Recession Strategy: Examining Key Market Levels for the High Beta Portfolio

Strategy, What to Watch for and More

In times of distress, even in my personal life, I look at the areas of opportunity to get back up and improve. Much like the market today, I only find it conducive to identify opportunity/risk/rewards in times of turmoil. For example, BluSuit, the brand we are building, is attracting a certain type of investor and improving processes while navigating this bear market.

This brings me to the point I am trying to make about this market cycle

Today Microsoft reported numbers and needless to say, it was not good at all. I don’t believe I have listened to an earnings call from Microsoft that ended up so bearish. Ad revenue, cloud growth, device sales, etc are all expected to show a decline in growth. There is a positive twist here despite, what seemed to be, bad news. Google’s numbers were significantly more bullish.

The Best Businesses are Formed During Recessions

Tomorrows long term winners are being born today in this macro chaos. I believe I own a few of them, but I don’t know yet as they become battle tested businesses. The key here is to pay attention to the best investment opportunities so we can grow our wealth. In the weeks and months ahead we will know who the winners and losers will be.

Alright, enough of the pep talk, let’s get to business.

Examining the Market Technicals

The purpose of today’s Substack is to examine a few key level’s I am tracking in the S&P and NASDAQ as well as leading indicators I am watching for recession warnings. One of my latest Newsletters is a must read, as I base a lot of my decision making not just on technicals but fundamentals and Macro. I do the best I can to be as concise as possible integrating all the data points I usually refer to. If you haven’t read S&P Hasn't Priced a Recession In you can click that link and it will direct you.

In the non-recessionary scenario I have S&P bottoming at this level that we are trading at today. However, in the recessionary scenario, I have the S&P bottoming in between 2750 - 3200 which is roughly 20% - 25% lower from here. How I came up with this number is by multiplying a -25% earnings recession (this is a historical average) in the forward earnings of the S&P while keeping it at a 15-18x forward multiple. If this is confusing, I broke down the math in the linked (above) newsletter.

Another 20% - 25% down could be intimidating but it’s actually an incredible opportunity.

Navigating this bear market (for those of us still here) has been difficult but the trend has been very apparent. All we have seen, so far, is a very orderly lower low/lower high situation. One can’t help but wonder if the ultimate low will look something like the 1974 bear market that was also caused by inflation.

Up or down, it doesn’t matter, I am going to be prepared for either outcome.

How I Plan to Maximize the Down Side Opportunity

Hedging is a strategy I have been fortunate enough to “develop” over this past year. It is a trading strategy used to minimize draw downs on the top line while also raising cash to deploy at the bottom of a market. The goal here is to opportunistically identify trends, key levels, and strategize entry/exit before you emotionally take a trade. In today’s market, I am seeing key levels to watch for on the NASDAQ as well as the S&P 500.

S&P 500 Key Levels

As expected, we got a bounce/rally due to technical divergences. The problem here is that my end of year thesis revolved around strong earnings. If there is not strong earnings, then markets will begin to “price in” a decline in the S&P 500’s EPS.

Since we rallied into the 50 day and 100 day moving average, this is an area that will act as a strong resistance. At this point, I wouldn’t be surprised to see some sort of pull back if not a full fledge reversal into the resumed down trend which should end up hitting 3200 fairly quick, possibly marking the major low to the stock market (TBD). If/when we reverse and we break below that 3750 mark, we are going to test lows and possibly even break below relatively quick.

NASDAQ Key Levels

The NASDAQ has gotten the brunt of the fall and an undercut of the lows will put it down 40% from peak to trough which will be nearly as much as the 2008 GFC. Above, you can see we traded above the 10 and 30 day moving average but are approaching the 50 day ma. In many cases, this would be a bullish development. However, when combining fundamentals/macro with where we are right now in the NASDAQ it looks like we will open below the 30 day moving average.

As of writing this, NASDAQ futures are down -2.31% which will give back all gains made today and put it back below the 30 day ma. Now, as I am thinking about this, I do recall what happened when CPI came in bad just a few weeks ago. I witnessed a major 7% reversal on bad news which means that could happen again tomorrow. I am planning on watching how the NASDAQ behaves at/around the 30 day moving average of 10935. If it crosses above, I will be hesitant to put a hedge on but if it respects the downtrending resistance line, this will be a good hedging opportunity.

A break below the 30 day and 10 day moving average will certainly trend the NASDAQ down to 9,700 which is the next support zone. If it hits this area, that will represent 13% downside from these levels. The major downside area, that we could see on an earnings recession, would be meaningfully below at 8,300, which is 26% down from here.

There is so Much More to Say than Just Technicals

There are more variables to consider when thinking about downside, as well as the upside. The reason why I wanted to publish this article was so that you, the reader, could see the levels I am watching for when thinking about areas to hedge into or potential zones of support/resistance that we can see bounces/rejections. Typically, just like an up-trending market, down-trending markets appear to respect their moving averages.

It is worth saying that technicals evolve very fast and it does require a certain level of attention to put/take hedges on/off. While combining my secular growth portfolio strategy with hedging, I have found this bear market to be easier to navigate as I have raised quite a bit of capital shorting SKYY ETF.

What I have noticed here is that SKYY moves closer with my high-beta portfolio which allows me to run more of a market-neutral approach (long-short strategy). It is important and noteworthy to consider how dependent SKYY’s strength is on the NASDAQ. If the NASDAQ looks like it’s about to rally or tank, typically I’ll see SKYY ignore its technical set-up and move with the NASDAQ on both the up and down side.

I’ll do my best to keep you all updated on what I am seeing out there and how everything is evolving in this rapidly changing environment

It is much easier to keep everyone update on the member community in Discord. I also share my thoughts as they evolve and so do the other experienced traders/investors apart of the BluSuit trading/investing group.

Stay Tuned, Stay Classy

Dillon