+15%, hope you've enjoyed it

An overview of our performance over the past two months

Reminder: these types of market positioning/macro analyses will no longer remain free as of September. The paid subscription will start after Labor day, I’m excited to let you know what this will include.

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Over the past two months I’ve been showing you a glimpse of how we like to make the macro positioning decisions in our hedge fund. We track a whole number of indicators which we condense into a simplified formula that helps us track the right time to shift gears, from bullish to bearish. The most important thing is always risk management, protecting your portfolio when the market is overheating (like in June and July), in order to reap rewards when it enters a correction (like in August).

The goal is to buy both shorts and longs when they’re cheap, meaning that the early allocation will necessarily start at a loss, unless we’re lucky enough to have the market move in our direction immediately after putting on a position. For example, our initial allocation into shorts at the end of June and again in mid-July all carried a loss for a few weeks, before delivering a significant benefit during August.

The total? 15% gain for the portfolio since June 30th. Not bad at all.

Here is a quick summary of our predictions made on this newsletter, date by date, and how we positioned for each:

• June 29th - our analysis on the validity of the “new bull market” argument. We stated that it was imperative at this point to start buying hedges for protection (SPX and NDX puts and put spreads). Always start small and build up if necessary (or cut down if the market breaks key levels). Bull trap more likely than a new bull market.

• July 16th - we anticipated that Tech earnings will add more fuel to the rally (which they did until FOMC a week later). Adding to hedges (SPX and NDX outright puts), they were even cheaper. Keeping tech longs.

• July 27th - post FOMC analysis saying that the rally might continue but that higher for longer is here to stay. We were not expecting much action until the CPI report on the Aug 9th or Jackson Hole on Aug 26th. This recommendation fell through after the Fitch downgrade next Wednesday. No big deal, the end of that week (August 5th) signaled that the bond-equity correlation is back to 2022 levels and that Fitch wasn’t the catalyst we needed. Something else will trigger it, like inflation.

• August 10th - and then it happened, the CPI intra-day reversal providing ample opportunities for a sell-off.

• August 15th - in our podcast we expressed an expectation of a bearish continuation, and boy did it continue. SPX ended the week 100 points lower. No new shorts were added, just held the existing ones.

• August 22nd - cover the shorts! Take profits and remain neutral for what was likely to be a volatile week. It was, NVDA earnings induced a swing move down, Jackson Hole a swing move up. Contrarian.

• August 25th - start building up the hedge position again, preparing for September

• August 29th - no change despite the 3-day rally. Watch break of 4540 level to pivot, or add to the shorts if necessary.

Did we perfectly time the market? Of course not. Even if we had it would have been more down to luck. Timing is important, obviously, but it’s not crucial if you place your positions carefully enough to help you weather the losses.

Our latest hedges, for example, (initiated on the 25th) are at a loss right now, just like they were during July. But they present less than 1% impact on the overall portfolio. When the environment is right (e.g. if the bullish move is not sustained) we are happy to add to them for an even lower price. If we do invalidate the entire bearish hypothesis, no issue in taking a small loss.

Once again, it’s all about risk management. Specifically, how much you risk for the potential gain. In the hedging strategy, the profile is 3:1 for another 100 point move in the S&P by mid to end September (like the one from August). The reward gets exponentially better for a stronger decline by the end of September.

And if it continues bullish and the August sell-off was just a correction? No problem, book a small loss, and move on. To longs.

It comes down to probabilities. Ours say that a bearish move is still the more likely outcome. Not because of a recession, but because of how the flows are positioned in the market, because of conditions on the credit and housing markets, because of at least one more hike expectation (even though this is probably already priced in), because the Fed will stay hawkish on inflation, and because of the overall sensitivity of the market to a bad print of economic data (e.g. if CPI starts to go up again). All good reasons to remain protected and not go all in long just yet.

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DISCLAIMER: None of the contents of this website can act as investment advice of any kind. Oraclum Capital, LLC (Henceforth ORCA) is a management company responsible for running the ORCA BASON Fund, LP, and for organizing a survey competition each week, where it invites the subscribers to its newsletter (this website) to participate in an ongoing prediction competition. The information presented on this website should under no circumstances be used to solicit any investment advice, nor is it allowed to be of commercial use to any of its readers. This website contains no information that a user may use as financial or investment advice. All rights reserved. Oraclum Capital LLC.

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