Micro Quad1 in play...
+ some very much needed healthy rotation!
Regime
So, Micro Quad1 is in play:
[I added the FANG Index to the Quad1 List, that gave a quad1 response in the march drawdown, while earlier assessments had a quad4 in the march drawdown. I will still need some time until the exposures of the quad exposures are stable. But I back tested with Fang and not much changed, so I think that change is o.k.!].
Truflation still down, so it only can be Quad1 or 4. Since the market is pricing in growth, we are in Quad1:
What changed from last week:
Tech is stalling a bit in terms of relative performance to the SPY.
BUT: we have a breadth thrust: T2108 (NYSE Stocks above the 20-day moving average popped up) and more Cyc’s (Building Materials, Auto Manufactures) joining the party. Also, ARKK (non-profitable tech) curled up and shows relative strength to the SPY now.
That is a healthy rotation and very much needed to sustain the rally.
Short term I think I would only add exposure to those “new” leaders, even then I would consider to be not too aggressive here. Stalking TSLA, but that is about it.
What needs to happen to get more aggressive is a pullback of the SPY and if we see then still Quad1 and Quad2 leading, I will add exposure. Until then nothing to do but then to ride my strategies.
I am already long 100%, so no worries, hedges have been lifted (just in time before the pop in IWM!).
Additionally, my P123 Strategies will add exposure based on the breadth thrust we got (so I should be long 100-120% and Monday evening) Enough risk for me!!!
R&D Projects
I am in contact with a macro service provider I trust and we discuss my new micro quad model.
First of all I want it to be verified by somebody else than me. If it holds (which I think it will!) I think we (my trading group) will have a monster edge at hand.
Again, it is based on the following paper:
The paper is about factor momentum.
It measures that if a factor is strong for 4 weeks, how big is the momentum of the factor after 4 strong weeks of the factor!
So, the high beta factor has about 4 times more momentum (trend) strength than value.
To determine the Quad: why give high beta the same weight as a value (that is which almost all macro models I know do!), when high beta trends much stronger?
Same with residual variance (the second strongest trending factor, see above in the table of the paper!):
In the context of stock market analysis, residual variance represents the unexplained portion of the variability in stock returns relative to the market volatility (or other factors).
For this I use relative strength.
For example, if high beta exposures are very strong in a drawdown of the SPY that means that (positive) residual variance of the underlying instrument is very high!
For the determination of the Quads, I use the highest beta possible exposures, measure their price momentum (need to be above the 20 week moving average) + relative strength.
That works great for Quad1 and 2 and also o.k. for Quad3 (because energy and other CYCs still have a relative higher betas and can be very strong against the market for months, e.g., show high positive residual variance).
I am still working on expression of the quads, not only for me but for subscribers.
ETF cold be one way, but also it could be that we buy the TOP 3-10 Stocks out of a strong industry group or ETF (e.g., right now the strongest Stocks from ARKK, right now: PACB, VCYT, TXG).
So, still a ton of work to do! But I think I am on a big edge.
I think that because a ton of great traders do exactly this: CANSLIM traders and breakout traders wait until higher beta industry groups and stocks show strength, they then wait for a volatility contraction pattern (which happens usually in market drawdowns) while relative strength is improving within the volatility contraction pattern.
I love I when papers (academics) and practitioners are on the same route ;-)
Stuff like that:
Whish me luck!
All the best and best regards.
Andreas
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