Harvesting Risk Adjusted Gains in Bullish US Equity Markets Consistently harvesting positive gains is difficult. In markets where risks remain rife, that task gets harder. That’s where tactical hedging during periods of elevated risk help improve risk adjusted returns.
Analyst forecasts are for US equity performance to be neutral to bullish in 2024. Some believe that returns are likely to be dragged lower given the massive run-up in the final two months of 2023. Occurrence of a recession in 2024 could result in a sharp correction. Yet, a successful soft-landing combined with rate cuts by the Fed may drive markets even higher.
Uncertainty also persists over the upcoming US election. Election years generate an average of +7.3% returns over the last sixteen US elections. However, they also drive volatility.
Uncertainty is the only certainty for 2024. As seasoned investors and portfolio managers, forecasting is a fool’s errand. On any given day, time in the market is always better than timing the market.
ETFs could be a cost-effective way to gain exposure to the S&P 500 index, and they distribute dividends as well. Downside risks can be managed using CME’s short-dated equity index options around key economic events while maintaining a bullish stance on S&P 500.
US EQUITIES TO RALLY IN 2024 BUT NOT BY MUCH ACCORDING TO ANALYSTS
Most analysts are bullish on the S&P 500. Given a turbo charged finish in 2023, optimism remains muted on further upside gains as uncertainty persists.
Source – Business Insider
The colossal run-up in the S&P 500 and Nasdaq-100 over November and December has raised concerns of the market running ahead of itself on over expectations. The S&P 500 is 13.5% higher since 1/Nov while Nasdaq-100 has rallied 14.7%.
Yardeni Research, Oppenheimer, and Goldman remain bullish while JP Morgan and Morgan Stanley expect the benchmark index to give away some of the run-up during November and December due to high valuations, rising geo-political risks, and recession.
Oppenheimer believes market views of rate cuts in the first half of the year may be too optimistic. If Fed disappoints on rate timing and size of rate cuts, S&P 500 could witness drawdowns.
2023: A YEAR IN REVIEW
While inflation was stubborn all year, so was economic growth. US GDP growth in 2023 far surpassed expectations. Back in March, the Fed anticipated GDP growth between -0.2% to 1.3% in 2023. Come December, the Fed now anticipated GDP growth of 2.5% to 2.7%.
Inflation cooled much faster. Fed’s downward revision of inflation expectations points to peak interest rates. Amid the dovish outlook at its December meeting, markets rallied sharply in anticipation of accommodative monetary policy in 2024.
ANALYST MISSED 2023 S&P 500 TARGETS BY A SIGNIFICANT MARGIN
The final close of the S&P 500 was sharply higher than the most bullish forecasts from major banks at the start of 2023. The index was trading in the upper part of the forecast range for most of 2023 and squarely within the forecast range by HSBC, Goldman, and Citi until June.
Optimism of soft landing & on rising rate expectations drove the index well above the forecasts.
ELECTION YEAR IN THE US USUALLY DELIVERS POSITIVE RETURNS BUT UNCERTAINTY A RISK
2024 is an election year in the US. Election years on average deliver positive returns of +7.3% since 1960. Election years since 1960 have delivered positive returns 81.3% of the time compared to 68.8% for non-election years.
The results diverge for election years in which Democrats are elected (+5.6% returns) compared to Republicans (+8.9% returns).
Historical volatility during election years has been higher (18.6%) compared to non-election years (17.8%). However, the trading range during election years was marginally narrower (29.6% from low to high) compared to non-election years (29.9% from low to high).
Election years are generally viewed positively by markets but also tend to underperform relative to non-election years.
TIME IN THE MARKET TRUMPS TIMING THE MARKET
“Time in the market” has historically trumped “timing the market”. Staying invested for longer increases the likelihood of positive returns. Timing is hard, doing so consistently is even harder.
Source - Putnam Investment
Putnam Investments research shows that staying fully invested in the S&P 500 between 2008 to 2023 would deliver strong annualized returns of 10.6%. However, missing the 10 best days of the index during those 15 years would lead to annualized returns just half of that.
Instead of actively managing allocation towards equity indices in a portfolio, investors can opt to hold low-fee index fund ETFs such as SPDR S&P 500 ETF Trust (SPY) or iShares Core S&P 500 ETF (IVV), which offers:
• Low capital requirements relative to replicating index returns
• Decent dividend yield: SPY offers 1.39% dividend yield in 2023 while IVV delivered 1.44%
• Low expense ratios: SPY expense ratio is mere 0.09% while IVV charges a meagre 0.03%
To protect against drawdowns, investors can deploy long put positions on short dated Micro E-Mini S&P 500 (MES) options. Long puts on weekly MES options can protect against downside risk with relatively low premium. This makes them effective in managing event-driven risk.
KEY EVENTS CALENDAR 2024
Mint previously covered event-driven volatility within oil markets. Like oil, event driven volatility can cause outsized moves in equities too. For instance, in November upon the CPI release that showed inflation cooling, S&P 500 jumped 1.9%. Similarly, events can cause downside moves as well. In September, after a hawkish FOMC meeting, the index tanked 1.6%.
FOMC meetings and economic releases during 2024 could result in sharp moves in US equity markets, especially if they diverge from market expectations. Investors can trade the economic calendar by deploying short-dated options around these events.
CME offers weekly micro S&P 500 options for each day of the week. For the FOMC meeting outcome, which is released every Wednesday, the Wednesday or Thursday weekly options can be utilized. Similarly, CPI releases are typically on Tuesday-Thursday. Nonfarm payrolls are released on the first Friday of each month.
Put option premiums is a cost that can chip away at returns. Long-dated coverage during period of muted risk can result in wasted premiums. Instead, investors can focus their short-term hedges around the pivotal economic releases such as FOMC meetings to limit drawdowns.
ESTABLISHING TACTICAL HEDGES AROUND KEY EVENT RISKS
To maximize gains from long position in S&P 500 index funds, investors can tactically deploy short-dated CME Options on Micro E-mini S&P 500 Futures (“Micro S&P Options”) around key economic releases as well as FOMC meetings. Micro S&P Options offer low cost in premium and delivers downside protection from index drawdowns.
CME Group offers short-dated options on Micro E-Mini S&P 500 futures with expiries on Monday, Wednesday, Thursday, and Friday. Each weekly contract offers exposure to 1 MES futures contract or 5-times the index value.
In the lead up to key events, a portfolio manager will need to assess the notional value of their ETFs holdings and match it against the required number of options.
As an illustration, considering a long position in SPY on 2/Jan at an entry of USD 475.29; each SPY share offers exposure to 1/10th of the index value. To match notional value of the long ETF leg with the put options, 50 shares of SPY are required.
Based on data as of close of markets on 29/Dec/2023, weekly MES options points to an IV of 11% for ATM strikes. In case investors opt to acquire the weekly option a week prior to the economic release (7 days-to-expiry), the option would cost ~USD 150 (30 x 5) equating to 0.6% of the notional value.
If the index drops more than 0.6%, investors are protected from downside on their long ETF leg. However, where the decline is smaller than 0.6% or index rises following the release, cost of protection remains a cost to investor.
ILLUSTRATIVE EXAMPLE
As a hypothetical example, assume that the highest S&P 500 target for 2024 (Yardeni’s USD 5,400) is reached by the end of the year.
The path to the target is likely to vary with ups and downs. Assuming that 50 shares of SPY are acquired each month while implementing tactical hedges around FOMC meetings. Market performance and FOMC meeting performance is assumed to be randomly distributed based on past market performance.
The following table shows the net profit this strategy would generate through 2024 with and without the tactical hedges.
In the above example, the options hedges yield a net profit due to large hypothetical downside moves in July and September. In case the downside moves do not occur, the options legs would expire worthless and yield a net loss.
IN CONCLUSION
Signal of a Fed Pivot points to a bullish US equity market in 2024. However, raft of risks remains in sight across the horizon.
Prudent investors know well that investment gains are harvested by ensuring time in the market rather than timing the market. However, prudence also requires that exposures be astutely managed using tactical hedges that optimizes benefits versus costs of securing downside protection.
Here’s wishing all portfolio managers long returns and short risk going into 2024.
MARKET DATA
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Usmarkets
Dow Jones To 34150 $DowJones is going to be in downtrend in next few days while dollar going to be stronger.
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US100 - NASDAQ INDEXNASDAQ (US100) - The market has made a corrective move upwards in an ABC form. The larger trend correction can be termed as WXY with Y likely to end near the previous low (10,440), or possibly lower.
The last high of 15930 needs to hold with price making lower lows from here onwards.
This idea is based on the Elliott Wave Theory. Manage any trade/Investment with your own risk management.
SPY bearish - pitchfork analysisSPY reached double pitchfork resistance levels (2 different pitchfork lines intersecting close to the point where price reached), both on daily and weekly. RSI on weekly also reached a pitchfork resistance line. This gives a good probability that SPY will take a down turn soon.
FERRARI ($RACE) at the resistance area!From a technical point of view, Ferrari ( NYSE:RACE ) Stock Trend is bullish, but at the same time it has reached an important resistance area around $300/320, and from here it could trigger a short-term corrective structure. The minor structure 12345 might be completed, but as we can see from the chart, it might be a wave 5 of 3 (major), so once the correction is completed, I don't rule out a new bullish leg.
Trade with care!
Like if my analysis is useful.
Cheers!
DOW JONES Technical view on what chart is trying to say.DJ:DJI
A reliable thing on which almost all investors believe in to know the trends of the market weather it will be upside or in the down side in the short term. so here it is a basic outlook of what I think looking at the chart of our fav index Dow jones which tell us so many things at ones and sometimes says nothing.
This is the time where we have to understand it better that market condition based on the economy level is very weak we cannot expect a big really from here to the upside even after it has tested its important trendline recently on the 15th of march after 5 days of collapse of the SVB (silicon valley bank) after which common expectations should be of a crash in the market which has not been seen yet or i guess it has been just postponed for a while by the US fed by promising all its customer that they will get there deposits back that too 100% of the amount they have with the bank. and 97% of account there had more deposit than the amount that is insured by the government at the time of collapse of any bank. so to the point to fulfil the promise of the government at the time of inflation and economic crises nearly already smart ass US government printed more dollars in order to give it back to the depositors and maintain there promise as well as trust of people on banking system.
Above phase is just to make you understand the economic outlook at this period of time because based on economic factors only technical theory can be supported. now coming to the technical part of the index as we were discussing above on 15th of march as you can see on the chart important trend line has been tested once and then it has started moving upwards which is supported by the fed news of printing more notes and pumping it in the economy. after the support now price will tell the next resistance level of around 34500. we can consider a short term upward move due to the extra dollar printing up to 36000 and 36800. this is same situation as we saw in the times of pandemic when people got cash credits on which market reacted positive and gave us a big bull rally and new highs. we cannot expect new high because now the situation is same but not the economy, there is inflation now which was already at high and expected to go more in coming time of June and July and then soon we see a correction flush of all the extra money and a red color splashing all over the markets.
This was my over look of Dow jones on bases of economic and technical view hope this can help you read the chart more easily.
Thankyou,
2023 Looks Very BloodyStocks look poised to head sharply lower through the rest of this year. The banking crisis has been snoozed like your alarm clock blaring at you first thing in the morning. The thing is you only get about 5-10 mins before it blares at you again. More bank failures are coming. Most banks are holding treasuries with unrealized losses and myself and others are combing through balance sheets and finding weak players asking to collapse.
This summer looks very negative. My hunch is the debt ceiling issue is going to compound the bank crisis. There seems to have been no progress made at all between Republicans and the White House over the last couple months and we only have 2-3 more months before this becomes a catastrophe. Myself, along with many others, believed initially that this was a non-issue, but the charts are saying otherwise. Perhaps we should not dismiss this as impossible. It could be a black swan that's right in front of everyone's noses but they don't think it is worth inputting into their risk calculations yet.
The rally from the October lows is not impulsive. There is no wave count to be made that is bullish there and the upward action has cut back into previous highs a couple times so there are many reasons to believe further downside is much more likely.
It is going to get a lot worse before it gets better folks.
I hope you all have your seatbelts on and some money in Volatility.
There won't be a warning. One morning we'll just wake up and 6 more banks have announced stress and people will start freaking out. Volatility will spike 40% in a day and people will rush in.
Good Luck.
DJI May be surprising you and in lower time it looks in the 4th Hey guys can see the moves made by dow jones from 13 march....each leg looking a 3 wave structure....
In my view it is in 4th wave of lower time frame and would show you much deeper levels...
This is not a trade idea but for educational purpose....
abcde patter in formation...!
Regards
Bank of America (BAC) A great potential for the mid-term
Bank of America is one of the largest banks in the United States, with more than 4,000 branches and 16,000 ATMs located across the country.
In 2008-2009, the bank was among the many banks that required a government bailout during the financial crisis.
Despite these controversies, Bank of America remains a major force in the banking industry and continues to be a trusted financial institution for millions of customers.
⛓Technical analysis
We may see a drop of up to 5% in the coming weeks before the recovery that should take place in the first 2 quarters of the year.
Trade safe!