Overtime

Mailtime

Good morning,

It’s the last Tuesday of the month, which means this week’s Overtime is Mailtime.

Thanks to everybody who sent in chart requests and a special thanks to the reader who sent in the thoughtful question below. I thought it was timely and relevant and tried give it a deserving response.

Let’s see what you had for me this week!

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Questions

Of course, you always see 20/20 in hindsight, but over the past 8 years, diversification, small caps, and especially international investing just hasn’t worked out. Everyone chases the S&P 500 and none of these strategies and diversification seem to be beating it. The Ultra Growth ETF strategy has been struggling to match the S&P 500 performance as well. My question is, why not just invest 100% in the S&P 500 and not worry about all the other stuff?

My answer is simple: Risk Management.

I’d be a perma-bull over a perma-bear any day of the week, but I do think it is naive to say that the U.S. market HAS to go up forever.

Just this century we’ve seen the S&P 500 go 13 years with no gains and the Nasdaq Composite go 16. A look back through history shows many countries have gone longer¹ or had highs that were never recovered². So while some people choose to manage this risk by putting some money into every stock in every country, I believe the best way to manage this risk is with technical analysis and trend following.

Make no mistake, we are trying to outperform the S&P 500 because that’s what money managers and clients look to.

But how you get there is important. In Meb Faber’s famous trend-following study, he used a remarkably simple strategy (buy/sell when SPX is above or below its 10-month moving average). The strategy’s return from 1900-2005 was only slightly better than buy and hold (10.66% CAGR vs. 9.75%) but the standard deviation, max drawdowns, and worst years were significantly less.

Said another way, you got similar returns with far less risk.

Another point I want to make is that while the S&P 500 has advantages that make it hard to beat (low cost, rules-based, and essentially a momentum strategy that adds to winners and kicks out losers) the extremity of the current environment is absolutely an anomaly.

The cap-weighted S&P 500 has outperformed the equal-weight index by 16% over the trailing 2 years, which is the most we’ve seen since the dot-com bubble.

In addition, the percentage of stocks outperforming the index YTD is tracking to a multi-decade low for the second year in a row (h/t Richard Bernstein Advisors).

None of this means the trend will end tomorrow. And I don’t think we’re dealing with another dot-com bubble. But I would encourage anyone not to abandon active management for passive just when concentration risk has increased the most (h/t to the great Todd Sohn for the chart below).

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Chart Requests

ADBE: Adobe

Adobe has popped back above $500 which should act as support but the chart is largely trendless and neutral in absolute terms. Resistance at the 200-DMA and $575.

AMZN: Amazon

Amazon is setting up nicely but the stock was turned away at $190 again yesterday. Just below resistance makes this a tough entry point, but I’d be a buyer of a breakout.

CNQ: Canadian Natural Resources

We looked at a MACD buy signal in XLE in yesterday’s Playbook and when I go chart by chart, nearly every stock in the sector is printing one. CNQ is no exception and the stock just bounced strongly off support. $33 is your stop, first resistance will come at $36.57.

COP: Conoco Phillips