The Weekly Equity Write Up: Rotation Alpha

Generating alpha in the regime rotation

“It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong.”

                        ― George Soros

The Big Picture:

Alright let's get to work. Exactly a year ago I was scratching my head asking myself will Fed chair JPowell be the next Arthur Burns as his Fed hike was at the cross section of Core CPI and Avg. Hourly Earnings......................

Now let's fast forward to Jan 2024. Inflation has come down as well as wages. Will the timing of rate cuts really make a difference if it's initiated in March 2024, May 2024 or June 2024 if the job of taming inflation is more than 80% complete and capital has to be deployed?

That question can lead to fierce arguments within investment committee meetings at hedge funds around the world but my simple view is that it really doesn’t matter because the market will always trade such an event 6 months in advance. Perfect example is the fierce November rally (especially within growth tech) which priced rate cuts for March. 

The beginning of the year started out rough for many due to the conflicting hot Headline CPI and Core CPI data (which energy bled into) putting in question the March rate cut But underneath the surface quality tech and growth tech companies that I love have been continuing to steamroll

Plus Earnings have been coming in very strong to kick off the earnings season and also increasing guidance within the semi’s (TSM and SMCI) has the sector leading YTD up +9%!

Key signals:

• My view is that today’s OPEX will be the first clearing event in the equities space that active Institutional managers are monitoring before fully readjusting their portfolios for the year! 

• Second, during the Jan 30-31 FOMC we’ll get a neutral tune from Powell in the lines of “We will not let one hot print determine our views on rate cuts!”. Rates have peaked and we’re in election year but most importantly market participants need to understand that a FFR between 3%-4.5% will be the norm!

• Third, NFP will remain robust with unemployment under 4%

• Fourth, Headline CPI should come in as gasoline prices in January have come in nicely pivoting the market back into the goldilocks landing environment.

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Trades: Mean Reversion Alpha

Which Sector Will benefit from this regime?

Quality and Growth tech without a question!

My 4 mean reversion trades for the following weeks:

TSLA back above $220

DIOD back above $73

ZBRA back above $260

MDB back above $410

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Conclusion:

These trades are the ways to generate alpha and significantly outperform the index. When you map the macro regime and sector rotations onto these specific situations where mean reversion has a high probability, you begin to outperform the index.

Check out the full intro interview I did with

Capital Flows

in this article:

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