SPY - How To Surf The Turbulent Market With The Dual Control System

2023-06-22 07:49:31 ET

Summary

• The article discusses the potential of the S&P 500 Index and the C/C Ratio to maintain global financial stability, similar to the role of the Federal Reserve.
• The S&P 500 Index is unique as a global ETF, trading 24/7 and covering a broad range of sectors, making it a strong backbone for the global financial system.
• I suggest that a dual control system equipped with the S&P 500 Index and the C/C Ratio can counteract pessimism in the global economy and financial system.

Introduction

I grew up in a harbor in South Korea. A Tidal Wave is very rare but if it rises out of nowhere, it is extremely destructive. When the sea was calm, many fishermen on small wooden vessels departed the harbor.

Normally they returned with a big catch, and many women worked, trimming, drying, and packaging them. The vessel owners paid the fishermen and women, and sold the fish packs in the market.

There were many young widows in the small town in the early 1950s. My mom said that the fishermen didn't come back several years ago. The sorrow story should be short.

The town is now a big city, "Pohang": Pohang Steel company, Pohang Engineering University, and a branch of the Bank of Korea (which is the central bank in Korea) are there. I graduated from Pohang Elementary and Middle schools, and moved to Seoul in 1955.

Recently some articles have described the Tidal Wave in the global economy and financial system, as an elephant in their room.

The Focus

In one article of mine, I said that The Federal Reserve [Fed], as an actual global central bank, has power and an ability to keep the world peaceful.

The focus of the article is to check the capacity of both the S&P 500 Index and the C/C Ratio to do the same role of the Fed to keep the global financial system safe.

The Backbones of the S&P 500 Index (or [[SPY]])

Most reporters, writers, and investors think SPY (the S&P 500 Index) is just one of many ETFs (or Indices). The thought is wrong because:

First, SPY is a global ETF which is trading 24/7 continuously. SPY is the unique ETF in this regard. The high-tech companies and multinational corporations do business overseas.

Second, SPY has 12 sector ETFs which are very popular globally and domestically.

Third, SPY covers not only tech stocks but also other sectors broadly, covering heavy-dividend paying, and other material stocks.

The Origin of the Dual System

"The A-A Decision and the C/C Ratio are mutually constrained each other. In a near term (in a couple of weeks), however, the C/C Ratio is somewhat free to maneuver to take an advantage when any security is mis-priced, disregarding a target of the A-A Decision (for example, a 50-50 or a 60-40). On the other hand, in a short term (in a couple of months), the A-A Decision would dictate by rebalancing toward a target allocation, leaving the C/C Ratio disrupted temporarily."

(From " A Dual-Portfolio Strategy With 2 Controls Has Worked Out. Can It Weather Any Looming Storm?" Nov. 08. 2013)

In 2013, lifted was the above quoted article, in which a dual control system with the A-A (Asset Allocation) Decision and the C/C ("Cash/Capital)" Ratio was accurately defined, almost one decade ago.

The Dual Control System had directed 1) the A-A Decision (60:40 or %0:50) by two-long term portfolios in a couple of months (Trend), and 2) the C/C Ratio (where Cash was the online savings accounts at the GE Capital Bank ("GECB") and in 2016 my two accounts were transferred to Goldman Sachs USA Bank ("GS Bank") which merged the GECB.

In 2020, the two portfolios were liquidated and the proceeds were deposited in the GS Bank's online savings accounts. As a result, the dual system changed to A Single System. A few days ago, a New Dual Control System with the S&P 500 Index and the C/C ratios, as shown in Table 1.

Conclusion

In my opinion, we can segment four groups of writers in any field: 1) optimistic writers [OWs], 2) neutral writers [NWs], 3) moderately pessimistic writers [MPWs], and 4) intensely pessimistic writers [IPWs].

So many good MPWs gave up because they couldn't find any reliable topic in the "exceptionally strong and persistent Bear Rally '' for several months. It is not a "Bear Rally". It is a genuine Bull Rally. In my opinion, most writers are so confused.

The watchable danger comes from the IPWs side: They publish somewhat shocking titles and fearful contents.

A good approach can bear an unexpected fundamental solution for a great failure in the global financial system. We hardly predict the crucial event such as the meltdown of the global credit system, but it may erupt suddenly from a jolt in a certain narrow area domestically or globally or both.

For example, some posts predict a tumult in the global credit system, and draw hundreds of comments. The pessimism grows swiftly, and spreads widely. In my opinion, that's what the posts want to accomplish.

The Dual Control System equipped with the 500 Index and the C/C Ratio may successfully counterattack the pessimism disease, starting by the posts. This is clearly not a hypothetical landscape, but it would be an actual playground.

Reference: Charlese Schwab Daily Reports

Three Reports (Jun. 16th ((F)), Jun. 20th ((T)), and 21st ((W)), 2023) follow:

These reports not only well-written but also refrain from being "bullish bias" as well.

Readers may figure out why the S&P 500 Index descent for three days (6/19, 6/20, and 6/21) in a row, but very slightly. You may grasp why, but don't go too deep. We may mistake by mixing a correlation and a causation.

It is a tough statistical work to determine whether it is a causation or not.

The Charles Schwab market Report on Jun. 21st, 2023

The stock market closed on a softer note today. The price action in the mega caps drove a lot of the index level moves, as well as a sense the market is still due for some consolidation. Notwithstanding the losses seen in the mega cap stocks, the major indices held up fairly well. The market-cap weighted S&P 500 fell 0.5%, but the Invesco S&P 500 Equal Weight ETF (RSP) fell by a modest 0.1%.

Market participants were also digesting Fed Chair Powell's semiannual monetary policy testimony before the House Financial Services Committee, but his comments didn't contain anything too surprising; therefore, they did not move the market much. Specifically, he reiterated that there is still a long way to go to get inflation back down to the 2.0% target and that nearly all Fed members anticipate the need for additional tightening before year end.

Following an early slide, there was a rebound effort in the afternoon trade as stocks pared their losses in response to falling Treasury yields, which reacted to a strong $12 billion 20-year bond reopening at 13:00 ET. The 2-yr note yield, which flirted with 4.76% earlier, fell to 4.67% before settling the session up one basis point at 4.71%. The 10-yr note yield, which hit 3.79% earlier, fell to 3.71% and settled down one basis point at 3.72%.

Selling in the stock market, however, picked up again in the final hour of trading on no news. Ultimately, the major indices all closed in negative territory.

The Vanguard Mega Cap Growth ETF (MGK), which had narrowed its loss to 0.6%, fell 1.1% today.

S&P 500 sector performance was mixed. The energy (+0.9%) and utilities (+0.8%) sectors held the top spots on the leaderboard at the close.

Meanwhile, lagging mega cap stocks pinned the communication services (-1.4%), information technology (-1.4%), and consumer discretionary (-1.2%) sectors at the bottom of the pack. Tesla ([[TSLA]] 259.46, -14.99, -5.5%), which has been on a tear, gaining 50% since May 24, was the main drag on the consumer discretionary sector after being downgraded by Barclays to Equal Weight from Overweight.

The information technology sector was also weighed down by its weak semiconductor components. The PHLX Semiconductor Index declined 2.7% with every component registering a loss. NVIDIA ([[NVDA]] 430.45, -7.63, -1.7%), up nearly 200% for the year, was among the more influential laggards from the space.

Nasdaq Composite: +29.0% YTDS&P 500: +13.7% YTD Russell 2000: +5.8% YTDS&P Midcap 400: +5.3% YTD Dow Jones Industrial Average: +2.4% YTD

(The italics are emphases.)

The Charles Schwab market Report on Jun. 20th, 2023

"The market started this holiday shortened week with losses. Broad based selling was driven by a sense that the market was due for a pullback after a big run of late. The major indices were able to close off their session lows thanks to some mega caps recovering from early weakness.

Apple (AAPL 185.01, +0.09, +0.1%) and Amazon.com (AMZN 125.78, +0.29, +0.2%) were some of the mega caps that underperformed in the early going, down 0.3% and 0.8%, respectively, at this morning's lows before closing with modest gains. The Vanguard Mega Cap Growth ETF had been down as much as 0.9%, but closed with a 0.1% decline.

The Invesco S&P 500 Equal Weight ETF, meanwhile, fell 0.9% and the market-cap weighted S&P 500, which was stuck below 4,400 today, closed with a 0.5% loss. "(The italics are emphases.)

The Charles Schwab market Report on Jun. 16th, 2023

"The stock market closed out this quarterly options expiration day on a downbeat note, but losses were still relatively slim when considering the big move up recently. The major indices spent most of the session oscillating around their flat lines before finding some downside momentum in the afternoon trade. Ultimately, they settled near their lows of the day. The S&P 500 for its part was able to maintain a posture above 4,400 on a closing basis.

Treasuries also settled with losses despite the preliminary University of Michigan Consumer Sentiment Index for June revealing a sharp drop in year-ahead inflation expectations to 3.3% from 4.2% -- the lowest since March 2021. The 2-yr note yield rose seven basis points to 4.71%. The 10-yr note yield rose four basis points to 3.77%. The move up in yields acted as a headwind for mega caps and other growth stocks.

Mega caps had an outsized influence on index losses, but many other stocks also contributed. The Vanguard Mega Cap Growth ETF fell 0.6% and the market-cap weighted S&P 500 fell 0.4%. " (The italics are emphases.)

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