Performance Report: 10/31/2023
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 10/31/2023.
October was a really solid month for all my accounts, with everyone seeing mild appreciation in spite of the fact that both bond and stock indexes saw declines in excess of 2%. While bonds continued to get decimated, the S&P 500 experienced 3 consecutive down months, a first since 2020. The S&P 500 touched correction territory falling just over 10% since its July peak. My Full-sized strategy is less than 1% off its July peak while the other two programs are about 2% off their peaks.
My Full-size strategy continued to outperform based on its exposure to OJ in addition to one other commodity trade. I did an in-depth analysis this month to confirm that the performance dispersion between my client accounts was indeed isolated to commodity exposure. And the conclusion was largely yes. There is nothing I can really do about this issue except to reiterate that the price action in larger commodity contracts such as OJ and sugar will likely be repeated in smaller commodity contracts held by all my client accounts.
On a risk-adjusted basis, my returns since inception are now considerably greater than my benchmarks. Using my proprietary VORR score, which essentially measures "how much of a positive return you have earned given how much in losses you have had to endure", all three programs are delivering risk-adjusted returns that are several multiples of our benchmarks.
I realize that not all of you have shared in all the gains as some accounts were opened at the "top of a wave" and thus your experience with my program may not be as ideal as others. To that end, I continue to iterate on my MAP system in hopes of making it more consistent and thus resolving the "returns in waves" issue. The MAP's original programming focused on "mean-reversion" trades. The objective was to "buy low" when a stock is below its mean and then sell high when it's above its mean. I have worked tirelessly over the past few months to add a momentum component. By utilizing both "mean-reversion" and momentum, I should be able to smooth out some of the waves and provide gains more consistently. To quote my favorite musician, Waylon Jennings, signing the theme song to my favorite childhood TV-show, Dukes of Hazzard, my goal is simply to "straighten the curves and flattenin' the hills." In next month's update, I should have some concrete back-testing results I can share.
As mentioned above, the S&P 500 just fell for three consecutive months. A decline such as this didn't even take place in 2022 even as the S&P 500 clocked its worst year since 2008. While the S&P 500 did fall into correction territory this month, the real carnage continues to take place in the bond markets. TLT continued its slide declining over 5% this month. REITS, measured by IYR fell 2.5%. Even AOM, our conservatively allocated benchmark, fell 2.4%, slightly more than the S&P 500 (AOM is a balanced fund that tracks a 50/50 stock - bond allocation so in theory 50% of the fund should be allocated to the S&P 500.)
The financial media and Wall Street put all their focus on cap-weighted indexes like the S&P 500 and the NASDAQ. And these indexes have held up better than a traditional balanced portfolio. But when we "look under the hood" we find some unsettling performance. While mega-caps have appreciated, small-caps have decidedly not. IWM, the largest small-cap ETF, is down for the year to the tune of 4.6%. This is important because small-cap stocks tend to be a leading indicator. And speaking of the larger indexes, even the S&P 500 equal-weighted index, measured by RSP, is down 2.5% YTD. This means that the great majority of the 500 stocks in the S&P 500 are down for the year even though the cap-weighted index is up nearly 10%. The only reason the DOW, S&P 500, and NASDAQ are up is because a handful of very large names, companies like AMZN, META, and NVDA, have appreciated. And because these companies have a much larger capitalization (read: size), they have dragged the cap-weighted indexes higher. These are not healthy developments though. In a healthly stock market, the majority of names should be participating.
Last month I wrote:
Historically, the September/October timeframe is when equity markets experience significant changes in trend. The 2008 Financial crisis started the prior year in October of 2007. The post-9/11 crash took place in late September. Both of these bear markets also saw significant bottoms in October. The dot-bomb bear market was resolved in October of 2002. The Financial Crisis saw significant capitulation in October of 2008 even if the bear market technically continued into the following March. The 1998 Asian Crisis was resolved in October. The 1987 Black Monday Crash was resolved in October. Going back to the 1960s and 1970's, both major bear markets across these decades were concluded in the month of October, October of 1967, and then October of 1974. Even the 1929 and 1931 crashes took place in October. October has proven that it can be a pivotal month and thus I'll be acutely alert in the coming weeks.
Stock markets have just completed a multi-month slog and are now entering their headiest seasonal period. It would be easy to turn wildly bullish. Finding cheap stocks that are bruised and beaten seems like a no-brainer at this juncture. If moving out of the stock market in August as we did was the right call then it seems moving into stocks now would be the right call again.
But I'm still cautious. I won't be surprised at all to see the stock market enjoy a sizeable rally for the next two months. But my concern is as follows: While it's not a mystery to me that the stock market nearly always goes up in November and December, it's not a mystery to anyone else either. What happens if investors reading the "tea leaves" decide to go on a wholesale buying spree and then something happens to cause a liquidity event? All that buying will have to be reversed in short order. So I'm looking to add exposure but will do so with caution and, as always, strict adherence to my rules of risk management.
When I came into the securities business in 2000, the widely held rule was "the stock market never goes down in a Presidential election year." Well, sure enough, it did go down in two of the three following election years (2000 and 2008). And everyone betting that stock markets never go down in an election year was caught on the wrong side. Today, it's a "given" that stocks never go down in December. But there are a host of "never before's" that are seemingly becoming commonplace. In 2007, it was believed that Real Estate prices never go down. By 2022, it was that bonds always protect stocks. For ever and ever, Dow Theory was an immutable law that stated stock prices shall always be priced relative to bond yields but today stocks are completely oblivious to bond yields.
While stock markets enter a seasonally strong period, there is ample justification for turning bullish on stocks. But given the fundamental landscape of stubborn inflation, rising rates, and a consumer that is overleveraged, I am going to remain cautious. I do expect that I'll buy some securities if my MAP system tells me to do so. But I also expect I'll reduce the size and risk of each position, as I've been doing recently. If the stock market continues higher, I expect to participate but in a limited way. I also plan to add some short-term US Treasury exposure with an annual yield north of 5%.
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.