Category: Sentiment Updates

Deja Vu all Over Again

By John Del Vecchio and Brad Lamensdorf

Deja Vu all Over Again

Stocks have been partying like it’s 1999 all over again. 

The real action is in unprofitable IPOs.

Take a look at the chart, courtesy of BofA Global Research:

Deja Vu all Over Again
Deja Vu all Over Again

Unprofitable IPOs just hit 80%, the same level near the peak of the Internet Bubble. More money is chasing few quality investment ideas. As a result, nearly everything is getting bid up to higher prices. 

The thing is, markets change. The companies that dominate the markets changes. The leaders in sectors change.

The law of economics and human nature don’t change.

The best opportunities, on both sides of the market, are at extremes. We are at an extreme with unprofitable IPOs. Could this trend move higher? Yes. However, it’s highly likely that all gains from here will be more than lost.

The Active Alts / Sentiment Trader Long / Short Strategy capitalizes on extremes. In case you missed it…

Brad hosted a webinar on February 9th talking about achieving better risk-adjusted returns in an overheated market. 

The Active Alts SentimenTrader Long / Short Strategy returned 25.87% in 2020 compared with 7.86[1] % in the Credit Suisse Long / Short Index.

What’s more, is that the Active Alts SentimenTrader Long / Short Strategy experienced a 9.99% draw down and held an average cash position of 19.4%[1] for the year.

The webinar dives into:

  • How to navigate the rocky markets we have been living through
  • How to generate alpha on the long and short side of the market
  • The power of our proprietary exposure gauge and what it means for investment returns in current market conditions

If you missed the webinar, you can watch it here!

Brad Lamensdorf Jason Goepfert Webinar

 

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General Disclaimer
Active Alts, Inc. (“Active Alts”  or the “Manager”) is an investment adviser registered with the state of Connecticut. Active Alts manages the Active Alts SentimenTrader L/S Strategy and SentimenTrader serves as the research/index provider for the strategy. Registration with the state of Connecticut does not imply a certain level of skill or training.
The information set forth regarding securities and investment advice was obtained from sources which we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. The performance quoted above represents past performance and current performance may be lower or higher than the performance date quoted. Past performance does not guarantee future results as investment returns may vary from time to time depending upon market conditions and the composition of the strategy.

SENTIMENTRADER DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. Investors should consult their tax advisors before making investment decisions, as well as realize that past performance and results of the strategy are not a guarantee of future results. The Active Alts SentimenTrader L/S Strategy is not intended to be the primary basis for investment decisions and the usage of the strategy does not address the suitability of any particular investment for any particular investor.
The Standard & Poor’s 500 Index is provided for informational purposes only. Indices are not indicative of the strategy and may not be suitable for comparison purposes.   Indices that may be shown do not reflect the deduction of advisory fees, commissions or other transaction charges.
Fees charged by the Firm are negotiable and may vary by client.

Before making an investment, you should consider your goals, objectives, time horizon and risk tolerance to be sure that this investment is suitable for you.  There are no guarantees that the strategy will perform as it did in the past. You could lose money and you should not invest unless you can afford to lose some or all of your invested funds.

Calculation Disclaimer
Dividends are included in the performance results. The Manager have also calculated the net results by applying the highest management fee to be charged to advisory clients. Results will vary based on the amount of the fee applied. The results were also calculated by rebalancing the long and short portfolios on a weekly basis.  The portfolio selection was and will be generated from the proprietary Active Alts stock selection process which is based on quantitative factors and mechanically driven. Commissions were added. No taxes were deducted; no borrowing costs were added; and no ex-dividend costs were included from the short portfolio.
Downside deviation is a measure of downside risk that focuses on returns that sell below a minimum threshold of a Minimal Acceptable Return (MAR).
Sharpe ratio is the average return earned in excess of the risk free rate per unit of volatility of risk.
Time to recovery is the duration of time it takes to restore the value lost.
Beta is a measure of a stock’s volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0.
Annualized volatility – Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price of a market-traded derivative (in particular, an option).
Max drawdown is an indicator of the risk of a portfolio chosen based on a certain strategy. It measures the largest single drop from peak to bottom in the value of a
portfolio (before a new peak is achieved).
(1) Indicators drive the exposure while a proprietary Long & Short portfolio are rebalanced monthly for the strategies equity drivers.
(2) Commissions were added to the exposure rebalance as well as the monthly stock rebalance.

Stock Market Sentiment Continues Its Bullish Rage

By John Del Vecchio and Brad Lamensdorf

The stock market continues to set records and bulls are raging.

Weekly market sentiment, courtesy of Investors Intelligence, shows bulls at 61.2% while bears are in hibernation at 16.5%

Bulls have topped 60% (a major warning sign) for nine consecutive weeks while bears hover near a 2 ½ year low.

Stock Market Sentiment Continues Its Bullish Rage
Stock Market Sentiment Continues Its Bullish Rage

Exuberant market sentiment by itself doesn’t mean the market will tank. It does mean risks are elevated. Now is not the time to be complacent. Any event could start to top the balance. Swiftly.

That will make it easier for bullish investors to switch their stance and for bears to become more active. In our own testing, once bears start to move off the lows, the returns disappear.

Rapidly!

In fact, John’s own risk indicator yields returns of over 800% when the “all clear” is given compared to buy and hold returns of about 600%. Meanwhile, when the indicator is in the “red zone” the returns are -0.61% annualized.

We are not there yet. But investors should be on high alert.

Investors should be planning their hedges.

The Active Alts SentimenTrader Long / Short Strategy ended 2020 with a gain of 25.87% and a drawdown of 9.99%. The strategy has recently made adjustments to account for conditions in sentiment as well as over two dozen other proprietary indicators.

To learn more about how these indicators can help your portfolio performance, book a complimentary call with Brad today.

Fund Managers Have Blown their Wad

By John Del Vecchio and Brad Lamensdorf

Fund managers have blown their wad of cash. The B of A Global Fund Manager Survey shows that cash levels have dipped below 4%.

This is a contrarian indicator.

Fund Managers Have Blown their Wad
Fund Managers Have Blown their Wad

Historically, cash levels below 4% indicate little cash on hand while 5% has proven to be too defensive. A 1% difference may not seem like much. But we are talking about trillions of dollars here.

As the chart clearly shows, high cash levels typically coincide with some very tradeable bottoms since 2011.

Back when the market was falling apart as the COVID pandemic hit, fund managers raised cash well above the upper band of 5%.

Since then, the market has gone virtually straight up.

This creates a couple of problems for fund managers. One is peer pressure. The market is roaring and cash becomes a drag. It becomes a major drag when you have the fastest rebound ever from a bear market like we saw in 2020.

The other problem then becomes performance anxiety.

There’s nothing like some anxiety to cause you to do things you might not normally do. So, fund managers chase risk. Often outside their comfort zone. They may do this against their better judgement.

As a result, when they are chasing stocks that they know they shouldn’t, it becomes a contrary indicator.

They have given into their emotions.

Market bulls still stand over 60%.

This is a warning sign.

Risks are higher here. Many stocks are off to a booming start in 2021. It’s becoming too easy to make money.

Nothing about the markets is easy over time.

Now is the time to prepare hedges.

Where are the landmines ahead?

Book a free call with Brad to discuss the Active Alts SentimenTrader long / short strategy and how to position your portfolio for the road ahead.

Market Euphoria is Literally off the Charts

By John Del Vecchio and Brad Lamensdorf

Euphoria in the market is literally off the charts. 

Here’s the Panic / Euphoria model from Citi below.

 

Market Euphoria is Literally off the Charts

Not much else needs to be said other than it’s time to work into hedges.

The team at SentimenTrader tried their hand at recreating the Citi model based on their understanding of the inputs that go into it. 

While SentimenTrader’s version isn’t as extreme as the original Citi model, the result is close. When the SentimenTrader proxy is above 1.0 (Euphoria), which happens about 14% of the time, the annualized returns for the S&P 500 are -3.7%. Conversely when the model is below 0 (Panic), the market returns 21.4% annualized.

More importantly, based on this version, the market sits at the third most extreme level of euphoria in the last 30 years.

Market Euphoria is Literally off the ChartsMarket Euphoria is Literally off the ChartFurthermore, SentimenTrader provides mode detail on the specific signals and the future returns.

Market Euphoria is Literally off the Charts

Market Euphoria is Literally off the Chart

Median returns tend to be negative across the board. Only 2011 was positive a year later, and barely so. This is even more reason to get active in hedging.

Active Alts has partnered with SentimenTrader to create proprietary signals that help inform the exposure in a long / short strategy. To learn more about how these models can help you mitigate risks in the market, book call with Brad.

You may schedule your call here. 

See more Sentiment Updates: 

Market Sentiment Remains Frothy into New Year

By John Del Vecchio and Brad Lamensdorf

The froth in market sentiment has backed off a bit but still in the danger zone. Stock market bulls still top 60%, and while bears have inched up a bit, the spread between the two exceeds nearly 43%.

As the chart below from Investors Intelligence shows, the bull/bear spread is still in the upper end of the range over recent history. Proceed with caution. We are still in the danger zone.

 

Market Sentiment Remains Frothy into New Year
Market Sentiment Remains Frothy into New Year

As we noted in the most recent Chart of the Week, there’s a fascinating piece from GMO published December 8, 2020 that talks about the bloodbath in value investing.

If you’re not familiar with GMO they manage over $60 billion. And the “G” in GMO refers to Jeremy Grantham who conducted groundbreaking work on quality metrics in the 1970’s.

To recap the gory details, here’s a synopsis from their report:

“After more than a decade of disappointing performance, Value stocks just experienced their worst 12-month performance in history. This has left these stocks trading at some of the cheapest levels relative to the market we have ever seen. This cheapness is robust to a variety of challenges that skeptics may raise, and this is true broadly across all major equity regions. An analysis of the sources of returns for Value since 2007 shows that more than 100% of Value’s underperformance is due to falling relative valuations, confirming that under the surface the Value premium actually still exists. If Value were to continue trading at current spreads to the market and experienced the same relative fundamental performance as it has over the past 14 years, it would beat the market. The flip side of the extraordinary cheapness of Value is the expensiveness of Growth: we believe Growth stocks have entered a bubble similar to the one in 2000. While we are not sure what the catalyst will be for the deflation of the Growth bubble and the recovery for Value, there are a number of plausible candidates for one, not least the eventual recovery of the global economy over the next 12-18 months as the pandemic recedes. We believe the outlook for Value is exceedingly bright from here, particularly in a long/short framework, which can profit from Value’s outperformance in both rising and falling markets.”

Even if we are entering another bubble in growth stocks, plenty of opportunity exists in the market. Closing the massive spread between value and the market will create huge opportunities for alpha in the coming years.

What’s more is that not all value stocks are the same. Some stocks are cheap for a reason. In our own work, we saw value, combined with quality and momentum, perform well in 2020. And, we agree that long / short is poised to perform well going forward.

Active Alts operates two strategies to navigate through all market conditions.

The long-only, Active Alts Focused Momentum Strategy was up 79.60% in 2020. What’s more, 2020’s performance was achieved with an average exposure of 74.87%.

In December, the strategy turned in a performance of 22.16%, with an average exposure of 55.09%.

Quality, momentum, value, and risk/reward. Those are the factors, when combined into one cohesive approach, are the engine that powers the Active Alts Focused Momentum Strategy.

The Active Alts Long / Short finished 2020 up 25.91%

That same GMO report, published December 8, 2020, is decidedly bullish on the long /short space in the future. The historical spread between value and the market is likely to revert to the mean.

This bodes well for tactical stock pickers.

Want to know more about the Active Alts Focused Momentum Strategy and the Active Alts SentmenTrader Long / Short Strategy?

Please schedule a phone call with Brad today.

You can book your call here.

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