HDGE: 3rd Quarter 2021 Portfolio Manager Review
In our opinion, in the short-term, the market is overbought. The below chart, the Short-Term Composite Indicator, courtesy of Investors Intelligence, represents a composite of dozens of other indicators. Right now, it has reached an extreme level on the upside.
While the current reading of 75 doesn’t necessarily indicate a crash is imminent, it does mean that easy money has been made from the extreme oversold reading in September 2021. Back then, we wrote about how the market should rally from that level. That rally has played out from a low-risk point of view.
As a trader, it’s time to pare back long positions or hedge.
We can see echoes of this extreme in bullish sentiment by delving deeper into stock and factor behavior. The two best performing risk factors are momentum and cyclicals, currently. Both are outperforming the broader markets. Momentum strategies, less charitably known as “chasing stocks” is one of the most consistent indicators of irrational exuberance. Here, the Highest Momentum stocks indicator – represents those stocks that have shown the highest rate of return during the last 12 months – has begun outperforming again after September.
Equally, cyclicals outperformance indicates confidence in the economic cycle. They have been performing well since January 2021, but especially so over the past month.
Stocks were grouped and ranked by the relevant factor as of the end of the prior month and the returns computed for the month just ended. Stocks chosen were based on Two Rivers Analytics’ universe of stocks. © Copyright 2021. All Rights Reserved Two Rivers Analytics. Further Distribution Prohibited without prior permission.
Logitech International S.A. (LOGI) declined steadily during the quarter ending down -27.10%. PC and gaming peripherals company Logitech had pulled revenues forward and “stuffed the channel”, a fact that is now catching up with them. Their latest results showed a post-Covid slowdown in demand coupled with supply-chain induced margin pressure. GDS Holdings Ltd. Sponsored ADR Class A (GDS) plunged in July, ending down -27.88%. Shanghai-based data center specialist fell, along with many of China’s tech stocks. The Chinese government famously began cracking down on tech companies, instituting measures ranging from limiting the amount of time spent on online games, to ordering food delivery companies to better protect workers. Redfin Corporation (RDFN) fell -20.99% in the quarter. This on-line realtor and home-buying company is suffering due to a slowdown in the heady housing market of 2020. New interest in relocation and second homes is dwindling in 2021, along with a reduction in bidding wars among potential buyers.
The largest realized and unrealized losses for third quarter were Coupa Software, Inc. (COUP), C3.ai, Inc. Class A (AI) and Etsy, Inc. (ETSY). Coupa Software, Inc. (COUP) stock was very volatile during the quarter, but finished Q3 down -16.38%. At the last earnings release, the company reported strong, but slowing, sales growth as the pandemic-induced acceleration waned. The company is seeing stiffer competition from SAP and others, while suffering from declining margins. C3.ai, Inc. Class A (AI) continued a long slide through a quarterly loss of -25.89%. The AI company’s growth could not sustain its valuation. Its average contract value has been dropping, causing declining margins. The company is losing ground to Palantir and other competitors. Etsy, Inc. (ETSY) stock recovered through Q3, ending up slightly at 1.03%. Etsy disappointed investors with weak guidance for Q3. Some analysts lowered their forecasts at the time of the announcement. Subsequently, Etsy stock is rising along with other tech and ecommerce stocks.
|Ticker||Security Description||Portfolio Weight %|
|HSBC||HSBC HOLDINGS PLC-SPONS ADR||-3.39%|
|CHRW||C.H. ROBINSON WORLDWIDE INC||-2.99%|
|DY||DYCOM INDUSTRIES INC||-2.72%|
|SAIL||SAILPOINT TECHNOLOGIES HOLDINGS||-2.62%|
|NWL||NEWELL BRANDS INC||-2.53%|
|AYX||ALTERYX INC – CLASS A||-2.23%|
|BFAM||BRIGHT HORIZONS FAMILY SOLUTIONS||-2.13%|
As of 09.30.2021. Cash not included.
Ranger Alternative Management
AdvisorShares Ranger Equity Bear ETF (HDGE) Portfolio Manager
Past Manager Commentary