This is an excerpt from our weekly 2Q Portfolio report. If you’d like to have access to the full report, including details about the 2Q Portfolio, please contact us.
Last week US stocks had their biggest rally in three months. Why? It may be the expectation of a “blue-sweep” with the Democrats winning unified control in Washington, and/or that further fiscal stimulus is now inevitable no matter who wins the election. Or, maybe, the rally was just a counterreaction to the correction seen in September. Nobody knows, and it doesn’t matter. What’s important is that this market want to go higher, higher, higher. No reason is necessary. Right now, the Twoquants won’t be stepping in the way of this bulldozer. We’ll let other people buy the dips.
Not getting involved in this bull market and sitting on the sidelines sounds a lot easier than it actually is. Patience and an unemotional view of the markets are qualities of all good traders. We need to fade the pain which is caused by not partaking in the markets and watching others make money hand over fist in the stock market. A substantial part of our long-term return is in the waiting. In other words, the AROR of patience can be very high in the long run, but invisible and painful in the present.
We also note the continuing bifurcation of stock return drivers. The “S&P 6” is up, but the “S&P 494” is flat to down. The stock market is literally controlled by a handful of names and passive flows. We think this will have an interesting ending and we’d like to be in a position to take advantage of it when the time comes. In last week’s report we included a chart from The Economist which showed that the probability of a Biden-win stands at 87%. As of Sunday, 11 October this probability has increased to 92%. Wow! It’s a done deal now! Or is it?
Quiz question: What asset didn’t move higher last week? Oil higher. Precious metals higher. Bitcoin higher. Yields higher. Stock indices higher. Grains higher. Even bank stocks managed to trade higher which is, well, quite amazing! It’s been one of those weeks where risk is 110% on. Period.
That said, we continue to believe that a more volatile and disruptive phase is ahead, which is why we stick to our cautious stance. When everybody else is making money, including retail, and positive sentiment feels off the charts we choose to be extra-defensive. Even when an agreement is reached for another relief package, which seems almost inevitable right now, we suspect it will have a diminishing impact on risk appetite. The market doesn’t rally on old news. Moreover, this would be the fifth bill in the US since March, but who’s counting.
In other news, Brexit is around the corner and coronavirus-infections are on the rise again globally.
Stay safe and #happytrading.
