07-13-2020: The COVID Tug-of-War

Whenever there is a massive intra-day trend reversal, all the pundits are pushed to explain why it happened and very few are pressed to answering how they handled the reversal with regard to their own investments.

Well... I don't claim to be a <shudder> pundit, but I can tell you how today's reversal was handled and its impact on some of our (including my personal capital) portfolios.

Let's start with the newest strategy... TQA (Turner Quant Advantage)... In the whole scheme of things, nothing happened today. No stop outs. No unrealized losses. Still fully invested. Now... don't get me wrong, our TQA strategy lost ground today, but none of those losses become real until we sell; and we didn't sell anything today.

Now, some of you (and you do know who you are) might say, "Sure, Mike... that's EXACTLY what the buy-and-hold managers say." And, you would be right... with one major difference... I do have stops in place in TQA; they just did not fire. Even though the model dropped over 4% today in unrealized losses, none of that drop was enough to trigger a stop out. If you're joining me this coming Saturday for my TQA webinar, this little explanation will fit right in to what I plan to discuss.

Tactical Growth also had a tough day... and since it has a much more 'nimble' stop loss strategy than TQA, several positions stopped out where we turned most of the stop outs from unrealized gains to actual realized gains. Now, I know one or two of you will hasten to add that the model did move lower today, and it did. It lost a little over 3%, but contrary to TQA, the TG model is now only 61% invested. The stop outs today took about 21% off the table today and removed that much risk off the table. The stop outs were: AMZN for about 18% profit; VEEV for about 9% profit; DOCU for about 16% profit; FIVN for about 3% profit; ADBE for a -1% loss; RNG for about a -8% loss and PYPL for about a -3% loss. We had about the same amount of capital invested in each position, so the net result today wasn't too bad from a realized gain perspective. Yes... I know that all of those positions were higher this morning and stopped out lower than their high of the day, but the net results were some very solid realized profits.

This points out one of the major differences in managing investment capital... how and when to exit. TG is designed to be a lot more nimble in its exits than TQA, but it also becomes a bit more susceptible to short-term whipsaws. TQA, on the other hand, will be a bit later in getting out of positions when the overall trend of the market does, indeed, move into a bear cycle; but it is far less susceptible to whipsawing markets.

In comparison, TQA is still up over 19% year-to-date, while TG is up a little over 5%. Both are nicely beating the market, which is down about -2.3%.

Now, having said all of the above, what's my take on the market?

First of all, I don't think the market finally woke up and realized that the economy is nowhere near supporting a raging bull market. Nope... that ship sailed quite some time ago. Economic reality and the stock market are simply and totally uncorrelated; at least for now. So, I seriously doubt that the market has suddenly received a dose of reality.

No... what I think happened today was simply the result of the daily tug-of-war between 'Happy-Days-Are-Here-Again with COVID nicely under control' versus 'the COVID plague is out of control and the world is coming to an end'. Today, the world-is-coming-to-an-end group won. Add to this that some of the quants out there probably had triggers in place to sell once the major indexes hit the next level up, which some did this morning.

This evening, the news is, there will be vaccines in production by the end of the summer. So, maybe the tug-of-war will shift back the other way in the morning. Right now, for reasons that I will not expound upon, any bad news on the COVID front is exacerbated in the press. Any good news is, typically, down-played. It takes overwhelming good news to generate a positive press reaction and very little bad news to generate a negative press reaction. I know why this is and you know why this is, so I don't need to explain why this is.

I assume the much expected horrible earnings reports coming out over the next couple of weeks will (likely) also be a drag on the market, but truly good news on the vaccine front can totally overwhelm the reality of our economy. I suspect the market will continue to trudge mostly upward until that fateful day when the market and the economy once again become reasonably correlated.

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