surprisingly, we have added a small number of long positions within our portfolios during the month of October, which have demonstrated persistent or new bullish momentum. However, we still maintain outsized cash (earning interest) and short positions (when applicable).
For our Conservative, long only accounts, the vast majority of our accounts are sitting safely in cash. We have also added two new energy stocks and one biotech ETF that are in bullish formation, despite the decidedly bearish macroeconomic backdrop. We will hold these positions until they hit their respective volatility- and momentum-based trailing stop losses.
Our Moderate and Aggressive portfolios also hold the above-mentioned long positions, a large chunk of interest-earning cash, and sizable short positions. The short positions should profit whenever the market declines. This is often a winning strategy in recessionary bear markets.
As always, we will continue with our current portfolio allocations until momentum clearly shifts from bearish to neutral or bullish. Based on my macroeconomic research, this shift to bullishness may not occur for quite some time across most risk assets.
As previously written, the ultimate goal of Vailshire’s long-term trading system is to profit over the long-term, whether markets are moving higher or moving lower.
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):
- 27 – 30% double SHORT NASDAQ ETF
- 20 – 22.5% SHORT bitcoin futures ETF
- 10% LONG select energy stocks
- 7 – 8% LONG biotech ETF
- 29.5 – 36% cash
Vailshire’s Conservative SMAs have limited (long-only) trading privileges and are currently allocated in the following manner (% base positions):
- 10% LONG select energy stocks
- 6% LONG biotech ETF
- 84% cash
Given the trading and investing limitations of our Conservative accounts, I am not able to actively hedge these portfolios.
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!
- In mid-October, I was honored to be the featured guest on the Savant Report. Jordan Wirsz did a great job (as usual) with the interview, entitled: The Game Plan: Dr. Jeff Ross Interview Macro, Stocks & Bitcoin.
- A few days later, Darius Dale and I had an excellent macro roundtable discussion on the Paul Barron Network.
Please enjoy the content and let me know what you think!
The Fed continues to tighten into a global economic slowdown to “destroy demand” and reduce inflation. At this point, a significant recession is not only inevitable in the United States, I believe it is increasingly imminent.
Risk assets historically perform terribly during the early stages of a recession and, therefore, we are positioned to profit from such a downturn using Vailshire’s long-term trading system.
As the facts and momentum change, so will our portfolio composition. For now, we continue to lean heavily conservative and short in anticipation of even more difficult economic times to come.
I am honored by the trust you have placed in me and Vailshire’s proprietary long-term trading system.
Living well and investing wisely with you,
Jeff Ross, MD, MBA