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Updated: Jul 18, 2023

A couple of weeks ago, in our 2021 forecast, we suggested that picking individual stocks will be even more difficult than usual in the coming year and that utilizing index funds to achieve diversification will be helpful. I’ve had a couple good chuckles since then as clients have called to ask if that means I’m going to change everything we’ve been doing for the last several years.


The answer, of course, is no, but to be perfectly fair, it is a reasonable question because that's what my team does-- we manage portfolios of stocks. However, we generally replicate an index by buying the individual components in it; we’re not out trying to re-invent the wheel. For example, if a client’s financial plan calls for an allocation to the S&P 500, and 6% of the S&P 500 is made up of Apple, then we just put 6% of those monies into Apple.


By doing so, we generate the returns of the index, but we’re able to sell losers and thereby generate tax advantages that cannot be achieved by simply owning an index fund. In other words, we buy stocks, and we do it in a way that generates all of the advantages of indexing plus an additional tax benefit.

…OK, you may ask, then what’s the value of indexing in the first place?

  • Pick any stock from the Russell 3000 (which is basically the entire U.S. stock market), and two-thirds of the time that stock would have underperformed the index itself.

  • More than 40% of all stocks experience negative returns on an absolute basis.

  • Just 10% of all stocks since 1980 can be defined as mega-winners.

  • Just four stocks in the S&P 500 account for 1/3 of its total returns this year (MSFT, AAPL, NVDA and GOOGL).

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The Dow was down 532 points on Friday. Oversold bounces like that of the previous week tend to have re-tests, but there have been almost no recorded instances of down markets between Tuesday and year's end. …Which is why we would utilize any rally between now and the end of the year to raise cash and otherwise risk-off.


An alarming dislocation has emerged between long-duration equities like the ARK names, software, long duration cash flows-- all of which have been getting vaporized-- and long duration itself. In fact, the yield curve has actually flattened so much that the yield on the 30 year long bond is near its YTD lows. (You keep reading about higher rates, but it’s only on the short end.)


There have been two 80%+ surges in the VIX since September 1 along with immense volume on intraday selloffs that have been frequently punctuated with market-on-close (MOC) sell imbalances.


Month after month, we have seen consistent deterioration in market breadth, indicating an ongoing contagion that even found some victims recently among the FAANGMT stocks (i.e. TSLA’s and FB’s recent 20% drawdowns).


There are also signs that retail investors have been increasing exposure as well, such as the surge in the average size of online broker daily trades. At the same time, the volume on S&P 500 futures contracts-- a reliable measure of market depth— fell every day last week. This latter measure suggests that prices could evaporate should selling pressure suddenly increase for a given stock or sector.


Goldman Sachs’s PB (prime broker) data showed how that works last week; they saw the largest net selling over any 10-day period since April of 2020. That would indicate that insider selling is two standard deviations greater than any quarter looking back over the last 6 years. (Whaaaat?) That is so heavy when you consider some of the episodes of massive selling we’ve seen over that period. So heavy.


In the current environment, we recommend using any year-end Santa Claus rally as a valuable opportunity to sell top heavy indices such as the QQQs and SPY and to accumulate value plays. The rotation to value is on. We continue to favor energy and financials and figure we’ll have plenty of time to buy sexy stuff like biotech next year.





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