Maximizing Rewards And Minimizing Risks With Hedging | Investing With IBD

TL;DR

Despite the tech sector experiencing a downturn in 2021, the indexes were still performing well due to mega-cap stocks. The investment strategy had to be adjusted to include more sector and industry ETFs for better portfolio management.

Transcript

now in 2021 what was kind of interesting about that year uh of course as we noted earlier you had kind of the sector rotation you had the the tech wreck a lot of these you know shopify's and PayPal and zoom DocuSign basically anything that was great during the covid uh recovery uh was was doing very poorly in 2021 but the indexes were still doing g... Read More

Key Insights

• 🖐️ In 2021, mega-cap stocks played a significant role in driving the indexes' performance while the tech sector experienced a downturn.
• 🧡 The investment strategy had to be adjusted to include a wider range of ETFs, such as sector and industry ETFs, for improved portfolio management.
• ✳️ Flexibility in adjusting exposures and using options helped mitigate risks and take advantage of market conditions.
• 🔊 The screening process focuses on identifying high-quality fundamental companies with high volume breakouts to identify market leaders.
• 😘 Cash exposure is flexible, with the highest recorded level being around 60-70% during market lows.
• 🥅 Net short positions are not a goal of the fund, but slight net short exposure may occur based on Delta-adjusted positions.

Questions & Answers

Q: Did the poor performance of leading stocks in 2021 affect the investment strategy?

Yes, the decline in leading stocks while the indexes were still performing well posed challenges for the investment strategy. Shorting ETFs like SPY and QQQ against these stocks did not provide the desired results.

Q: How did the adjustment in the investment strategy improve performance in 2022?

The inclusion of sector and industry ETFs allowed for better portfolio management and adjusted exposures within the portfolio. This flexibility offset exposures in other areas and helped during rapid market drawdowns.

Q: What screening criteria are used to identify potential stocks for investment?

The initial screening process focuses on identifying meaningful breakouts, which are accompanied by high volume spikes in trading. Market Smith screens are used for this purpose. High-quality fundamental companies with high volume breakouts are further analyzed to identify market leaders.

Q: Are options incorporated into the investment strategy?

Options are actively used in the strategy. Index options are occasionally employed as a hedge, while put options on individual stocks are used to hedge against event risks or put a floor under a stock's price during retracements.

Summary & Key Takeaways

• In 2021, there was a sector rotation and a tech wreck, causing leading stocks like Shopify, PayPal, and Zoom to decline while mega-cap stocks boosted the indexes.

• The investment strategy faced difficulties due to the disconnect between underlying stocks and hedges, prompting the inclusion of more sector and industry ETFs in the portfolio.

• The expanded strategy proved to be effective in 2022, offsetting exposures and benefiting from rapid market drawdowns.