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Despite skyrocketing investor enthusiasm, buy-write strategies are complicated investments with skewed payoff structures that muddle the interpretation of past performance, because returns depend on market conditions.

Read this week's Major Trend.

Read this week's Major Trend. 

Core was up 1.5% in July, as positive performance from equities was supplemented by positive contributions from commodity and fixed income holdings.

Read the latest MTI update.

The portfolio takes a very active approach within sectors, with almost half of its Consumer Discretionary weight allocated to Homebuilding, while completely avoiding Chemicals within the overweight Materials sector. 

All the talk has been about mega-cap growth stocks, but equities with low-quality characteristics have fared even better. High beta, negative earnings, and those with high short interest have trounced the rest of our universe.

During the last two months, the Equal Weighted index has beaten the Cap Weighted version by 1.3%. That’s not much of a turnaround considering the 10.6% advantage for the top-heavy SPX from February to May. The seven largest firms (28% of the index weight) have contributed two-thirds of this year’s 20% gain in the S&P 500.

Every one of our style boxes is having a terrific summer. Small Value’s +16% leads the pack over the last two months. Even with their recent advance, median P/E multiples for Small- and Mid-Cap Value stocks are still cheap compared to their 40-year histories.

Our Ratio of Ratios continues to narrow as smaller firms finally join in on the stock rally. Both the S&P 600 and Russell 2000 have out-gained the S&P 500 by 4% since the end of May.

Our latest ratio is a dismal 1.01. The “one-month” result is usually by far the strongest reading of a quarter (long-term average ratio of 1.85). You have to go back to July 2020—the depths of the pandemic—to find a worse “one-month” reading.

The rally in risky assets became even more broad-based, with small caps and EM participating fully.

The U.S. dollar broke below its recent support; its weakness has been a dominant driver of risky assets and its direction will be an important determinant of the current rally.

The market broadened enough in July for the NYSE Daily A/D Line to “confirm” new SPX highs—a statistical positive: When the A/D Line made a concurrent 12-month high during July, the average return for August-December was +6.5% versus -1.1% when breadth didn’t confirm the index.

In mid-July, we sold our tactical portfolios’ small (2%-ish) position in physical gold ETFs. That holding had been built up from 2018 to 2020 to around 5.5% of the portfolio, then pared in early 2022 when Russia invaded Ukraine. That doesn’t mean we’re gold bears.

As we’ve noted, none of the major indexes has kept pace with the typical path traced out during past cyclical upswings. It has since occurred to us that this nearly ten-month stock rally is being compared to an unrealistically high standard: The current advance doesn’t have the advantages enjoyed by bulls that launched out of recessionary conditions.

The S&P 500 came within 4% of its early-2022 high on July 31st, and some technicians insist that such a powerful recovery of bear-market losses has invariably been a bear killer. In both 1957 and 2000, however, bear rallies brought the SPX to within 1% of its prior high; and it’s worth noting, in 1957, the mid-July retest gave way to a recession in just six weeks.

Not to pick a fight with Keynesians (or other economists), but we’re reluctant to label the explosion in the federal deficit as unequivocally “stimulative.” Some factors behind the increase probably do boost the economy, but others simply rob Peter to pay Paul.

In the last twelve months, spending on energy goods and services as a share of total consumer outlays dropped by 1.1%—that amounts to about $200 billion in savings (annualized).

The path of real stock prices in the current cycle looks very different from the typical pre-recessionary track. In fact, based only on the chart of performance in real terms since January 2022, we’d probably believe the economy has recently emerged from recession.