Market Update - October 10, 2018
October 10, 2018
Given the recent market sell off, let’s provide an update on our portfolio.
The market sell off here in October has been profound and it reached its first crescendo today as the Nasdaq sold off over 4% and the S&P 500 sold off by over 3% today alone. The move down in the market is being led down by growth companies especially technology and consumer discretionary.
In fact, companies with significant digital presence have been punished the worst as you can see in ETFs like IBUY and FDN which only invest in ecommerce companies. While we invest in more than just eCommerce companies, there are similarities in the types of companies being punished in this sell off.
Our long portfolio is down more than the market so far in October and it has been material. A few key observations:
1. On Monday October 8th, we increased the short exposure in the Long/short portfolio to bring the overall exposure down to 50% net long. These extra short positions helped on a day like today (October 10th). We made this move because most but not all of our risk signals showed enough weakness to trigger our defense.
2. As we examine our risk allocation signals, we have seen several of our key metrics degrade – hence the action we took in #1 above. However, one key signal has not turned bearish yet which is why we are still net long in the Long Short portfolio – as opposed to market neutral. But we continue to monitor all of the key metrics every day.
3. One key issue we have been monitoring is that our bullish portfolio is leading the way down relative to the bearish stock calls. This is occurring despite our belief that these bullish firms will surprise to the upside in the upcoming earnings season. If we are right, then these firms are on sale and earnings is right around the corner.
4. Earnings season is about to start and we have delivered a 78%+ surprise rate on each of revenue and EPS in our bullish portfolio for 8 straight quarters. We have no reason to believe that our current bullish portfolio will not achieve similar surprise rates in the upcoming quarter.
In the end, the one market truth we rely on is that companies that surprise on revenue and earnings will move in their price commensurate with their surprise. Over the long run, this has always been true. So, we stay committed to finding the surprises even in the face of market displacement.
As always, if you have any questions about our strategy and portfolio construction, please call our office to discuss at 443-288-6444.
Thanks
Wayne