The Moneyball Newsletter – June 2023

The Moneyball Newsletters are published exclusively for the graduates of The Moneyball Investors Playbook course. At the requests of some of our community readers who are having a tough time making sense of the current market, we decided to make this particular issue public in real time to hopefully offer them better clarity. However, certain portions of text or images may be blurred out or omitted altogether in this post that are covered during the courses.

Market Views And Updates

From The Desk Of TJI

The bear market is behind us

We mentioned in our previous newsletter at the start of 2023 that patience pays a lot as an investor. For those of you who had shares in the US markets, you may have seen a sharp rise in their value, especially for stocks that were in the tech and communications sector. In particular, we shared that Meta, Adobe and Microsoft were very compelling ideas for consideration back then and these stocks have now become big winners for some of us in the community thus far this year. On the other hand, retail investors who purely relied on “financial myths” and acted on the adage, “Sell in May and go away” would have missed the quick run up and the beginning of this new bull market.

Our current P/L year to date:

After ten consecutive interest rate increases for for the past fifteen months, the Federal Reserve had opted not to raise the federal funds rate at the latest June 2023 Federal Open Market Committee (FOMC) meeting, although they signaled that we may still be headed for higher interest rates in the future and that this current pause may not spell the end of the cycle. 

To this, we are of the opinion that the Fed wants to exercise the flexibility for future rate hikes should the inflation data not slow down enough. But we would like to think that we are much closer to the very end of the cycle than anything. Even if they should do so which we suppose is less likely, it will only be a matter of time that the long term rates will fall again which makes it easier for businesses to grow and expand with cheaper access to capital.

In our Facebook post, we shared that this is likely to be one of the most hated bull markets in history as the majority of the market participants are left on the sidelines thinking that the markets will continue to stay bearish (majority of them are net short). This is because they have been listening to pessimistic macro sentiment, economic data from market analysts or financial bloggers to make their investing decisions. There is absolutely nothing to suggest that a bull market can emerge with all the negative headlines that have been ramping up in the financial media. Nonetheless, the rally has been attributed to the new wave of “artificial intelligence” for justification.

This is in stark contrast to the period from early 2020 to the end of 2021 where markets seem to only go up in one direction and the all too familiar rallying cry of “buying the dip” has given way to “stay out of the market at all costs” the last few quarters. This comes after the S&P 500 Index (SPX) fell close to 27% from the peak while Nasdaq 100 (NDX) tumbled close to 37% from its last peak.

Fast forward to June 2023, the S&P 500 has finally closed above 20% higher than its previous lows of about 3490 in October last year which marks the start of the new bull market. At 248 trading days, it was the longest bear market for the S&P 500 since 1948 which took 484 trading days. Excluding the latest bear market, each bear market on average lasts 142 trading days. It was worth noting that the resilient comeback of the US index came against the backdrop of the most severe Federal Reserve’s rate hike in four decades, the deeply inverted yield curve and the turmoil faced by US’s regional banks. For the last one year, the market in particular, has also been on a recession watch that perhaps hasn’t fully materialized.

This is how bull markets start and are born out of pessimism. This time, it is no different. Always apply the methodology that you have learnt during the Moneyball Investors Playbook course to assess the market sentiment and decipher what is likely to happen next. It gives us clarity on the behavior of the market participants rather than listening to the incessant market noises. We can follow our game plan confidently and invest when the odds are in our favor when the probability of the market moving in our desired direction is higher than otherwise. This is by no means to say that the market will rebound immediately after we buy but as long as we accumulate at attractive price levels and that we do it in stages, our average cost will be reasonably low which will give us a good upside eventually when the stock recovers. We will make the best portfolio returns in this manner.

We would also be launching our Options Investors Playbook where investors can learn to mitigate their downside/lower your average costs and improve their investments returns. Those of you who have been well acquainted with stocks investing already, learning options is a great way to level up and improve your odds as an investor. You may check out this link to register for the upcoming options workshop.


Quality stocks will eventually recover

Despite some US tech stocks and travel related stocks having recovered near to or above its previous highs, there are also other good stocks that have yet to shoot up meaningfully. Understand that for stocks, they often move in tandem based on their industry or sector. Different groups of stocks will rise up at different times. Usually the ones that were beaten down the most in the last crash may tend to rebound the fastest from our experience. This is what happens with the tech stocks that were the worst performers in the recent crash before they eventually recovered fast and furious. As long as we pick quality stocks, the recovery will only be a matter of time.

Back in late May, some investors may highlight that the current rally is not sustainable as it lacks market breadth and may not have legs. Many investors are staying cautious as there is only a narrow participation with just about 30% of the stocks trading above their 50-days moving average. The price jumps in the mega-cap stocks recently were a result of some of the stocks taking advantage of the artificial intelligence theme this year and the adoption of cost-cutting measures.

Here is our take on this. With the market breadth being narrow, this disconnect eventually will be resolved in two manners. Either the strong gains from the leaders start to fade going forth or that the other market laggards will start to play catch up. It is worth noting that even at the start of most bull markets, rarely do all stocks from all sectors recover at the same time. Every dog has its day and sector rotation often happens where different sectors are in favor at different times. The trick is to know which ones to focus or concentrate on so that an investor can invest more efficiently with their capital and to recycle them once the job is done in line with our Moneyball investing methodology. Hence a narrow market breadth does not necessarily spell all doom and gloom. As of late June, about 50% of the stocks are now trading above their 50-days moving average.


It is time to be very selective now

So now, where do we go from here?

We have to be cognizant of the fact that for some of the US stocks, they have been up too far too fast, and are likely to pull back and consolidate before it goes back up higher. The sharp ascent of current prices are usually not that sustainable. Consequently, the stocks that have gone up too fast have also pulled the index up pretty quickly because of their heavier weightings and hence the same goes for SPX and NDX that they are currently a little too frothy for our liking. Do not chase AI, tech or travel-related names like the ones below. They are overdone at this point in time.

For the general index of SPX, a potential pullback to 4,150 or 3800 levels is not out of the question which were

For a rough gauge of when we may like to accumulate more good stocks, it will be when the SPY ETF heads back down to 415 and 380. For the US tech stocks in particular, it will be when the QQQ EFT is closer to 330 and 310. Of course it may or may not happen, but as a prudent Moneyball investor, our job is to manage our risks and buy only when the chances of making outsized gains are great. But do bear in mind that you should always be referring to the individual stock charts to make the buying or selling decisions of them. 

These pullbacks may or may not materialize, but a true Moneyball Investor will only pursue the most compelling investment ideas at a good price and at a good time. This is also why we divested from DBS by mid-February this year and recycled the capital to opportunities with better upside potential. We would rather not invest if the odds of capital loss is greater than that of gain. You can’t grow what you lose. Amateurs often think in their mind how much they can potentially make from a trade. Professional investors on the other hand will ask themselves how much they can potentially lose from it. This is how we manage to mitigate the number of positions going underwater and also the magnitude of their drawdowns if at all. At the same time, allow the winners of your best ideas to hit their own home runs eventually.

At this juncture, it can be prudent to take some money off the table for the over-extended tech or AI related stocks from a risk standpoint while waiting patiently for the rest of the stocks to participate to the upside. Some of the stocks that are ripe for the picking which we can reduce our concentration on includes:

Apple (AAPL)

Microsoft (MSFT)

Booking Holdings Inc (BKNG)

Adobe (ADBE)

At the same time, here are some companies with a solid business that have a lot more room to go from here:

Nike (NKE)

UnitedHealth (UNH)

Alibaba (BABA)

It is also an opportune moment to build our long term dividends portfolio in some of the Singapore REITs where “the boat has yet to sail” and can possibly expect at least 5% and beyond in terms of dividend yield in today’s prices. Some of the Singapore REITs are floating just above their Covid price levels. 

Mapletree Industrial Trust (ME8U)

Capitaland Integrated Commercial Trust (C38U)

While we can also get such similar yields from the Singapore banks at this juncture, we would not be looking at them as the downside risks for them are significantly higher than the REITs are technically on the charts. For DBS (Ticker: D05), we would be more receptive to enter at about $25 which you can observe from the charts that

The even more important lesson is to invest objectively

Skeptics will say that markets have yet to price in a recession and that we are having a fake bull rally and that markets are going to come crashing down once the full effects of recession settles in. This is one of the narratives that will be seen in the financial media that will prevent investors from either getting into the markets or getting investors who are half convinced about the rally to pull their money out. 

And should the market continue to thread even higher subsequently, the financial media will then paint a rosy picture of the economy and say something like “the worst is over” and will give the “all clear” signal to start pumping in your money. That is in fact the time when we will start to get out in stages and keep more dry powder.

History doesn’t repeat exactly but it often rhymes like the paragraphs above. Good and bad times don’t last in the financial markets. The recent bad times have been longer than usual and we would be more inclined to think that the worst has indeed been over and that we are in the innings of a new bull market.

Market crashes like the recent ones in 2022 and 2020 are no doubt nerve-wrecking but are part and parcel of the price we pay for good long term returns. However, as you learn by now, it is absolutely possible to mitigate or avoid some of these painful crashes by investing mindfully with the actionable knowledge you learnt in our Moneyball Investors Playbook and by tapping on suitable options strategies in the Options Investors Playbook.

As we stay alert to the market developments, don’t be just problem minded but also opportunity minded as an investor. Never let a good crisis go to waste and be ruthlessly greedy when the opportunities become too compelling. We share this often in our regular market updates as well such as when we had the news of a recession coming from FED in late April this year, having the gumption to accumulate stocks at a great price during the October lows last year without having to wait for the CPI numbers to drop as markets are forward looking and how to deal with geopolitical tensions such as the Ukraine invasion.

Research articles like the recent ones by the strategists at Morgan Stanley which anticipate a sharp pullback in corporate earnings that will reverse the rally or the one at Goldman Sachs which expects a mild growth in the earnings per share should only be taken with a pinch of salt. Even these analysts cannot agree with each other with the same data points that they have.

Hence, simply ignore the opinions of market analysts, financial bloggers and have a systematic decision making process as to when you should be buying or selling where no emotions or biases are involved. As long as you stick to the thought process and methodology that we covered during the lessons, you do not need anyone to tell you when it is good to buy or sell.

That said, do also bear in mind that the emergence of a new bull market in US does not preclude the fact that short term corrections of 5-10% are probable or even a revisit to a bear market (albeit pretty unlikely). A more probable scenario would be a stronger shift towards an overall bullish market sentiment with broader breadth where we will start to see more funds rotating to other US stocks that have yet to meaningfully gotten up while the stocks that have already run up will see some form of limited pull backs.

As for the China and Singapore markets, although the downside seems rather limited, we may still stay range bound for a while more before we start to trend upwards.

The thing is that we never say never in the markets, hence we still stick to our risk management strategies and adjust our sails along the way. This is a better way to invest and an even better way to get awesome risk-adjusted returns.

Do sit tight for the rest of this year and all the best to fellow investors!

Onward And Upward,

The Joyful Investors

The Moneyball Newsletters are published half-yearly for graduates of The Moneyball Investors Playbook. Our graduates have access to more in-depth trade alerts and actionable insights in our private Telegram chat group. For the general public, you may join us on our free Telegram channel and follow us on our socials @thejoyfulinvestors for more frequent market updates and investing tips as well.

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