I’ve emerged from my tryptophan-induced coma and I’m coming out swinging. If I hear “this time is different” one more time, I’m going to do something crazy, like asking my in-laws to stay in town for another week.
I can’t even count the times I’ve heard media pundits and gurus say “this time is different” over the last couple of weeks. According to them, the U.S. dollar’s relationship to asset classes is no longer relevant, and the Holy Grail of investing, now that Trump is here to save the U.S. economy, is to get long the S&P 500.
As is usually the case, these guys are looking at one factor over one time period to draw conclusions. This type of lazy analysis highlights why it’s so critical to make decisions using a multi-factor process that evaluates various aspects of markets over multiple time frames. Let me state clearly that “this time” is not different.
In fact, the USD’s recent strength, coupled with the fundamental, quantitative, and behavioral gravities for the U.S. equity market, is offering up a risk-adjusted trade that could deliver a similar return to the S&P 500 over the next six months, but with none of the risk.
You can listen to the “this time is different” guys and blindly buy the S&P 500, or you can allow me to show you the benefits of being LONG the consumer staples sector via the Consumer Staples Select Sector SPDR ETF (XLP), while being SHORT the energy sector via Energy Select Sector SPDR ETF (XLE).
Don’t get me wrong; there are times to be LONG the S&P 500 in a directional trade. But most talking heads and money managers think that being LONG the S&P is always the answer. In my hedge fund, I do employ directional trades, but I also really like relative value trades. In a relative value trade, I get LONG one market and SHORT another market to extract the relative value of one of those markets over the other.
The overwhelming benefit to a relative value trade is that you can typically generate a return similar to an outright directional trade but with a much better risk profile.