Wennco Market Views: January 2019 Update

Updated: Jun 8, 2019

January Recap & Looking Forward:


Coming off extremely oversold conditions to wrap up 2018, the S&P 500 Total Return Index gained 8.01% in January and rallied over 15% from the 12/26/18 low through 01/31/19. January’s vertical move annualized over 100% for the S&P 500 Total Return and 200% for the Nasdaq (see January COMPS @ the end of this note). Momentum stocks finally caught a bid, and volatility – if measured by the VIX Index – made a trip from the mid-30’s in late December to the mid-16’s at the end of January. Much of the liquidity that came out of the market in Q4 came back in January, and this usually trumps all else. Near the end of the month, Fed Chairman Jerome Powell’s incredibly dovish tone surprised many; myself included. Not only will the Fed be “patient” on additional rate hikes, it also signaled it will be flexible in reducing its balance sheet. The script has been completely flipped and the Fed is being as explicit as possible: they are in no hurry to raise rates anytime soon. Will this be enough to offset weakening economic and earnings growth?


From a technical stance, the 200-day moving average on the S&P is less than 2% away @ 2741. Holding 2700, which is roughly where we are now, is important. Give or take a few handles, 2700 is the S&P’s 61.8% retracement (on a daily chart), the S&P’s 100-day moving average and the upper-end of the S&P’s 12-month Bollinger Bands. On a slightly longer time horizon, a very important uptrend - from the February 2016 lows - is around 2840, and until we are above that, not much else has changed (in my opinion). There will be a point, one would think, where fund managers will have to start chasing this rally even higher. Is it over the 200-day? Over 2800-2840? It’s probably no higher than 2800-2840, which coincides with the important 2016-uptrend mentioned above, and any breakout from there would put all-time-highs in sight. It wouldn’t be surprising to trade back towards 2600 in February, and go either way from there.


Today’s market is clear in that price destinations will be reached quickly; whatever needs to get priced in seems to be happening almost instantaneously. If we’re going up it’s a quick move, and an even quicker move on the way down. Taking the “stairs up and an elevator down” is now an escalator on the way up and an express-elevator on the way down. January’s 8% rebound after December’s loss of 9% is a reinforcement that equity markets have changed their behavior: volatility, in both directions, is here.


I do think the lows we made in December will be re-tested again this year, and believe it will be sometime in the first half of the year.


Here are the updated 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: Although reported progress is being made between the U.S. and China, the March 1 deadline is right around the corner - and the U.S. will raise tariffs if no deal is made before then.

2) Oil is Holding Steady over $50/bl: WTI Crude holding $50-55 has undoubtedly calmed markets. $50 remains a key level to hold for all markets, especially high yield.

3) Earnings and Guidance: Fourth quarter earnings are roughly half-way done. While earnings have been okay but not great, revenue has been weak, and guidance has been very weak. There is a clear deterioration in growth.

4) Interest rates and the Fed: As mentioned above, Fed Chair Powell surprised markets with his extremely dovish remarks. The Fed refused to end the current cycle in 2016 and seems adamant on trying to avoid it again now.

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.


Wennco Downshift ETF Update:


Since inception (7/1/18), our Downshift ETF strategy is -0.69% (net of Wennco fees) vs. 0.61% for the S&P 500 Total Return Index through 1/31/19. While we didn’t capture nearly as much of the S&P 500’s upside as we would have liked in the month of January, we prioritize avoiding much of the downside participation in exchange for missing some of the upside (especially over the short-term). During the 7 months since our strategy inception, we’ve seen the strongest quarter in several years (Q3), the worst month in several years (December), and the strongest month in several years (January). Despite these significant months and quarters, which moved violently in both directions, we have arrived within 130bps of the same destination as the S&P 500, and with significantly less volatility. And that is the goal.


Owning uncorrelated return streams is important to preserving wealth, and especially makes sense in late in market cycles (like where we are today). Bonds have become less uncorrelated to equities, and investors need more reliable sources of protection in risk-off markets. Our strategy has two parts which are negatively correlated: long-dated and actively managed S&P put options and actively managed covered calls. Owning both market beta (direct correlation to the S&P), along with uncorrelated return sources, is a prudent way to grow assets over time. During months like October & December of last year, when the S&P was down -6.84% and -9.03%, respectively, (and down significantly more at the intra-month lows), investor portfolios were stress tested. An alternative strategy that can take advantage and capitalize on the volatility with truly uncorrelated investments not only helps compound returns over time, it also reduces timing risk. Being forced to raise cash from long-only equity portfolio’s during months similar to October or December hurts any financial plan.

Downshift ETF vs. S&P 500 Total Return Charted: After 7 months, Downshift ETF has nearly the same destination as the S&P 500 Total Return Index with much less volatility


Source: Schwab & Bloomberg


Sector ETFs


XLK: Technology (monthly chart)

Source: Bloomberg


XLV: Healthcare (monthly chart)

Source: Bloomberg


XLY: Consumer Discretionary (monthly chart)

Source: Bloomberg


XLI: Industrials (monthly chart)

Source: Bloomberg


XLF: Financials (monthly chart)

Source: Bloomberg


XLP: Consumer Staples (monthly chart)

Source: Bloomberg


XLE: Energy (monthly chart)

Source: Bloomberg


VOX: Communication Services (monthly chart)

Source: Bloomberg


XLU: Utilities (monthly chart)

Source: Bloomberg


KRE: Regional Banks (monthly chart)

Source: Bloomberg


IYM: Materials (monthly chart)

Source: Bloomberg


AMLP: MLP (monthly chart)

Source: Bloomberg


VNQ: Real Estate (monthly chart)

Source: Bloomberg


S&P 500, Transports & Small Caps


SPX: S&P 500 (monthly chart)

Source: Bloomberg


TRAN: Transports Index (monthly chart)

Source: Bloomberg


IWM: Small Caps (monthly chart)

Source: Bloomberg


S&P 500, Nasdaq & VIX Index January COMPS & Annualized Performance

Source: Bloomberg



Chris Wenner

CIO & Head Trader

Wennco Downshift Strategies


Info@Wennco.com
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Wennco LLC is an SEC registered investment advisor located in Atlanta, Georgia. Wennco LLC provides asset management services utilizing the Wennco Downshift Strategies and Customized Option Overlay Solutions.