Algorithm Performance: 2022-08-03
Performance Rankings
The Market: +1.01%
Long Term Portfolio: +0.65%
The Neural Net: +0.59%
Base Algorithm: +0.47%
Trading Bot: +0.24%
Kokomo: +0.00%
GoodVibrations: -0.08%
What Happened And Why?
In all honesty, there isn’t that much to tell. GoodVibrations took a trivial loss, Kokomo just about broke even, everything else went positive but underperformed the market.
Our longterm portfolio did quite well today.
Look at that distribution - that’s a thing of beauty.
Performance today is similar to 2022-08-01 (Market up, most of our publications positive but less so). Rather than retread that report, I’d like to speak more generally about why days like today have been happening lately, and will likely continue in the near future.
I spoke with Vlad, our head long-term analyst, in determining our market stance. I don’t have to tell you that markets have been sketchy. We’ve spent much of the year teasing a recession (from January to mid-June, SPY dipped almost 25%). Even though we’ve rebounded nearly 15% from that low, we aren’t convinced that there still won’t be a recession, or at least another major drop-off. For this reason, we’ve made the active decision to play defensively for a while.
Our algorithms will be following this as well. They’re all learning systems. On an average bearish day in 2022, $SPY has come down 1.14%. For comparison, if we look at bearish days since 2000, that number is only 0.72%. Bearish days in 2022 have been 58% more bearish than usual. With about 46% of trading days being bearish (this number is pretty consistent over 2022 and since 2000), our models are all looking at harsher training data than usual. Even if the markets are rebounding, they will continue to play more conservatively.
When Do We Intend To Lean Back Into Growth Stocks?
This is a tricky question, but as our users, we feel that we owe you an answer. Over the course of last month, 10 year real yields dropped substantially - from 0.54% to 0.09%. Since bond yields became much closer to the rate of inflation, riskier assets became more appealing to investors seeking to beat inflation. This was a large driver of growth stocks going up last month - investors piling in because bonds became less appealing than usual.
Now in a single day, 10 year real yields went back up to 0.27%. That’s just one day, but a sign we need to keep an eye on. If this continues, we can expect bonds to become a more attractive option, which would have questionable impacts on growth stocks. We want to spend more time keeping an eye on yields and economic indicators before switching back to growth stocks.
In terms of economic indicators, it tentatively looks like a second quarter of negative GDP growth. We also don’t see any clear signs of inflation lightening up. CPI had gone high over a year ago - and the money printers were still on just a few months ago. And as long as inflation is increasing, the Fed will have to raise rates again, meaning the economy is likely to be pulled down further.
If we bet on growth and we’re right, we can probably out-perform the market. If we’re wrong, we’re looking at steep losses.
If we bet on defensives and we’re right, we should outperform the market in the long-run. If we’re wrong, we expect to underperform, but still come out positive.
Tomorrow’s Outlook
The full algorithm reports will be published tomorrow morning, once Allen has had a chance to vet its recommendations. In the meantime, here are our tentative exposures for the trading day tomorrow:
You’ll notice each algorithm’s exposure looks pretty similar to its previous exposures. I expect this pattern to continue; our algorithms won’t make major changes to their investment strategies overnight. But if they do, we’ll highlight that here.
That’s all for tonight. I know tonight’s report got a little dense in places; thank you for reading. Congrats to everyone who made money today, and I wish you all good luck tomorrow.
-Asher
