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Friday, March 29, 2024

Monday Market Movement – S&P 500 Rebalancing is Just Deck Chairs on the Titanic

bf-al635b_spsec_9u_20160915210031Rearranging deck chairs on the Titanic.  

That's the image that springs to mind as the S&P breaks Real Estate out of the Financial sector after the close today in a move that BMO Capital says is not likely to have a significant effect on either the new sector or the S&P overall.  REITs are, in fact, up 14% for the year but the ETF (VNQ) has pulled back sharply, from $90 back to $85 (5.5%) this month – a strong retrace of the 20% run-up as predicted by our 5% Rule™.

Notice how Industrials have fallen from 86% of the S&P in 1976 (pre-Reagan) to 9.7% on Friday but it was already down to 11% in 2001 – it took just 25 years after our Bicentennial to destroy 75% of those jobs in America.  Health care became a monstrous 15% of our market (thanks Nixon), double what it is in any other developed nation.  IT is a dominating 21% of the index these days now more so as the Financial sector is cut from 16% to 13% though Real Estate will still move in lock-step with Financials, so what's the point?

One effect we're going to see is the dividend yield of the Financial Sector is going to dwindle as all the high-yielding REITs are moving out of their neighborhood.  We have the FOMC Rate Decision on Wednesday (2pm) and it's a coin toss whether or not they raise rates at this meeting but Treasuries haven't waited and have already been rising – taking a steep toll on dividend-paying stocks as people opt for the (supposedly) risk-free alternative:

In truth, Treasuries are far from risk-free.  Even if you assume the country you are investing in will be able to pay you back, you still run the risk of the currency devaluing during your holding period – causing you to literally get paid back in paper that is worth less (worthless?).  Another way bond-holders get killed is when rates begin to climb.  That causes their low-rate paper to become unattractive and, should they try to unload it, they may have to do so at a steep discount.  

Nonetheless, there's only so many $100 bills you can fit under a mattress before it gets uncomfortable (and you have to REALLY trust your maid) and we have banks who charge us to hold our money there so the choices are putting money into Treasuries or Equities or, gasp!, Real Estate.  That's right, just 8 years after our last meltdown, many countries already have a bubbling Real Estate market and the broken out Real Estate sector of the S&P has TRIPLED since 2009 – back to it's pre-crisis highs despite much lower earnings.  

We'll have to wait and see what the Fed does on Wednesday (announcement 2pm) but Japan beats them to the punch with an announcement of their rate decision at 2am that morning.  Other upcoming excitement for the week is as follows:

Other than the Fed, it's not a very exciting data week and no earnings so we'll see how the market performs with only the one, one VERY BIG catalyst to move it.  It will be a good indicator of how much of a factor rates are for the markets and I still think it's more likely they raise than they don't and we're short on the Treasury ETF (TLT) with a bearish Dec $140/133 put spread that we bought for net $3.30 in our Options Opportunity Portfolio.

That portfolio, by the way, did close over 100% as we expected, finishing Friday with a lovely 102.6% gain and, as we said, with another $118,000 (118%) in planned gains from our remaining positions between now and Jan, 2018.  Apparently Seeking Alpha does not increase the price until October 1st but, after 9/30, prices for the OOP subscription will be going up to $250/month – which is still quite a bargain for a portfolio that's been averaging about $8,000 a month in gains in its first year.  

As you can see from the summary, we have plenty of cash on hand and we're using just 1/4 of our margin because we're still playing it very cautiously with strong hedges in anticipation of a much-needed market correction.  Until then, we still seem to manage to find some fun things to trade along the way.  

Just be careful out there!  

 

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