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V2 Model January 8, 2022 UPDATE and CHANGE

V2 Model January 8, 2022 UPDATE and CHANGE

January 08, 2022

Hello:

V2 PERFORMANCE

This week:

V2 -7.14%

SPY -1.83%

2021:

V2 -7.14%

SPY -1.83%

RECAP

The first week of the new year saw heavy selling in the growth stocks, a rotation into value stocks, and a sharp rise in long-term interest rates. The Nasdaq Composite dropped 4.5%, the Russell 2000 dropped 2.9%, and the S&P 500 dropped 1.9%.

The persistent advance to a 1.80% rate, however, was unsettling and opened the door for 2.00%. The increased likelihood for a higher interest-rate environment contributed to the rotation into value stocks.

The most value correlated sectors are Financials, Industrials, Materials, Energy, and the DOW. Small Caps and Emerging Market could also perform well in this environment.

This was the worst start for the NASDAQ since 2008 and the worst start for the SP500 since 2016. Yet, longer-term uptrends are still intact for them. Related, the VIX (Volatility) remains below 20.

The V2 Model was down this week as we were long growth equities.

The V2 Ratio for UPRO turned negative on Friday. However, several other areas of the markets improved. As such, we will make several changes during Monday's session.

CHANGE

SELL 100% of UPRO.

Use 20% of available CASH to buy ERX (2X Energy)

Use 20% of available CASH to buy UYG (2X Financials)

V2 ALLOCATION

CASH (60%)

ERX (20%)

UYG (20%)

CHARTS

V2 Consolidated (UPRO). You can see we crossed on Friday. I also circled the number crosses. There have been 5 in 6 weeks. No strong up or down trend has emerged. The V2 Model typically loses value in sideways and whipsaw markets.
$TNX. Ten-year yield. You can see this has broken above the high from last March. It would not be surprising to see a pullback to test this line and then continues movement towards 2%. It is also possible after such a quick run up that we will see a reversal here and a move back under the line. That is one of the reasons we are scaling into value-type holdings.
UYG (Financials) vs SSO (SP500) Daily. You can see UYG broke out late this week against SSO. 2X Financials in this time frame are now beating 2X SP500. We like to see sector outperformance over the SP500 over a longer time period before allocating to it. Here we have it.
ERX (Energy) vs SSO (SP500) Daily. You can see ERX broke out late this week against SSO. 2X Energy in this time frame is now beating 2X SP500. We like to see sector outperformance over the SP500 over a longer time period before allocating to it. Here we have it.
$VIX. Volatility. You can see we are below 20 which should mean good things for the overall market.

NOTES

This was a tough start to the year. It reminded me of 2016 and 2018. In each of those years, we had sideways market performance for a number of months. Both of those years were weak for us.

Sector rotation is tough for all investors to manage. With such a recent rapid increase in rates, it would not be surprising to see a pause or even a reversal at this point. We expect volatility to increase. This is one of the reasons we are keeping 60% in CASH, and allocating our holdings to 2X Value Sector ETFs rather than 3X at this point. We will look for stronger trends to emerge, in either direction.

PLAN

Our plan for next week? Market trends may change and they may change rapidly. We will stay nimble and be vigilant to changes in either direction. We will follow the math.

Distance=Victory

Chris

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