As I map out my market and trading strategy for year-end and for 2021, here are some strategic and thematic ideas that I am currently employing:
1. Short Fixed Income
Bonds are among the most risky and least efficiently priced asset classes extant. The 10-year note yield is about to break to the upside (of its 200-day moving average) -- the 30-year yield already has. A large, Democratic-led February stimulus package could be a catalyst for the 10-year U.S. note to climb over 1% in the near term.
2. Short Homebuilders
The sector is negatively influenced by the rate of change in bond yields. With mortgage rates rising and home prices catapulting higher the seeds of slowing home demand are being sown. Peak Housing may be at hand in the next few months. After having tripled from the March 2020 lows homebuilder stocks are vulnerable.
3. Short 'Growth'
Growth has benefited from a low risk free rate of return which has expanded valuations. This tailwind of 2019-2000 could become a headwind to high price earnings multiple stocks, and maybe for the market as a whole.
4. Short Stocks That Have Had Large Valuation Expansion
Again, interest rates rising are non supportive of further P/E expansion and argue in favor of multiple contraction. Apple (AAPL) is the poster child.
5. Long Value
There is so much money in "growth" that any incremental fund flow losses and pivot into value could have a forceful marginal impact on demand/supply equation for value stocks, which are very cheap relative to growth. A Democratic administration will likely lead to a lengthy regulatory attack, which most companies, I have written, will endure profitably.
6. Long Banks
I have written that third-quarter 2020 likely represented a cycle low in net interest income/margin. This, coupled with historically low valuations -- that rival 2009 -- could light the fire of the much hated bank stock universe over the next few quarters. (Note: Several banks (e.g. Barclays) and consumer finance companies crushed EPS expectations after the market closed).
My Evolving Short Exposure
Given my more active trading of late, I like to repost my trades and changing exposure for clarity and transparency
In "Today I Give The Market A Bad Name" I continue to chronicle my move from large net long to net short.
On Thursday I started the day medium-sized net short in exposure.
I ended the day between medium-sized and large sized short:
* I shorted a package of homebuilders.
I further observed that the pivot from growth to value on Thursday, intensified. (Towards that end I had initiated positions in two value ETFs earlier in the week).
My long exposure is skewed towards value.
I ended the day between a medium-sized and large-sized net short exposure.
(This commentary originally appeared on Real Money Pro on October 23. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)