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Stay Nimble Out There: Charts Point to Blue Skies Ahead for Now

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April was, for the most part, a continuation of March, February and January of this year: up and to the right.  Since the lows were put in during late-December, global markets have tacked roughly $13 trillion in market cap.  More than a 25% rally in 4 months – even after a nasty Q4 of 2018– is a huge move for the S&P 500.  How huge?  The start of 2019 is the strongest start to any year since 1975.  Year to date (through April 30), the S&P 500 Total Return Index is annualizing 66% and the Nasdaq 84%.  The dark clouds that were hovering over markets in December have parted and have given way to bright blue sunny skies.  As long as the Fed’s dovish pivot remains intact, the sun can continue to shine for now.  But if the Fed’s tone changes back to hawkish, or if interest rates just start going higher, then all bets are off.

The S&P 500 Reclaimed ATH’s in April:


Source: Bloomberg


Global Market Cap Recovery (12/24/18 – 4/30/19):


Source: Bloomberg


High Velocity Start to 2019 (Annualized ROR = Right Column):


Source: Bloomberg


Nasdaq’s V-Shaped Recovery (Weekly Chart):


Source: Bloomberg


Valuations have repriced, but are they done?

S&P 500’s Forward PE Ratio (significant repricing from the December lows, but the S&P 500 could still trade well above 3000):


Source: Bloomberg


SPX Q1 Earnings (so far):  Revenue is Weak, Earnings are Decent, Guidance is Soft(ish), and Comps Won’t Be Easy for Q2 or Q3 = Mixed Bag


Source: Bloomberg


Many reputable strategists are pointing out high levels of cash on the sidelines and many investors waiting to buy the dip.  That’s probably true, but there’s also very little short interest and the short VIX trade is incredibly crowded.

Short Interest in SPY (SPDR S&P 500 ETF):


Source: Bloomberg


Net Short VIX Positioning is Extreme (2012-Present):


Source: Bloomberg


There are a few divergences that are worth pointing out:  Small caps and Transports are two of them.

 Small Caps vs. S&P 500 (Notable Divergence):


Source: Bloomberg


Transports vs. S&P 500 (Notable Divergence):


Source: Bloomberg


Personal Spending vs. Personal Income are telling two different stories.

Personal Spending (Month over Month 2013-Present)  


Source: Bloomberg


Personal Income (Month over Month 2013-Present)  


Source: Bloomberg


Here are the key drivers that we see as most important in this market (in no particular order as they are all significant):

  1. U.S. – China Trade Talks:  How will markets react to the eventual deal with China?  Does this happen at or around the same time as the G-20 event in late June (or will it happen in May)?
  2. Oil is Holding Steady over $50/bl:  Higher oil prices with slower global growth isn’t a good combination, and that’s where we are today.  Away from that, $50 remains a key level to hold for all markets, especially high yield. 
  3. Earnings and Guidance:  Q1 earnings are more than halfway done.  While there has been some solid beats on the bottom line, revenue and guidance have been lackluster.
  4. Interest rates and the Fed:  The Fed refused to end the current cycle in 2016 and seems adamant on trying to avoid it again now.  The Powell put is newly formed – but its strength and reliability is TBD.  After all, he went from hawkish to dovish on a dime.  Powell pivoting back to hawkish if the data picks up isn’t far-fetched.  But without strong data, the odds of a rate hike(s) for the balance of 2019 is close to zero.  And even if growth picks up, the odds are still near zero. 
  5. Debt:  Debt quality is deteriorating at the same time debt levels are very elevated.  While there has been some deleveraging in households and the much of the banking sector since 2008, both corporate debt – away from financials – and debt to GDP are at nosebleed levels that can add fuel during the next bear market.  The growth of the triple BBB corporate bond market is especially worrisome. 

Wennco Downshift ETF Hedged Equity Strategy Update:  

In the 10 months ending 4/30/2019, Downshift ETF has returned 0.34% (net of Wennco fees) vs. 10.13% for the S&P 500 Total Return Index.  Our strategy didn’t capture nearly as much of this V-shaped recovery as anticipated (especially in January and February).  Too much upside was capped via selling covered calls during the brunt of December’s selling and into early January.  The negative carry of long-dated S&P 500 puts was the other factor.  Simply put: we were overly protected and worried that December was the start of something deeper and longer.  The exact opposite happened and here we are today.

As disappointing as the past few months have been, the strategy outperformed the S&P 500 Total Return by nearly 5% (4.87% to be exact) from inception (July 1, 2018) through December 31, 2018.  The first 4 months of 2019 doesn’t tell the story of the last 4 months in 2018.  The next 4 months will likely tell a different story than the previous 4 months.  To put this move the past 10 months into perspective, the BXM Index – which is a monthly buy-write/covered call index against the S&P 500 – returned 1.46% during this same 10 month period (7/1/18 – 4/30/19).  Downshift ETF has 2 layers of negative correlation: covered calls and S&P 500 long-dated puts.

We firmly believe that our strategy is built to achieve superior risk-adjusted returns over full market cycles, and the magnitude of 2019’s rally is unlikely to last forever (although the first 4 months of this year has been something to cheer about for millions of investors, which is always a good thing).  Since Downshift ETF’s inception, the S&P 500 Total Return registered 2 months of greater than 5% losses:  December 2018: -9.03% and October 2018: -6.84%.  During those two months, Downshift ETF returned -4.12% and -1.65%, and had a combined downside capture of 36.35%.

I hope everyone has a great May.  Stay nimble out there. 



Chris Wenner
CIO & Head Trader
Wennco Downshift Strategies


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