11-09-2020: What the heck just happened??

Year-to-Date Strategy Stats as of today:

+ 36.77% : Turner Quant Advantage (TQA)

+ 12.55% : Tactical Growth (TG)

+ 1.64% : Diversified Income (DIS)

+ 16.98% : Leveraged Index (LI)

+ 9.90% : S&P 500

Despite incredible news on the vaccine front today, much of the tried-and-true stocks of recent months took it on the chin... big time. And, in TQA, we own one of those stocks that, in addition to getting socked on the chin, got punched in the gut. How do I define "punched-in-the-gut"? Down nearly -17% in just one day. There is no way to sugar-coat that kind of hit, but the TQA model does take on some higher-risk (volatility) stocks. That is one reason why this model is up nearly 37% year-to-date. This model tends to hold higher momentum stocks that have the propensity to move up strongly as well as down strongly, from time-to-time.

Let's take a deeper dive (pardon the pun) into this stock that lost so much today. I would like to tell you the ticker symbol, but I don't want to give you buying or selling advice on any particular equity; not in this forum. I'll call this stock, "XYZ".

XYZ is a great company. Great Fundamentals with a TCI Rating of 72 out of 100; a "STRONG BUY" Fundamental score. It also has (had) great Technicals with a rating of 90 out of 100; a "STRONG BUY" Technical score. But... and this is a BIG BUT... this stock is up over 300% this year and highly levered to the stay-at-home world in a COVID-terrified environment. Today, Pfizer announces a vaccine with a 90% efficacy rating will be available in a limited fashion in just 3 more weeks. This announcement is truly a miracle and a tribute to the great work at Pfizer and the fact that you-know-who removed almost all the regulatory roadblocks that would normally move this announcement out another 3 or 4 years... but... I digress.

Let's stick with XYZ and what the heck happened today. In TQA, we normally have stops at 3 standard deviations of normal volatility below the Friday closing price. But, with the market in such a state of potential risk in this post (semi) election period, I am using 2 standard deviations. A standard deviation of normal volatility (let's abbreviate "one standard deviation" with "EM", which is also an abbreviation for "Expected Move" which is the estimated amount of volatility a stock exhibits on a weekly basis based on the last 12 months of volatility history... whew... this one will be on your semester test) for XYZ is about 13%. If we held XYZ in our Tactical Growth model, the stop would be about 13% below the Friday close. 1EM, in this case, is 13%. By the way... this percentage varies with every stock and ETF based on its historical volatility and can range from under 3% to well over 20%, depending on the equity. XYZ closed this past Friday at about $500. That means, 1EM for XYZ is about $66.00. 2EMs would be 2 x $66 = $132. A 1x EM stop would be calculated as follows: $500 - $66 = $434. But, in TQA, we have a 2x EM stop on XYZ, which puts its stop at $500 - $132 = $368.

Now, before your eyes completely glaze over... here is what this is all about... Our objective is to hold onto positions until they move from "normal volatility" to "a change in trend". In TQA, a change in trend is when a holding moves against us (loses) by more than (up to) 3EM's. In Tactical Growth, in comparison, our stops are usually 1EM below the Friday close... that means TQA has a stop loss tolerance of 3 times that of Tactical Growth.

The TQA model is designed to handle whipsaws far better than any of our other models because it takes a serious, longer-term down-trend to hit the stops of equities held in TQA and this permits TQA to stay invested longer and to take advantage of rebounds by already being invested. This can be good and it can be not so good on any given day. While the TQA model has an historic draw-down history of only -4.55%, today it dropped -1.77% and a great deal of that loss is directly tied to the XYZ holding.

So, if you are a client of mine in the TQA model, we had a pretty rough day. But... if you are peeking over the fence at the near 40% gain in TQA and saying to yourself, "I want some of that!!", I want you to understand that there can be some days in some holdings where we can see substantial sell-offs and still be holding the stock.

Right now, XYZ is trading at about $417 and lost almost 17% today. But... and this is very important... XYZ is still a long way from stopping out. Remember, its stop is almost 26% below the Friday close and it only dropped about half that amount today. If your risk tolerance is not strong enough, financially, to handle losses like we incurred today in XYZ, then you would be far better off in our Tactical Growth model, where the stops are set at 1EM and not 3EM's.

Our goal is to achieve the results that our clients want, which means market-beating returns in a bull cycle and to generate profits in a bear cycle. Most advisors have a goal of just outperforming the market. That is a great goal in bull markets, but that is a horrible goal in bear markets. If your advisor beats the market by 20% in a bear market that goes down 50%... you have still LOST 40%. Ask your current advisor what his/her goal is for your portfolio in a bear market... you might be very surprised to learn that it is probably to not lose as much as the market loses. That is a pathetically poor excuse for a goal for any asset manager in my opinion.

Don't have an asset manager? Call me. Let's talk about this a bit more.

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