Performance Report: 07/31/2023
All performance data for our strategies is net of all fees and expenses. All performance data for indexes or other securities is from sources we believe to be reliable. All data is as of 07/31/2023.
July was an excellent month for us. All program accounts in my MAP strategy performed well this month outpacing gains in the S&P 500 while putting even more distance between us and our benchmarks. Since inception, my full-size MAP strategy has carried a nearly identical risk profile as our primary benchmark AOM, yet, our returns have outpaced AOM almost 3:1. The VORR score is an accurate representation of the alpha I've been able to generate.
The financial media will be quick to point out that equity indexes have performed exceptionally well this year, which they have. But they are reluctant to address the poor performance of the bond market, which comprises a significant allocation for most investors. While the S&P 500 appreciated 3.1% in July, TLT, the most popular ETF tracking 20-year Treasuries, fell 2.5%. If an investor had an equal share of the S&P 500 and TLT, July was barely better than a push.
While I'm encouraged by our performance the past couple of months, there are a couple of gnawing issues with the MAP system I would like to see improve. First, our gains have come in "waves". Since inception, there have been five instances of back-to-back months where the strategy gained in excess of 8.5%. In fact, all of our gains have occurred in the span of these 10 months while the other 41 months have been flat. This behavior has a couple of drawbacks. First, if a client brought over his or her assets at the "top of a wave", which several have, their performance since inception can be far below what others have experienced. Further, long spells without material gains can challenge anyone's resolve. Fortunately, I remained diligent in months like May so we can have months like June and July. The hit we took in May was due to exposure to the very same securities that have done so well the past two months.
Second, it appears the MAP tends to be early. We were really early getting out of the equity markets in the late summer of 2021. It worked out in the long-run but it was trying at the time. And it appears that the MAP was early in generating signals to move into hard assets late last year. Again, it appears to have worked out for us over a longer time horizon. The MAP is designed to identify moments of capitulation and it seems it's generating buys as securities climb the proverbial "Wall of Worry." In the process of climbing the wall, we get "stopped out" multiple times until the security can finally break through. In the long-term, the MAP should continue to serve us well by identifying low-risk buying opportunities. But in the short-term, it can be a bumpy ride in a market that is so overleveraged.
I am going to forego a lengthy market update this month as the next three weeks are going to be very busy for me as I try to move my last remaining clients off the TD Ameritrade/Schwab platform. I will note just a couple of things. First, my observation that market internals, or technical indicators, improved decisively in June was prescient. In July, equity indexes continued their long ascent going back to last October generating consistent gains throughout the month. The Dow Jones index tied a record for consecutive up-days at 13. The last time it happened was in 1987. The other instance of the record was prior to 1900.
The rebound from the bear market low has now surpassed the length of the bear market by several days. Yet, the S&P, and other major indexes, have yet to surpass their all-time highs.
Will the technical strength of this market continue to push equity indexes to all-time highs or will they start to fade? There are some cracks starting to show in the indexes. As I've pointed out in the last couple of months, new 52-week highs have been weak in light of the strong performance of the indexes. Just the past two weeks as indexes continued to eclipse their prior peaks, 52-week highs have been trailing off. Here is the chart.
Further, key indexes like the small-caps and financials failed to outperform in the second half of July. They are not underperforming at this point but rather tracking the S&P 500 almost point for point. If they start to underperform, things could get dicey for equity investors. The one area that continues to be incredibly resilient is junk bonds. I just can't fathom equity markets experiencing any dire outcome until junk bonds start to fall. From every possible angle, junk bonds are a fool's errand at this juncture and typically the most wildly overvalued securities tend to break down first. So, I'll continue to watch these three critical areas of the market to see how concerned we ought to be.
With all that said, as of the end of last week, I started to pull back on all our exposure in both equities and hard assets. I did this in part to lock in gains and in part because I see a level of exhaustion in equity indexes that needs to be resolved. The S&P 500 hasn't experienced a true down week since the end of February (A "true down week" is when the index closes lower than the low of the prior week). All equity indexes are strenuously overbought. If equity indexes pause or decline while continuing to exhibit technical strength, I may rebuild some of our exposure. But for now, we don't own a single S&P 500 or NASDAQ component. With IB's generous rates on cash balances, I feel more comfortable sitting in cash right now. Our commodity exposure is minimal as well when compared to where we were earlier in the year and I'll be more aggressive in rebuilding it when the MAP offers concise buying signals.
Overall the stock market is in rarefied air. The DOW tied a record of consecutive days of gains, the S&P hasn't had a down week in 5 months, and the US economy has not had a cyclical recession in 14 years. (Covid was an external event that impacted the economy but not a cyclical event.) I believe now is the time to start getting defensive even if the technical indicators are not all aligned like there were in 2021. I'll continue to proactively build exposure to alternative assets but will likely stay clear of cyclical themes that are sensitive to the economy.
As always, please do not hesitate to call me at 512-553-5151 if I can be of assistance.
1) Inception date of 4/30/2019
2) All benchmark prices are obtained through the Yahoo!Finance website. S&P 500 Index is calculated using the index price. AOM is the iShares Core Moderate Allocation ETF. Global Balanced is calculated using a 40% allocation to the S&P 500, a 40% allocation to BND, and a 20% allocation to IEFA.
3) VORR is our "Value over Risk Ratio": Calculated by taking the total return divided by the sum total of all negative months. Ideally, the ratio represents how much loss an investor has to endure to get X gain. A negative RORR score implies there is more risk in the investment than return.