This is a short write-up to update some of the changes i made to my portfolio. In my May post, i have pointed out that markets are uncertain in the second half of 2021, and the reflation narrative might be shaken. I also mentioned that FEDs messaging is the key to set the sentiment for the markets. In the June FOMC meeting, FED has announced that potential rate hikes will not be until 2023. However, their stance seems to be hawkish from now to 2023. In addition, they are still not shrugging off tapering. Since my last post, the long end of the curve started to flatten a bit. We have also seen some price action in the dollar after the FOMC, which led me to pay a bit more attention to some of my trades.

Macro Updates

Bull Flattener

The yield curve has started to fall at the long end (7yr-30yr), indicating growth is about to slow down.  In addition, YOY inflation has cooled off a bit. When economic growth slows down,  growth stocks will provide greater opportunities due to duration play because higher cash flows are in the future compared to value stocks. Growth stocks are more attractive when nothing is growing.

Sector-wise, technology, consumer discretionary and communication started to outperform energy, real estate, industrials, Materials, and utilities since  June 2021.

The Rising Dollar

After the June FOMC meeting, the dollar started to spike up. This is alarming for the reflation trades (cyclical and commodities) and emerging markets.  If it breaks 93.5, it has more room to rise up. Most importantly, the rate of change is what matters to us. If it moves quickly beyond 96 to 100, triggering a risk-off event has a higher probability. Such dramatic rise of the dollar does not only hurt reflation trades, it hurts the entire market as a whole. That is why the dollar is the single most important thing to watch out for in the next 3 to 4 months.

When it moves it moves everything.

VIX

We started to see some spike in VIX in late June (spiked to 20s), but it has cooled down to 15.  It is not of concern at this point, but something to watch out for. Volatility is gradually getting cheaper and we all know what will happen when vol gets suppressed for too long – it will lead to hyper-volatility.  As I mentioned in my May article, Jackson Hall is coming in August and tapering is still on the table.

As long as the dollar remains range bound and FED has minimum interventions with tightening, bull flattening brings up a goldilocks environment for risk assets, which favors mega-cap growth stocks and some hyper-growth names (ex -ARKK constituents).  Nasdaq and Hyper-growth names already started to show some signs of strengthening compared to reflation winners (copper miners and energy stocks) in the last several months. However, Goldilocks does not mean that other areas of the markets are unfavorable, but growth areas of the markets benefit more compared to other sectors.

The implication to the portfolio

As a trend follower, portfolio management becomes crucial during uncertain times. I am bullish on some metal miners and energy in the long term, particularly along the ESG theme. For some high conviction names (ex- Vale and U), market dips will present a good opportunity to add more to those positions.   Having said that, it’s better to take some profit off the table from certain reflation trades. One should not be too greedy when there are good trades already working in your favor. Trying to squeeze more juice in uncertain times will not help to break the deal, but diminish your hard-earned returns. Having my high conviction trades are still on the card (Crypto and Carbon credit trade), it’s time for me to take some profits from my reflation trades given that macro conditions are not in their favor short term.  I will have the opportunity to re-enter in to some of those trades at a later date.

YTD performance of the portfolio is already hovering around 60%. Keeping some dry powder for the future is sensible during uncertain times rather than squeezing more. I think having some discipline is more important in the next 3-4 months.

Portfolio Updates

  • RIO – I had about 15% gain over 6 months and I have trimmed down this trade. Technical wise it is consolidating and I have  Vale in my portfolio which is a similar but high conviction trade with better 6 months performance and technicals.
  •  CVX, BAC, and ICE – These trades were flat since the beginning of March. In addition,  charts do not look promising in the medium term when taking macro into consideration. I already closed these trades.  I might get a better price to re-enter in another day.
  • No Change to Vale, U, ALB, INFL SBER, and MITSUI, and I have placed stop loss to these trades.
  • As a new addition, I included ROKU in my portfolio. Fundamentally and technically ROKU  looks attractive at this price. Moreover, it is in  ARKK ETF with a higher weighting and more funds will flow into this ETF if growth starts to perform well.  However, most of the ARK valuations are still expensive. In relative terms, some of them are average compare to certain growth names like TSLA. ROKU had a significant run-up in the last two weeks then it cooled off a bit.
  • AMZN chart is also showing a bullish rectangular pattern. I have already bought mAMZN(mirror AMZN -synthetic stock) from terra mirror protocol using some of my crypto capital (closed some of the losing ALT coin trades to fund mAMZN). This is different from buying actual AMZN and it has its own risk. Nevertheless, I wanted to try out the mirror defi protocol.  mAMZN allows me to use my existing capital in terra blockchain and express the view on AMZN at the same time.

Final Note

In my opinion, the reflation narrative is losing its momentum. I do not know whether it’s a short-term or a long-term consequence. However, my biggest worry is the rising dollar, and it might hurt my reflation trades. In addition, the speed of its rise is something not to take lightly. It can lead to a market risk-off event in a short period of time.  Looking at the rise of Meme stocks,  excess liquidity, and debt in the system, the rising dollars can add more problems to markets.  Having said that, this slowing growth can be due to seasonality as well, which is I’m not sure either.   Most importantly, we cannot predict the future precisely, but we can stick to our discipline and control the risk. I think that’s what is important in the next 3-4 months. Keeping some dry powder is always useful; remember, not having a position is also having a position when things start to go south, and freeing up some cash provides more flexibility into ones portfolio.

Growth over value in the medium term but respect the dollar

Disclaimer – ” I am not a financial advisor and this article is a construct of my personal views on various markets and the economy. Therefore, information shared in  this article should not be used as investment advice by the reader”

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