How To Not Get Crushed: Investing Cautiously Ahead Of The Fed's Rate Tightening.

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Stock Picking Gets Harder 

Every day the market is open, our system gauges stock and options market sentiment to rank thousands of securities by their potential returns over the next six months. Our site uses the top-ranked names to build hedged portfolios for subscribers. Six months later, we publicly post the returns of top names and hedged portfolios from each week. We had some challenges with this in the second half of last year, but we may be getting back on track now. More about that below, but first a quick update on a previous post about Biden's Fed governor nominee, Lisa Cook. 

Lisa Cook: A Potentially Radical Pick

Last weekend, we shared Steve Sailer's post about how Lisa Cook had apparently flubbed her most well-known paper:

In her paper Violence and Economic Activity: Evidence from African American Patents, 1870 to 1940, Cook claimed that a rise in violence against African Americans led to a sharp decrease in patent applications awarded to blacks after 1900.

The glaring flaw was found by psuedonymous Twitter user "Anechoic Media": Cook's key source in black patent data was a survey conducted by the U.S. government for the Paris World's Fair of 1900, so of course that source doesn't show black patents after 1900, because the survey ended before the fair.

Now, Steve Sailer notes an extraordinary post by economist Harald Uhlig, who had a run-in with Lisa Cook in 2020:

Macroeconomist Harald Uhlig has an endowed chair at the U. of Chicago and is a former chair of that world famous economics department. Like Cook, he was also affiliated with the Federal Reserve Bank of Chicago … until the crazed month of June 2020 when the Chicago Fed Bank cancelled him for daring to criticize as “flat-earthers and creationists” the lack of scientific evidence for the suddenly sacred Defund the Police movement in the weeks when Black Lives Matter supporters were running amok in an orgy of riot and murder in the streets of Chicago.

In response to his heresy, Cook lashed out at Uhlig’s right to free speech [see the screen capture in Steve's tweet below]. 

Steve Sailer goes into more detail on this on his site, which you can see by clicking the link in the tweet above. Now back to stocks. 

Our Top Names From Late January

These were our top ten names on Thursday, January 27th. 

Screen capture via Portfolio Armor on 1/27/2022. 

I felt fairly confident about this batch when our system generated it. Tesla, Inc. TSLA, Nvidia, Inc. NVDA, and Google parent Alphabet, Inc. GOOGL, GOOG are of course all dominant companies in their industries, and all have generated strong returns when they appeared in our top names in the past. Antero Resources Corp AR and the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2x Shares GUSH seemed to make sense given the bull market in oil, and we'd done well with the iPath Series B Bloomberg Coffee Subindex Total Return ETN JO, given the coffee shortages over the past year. 

Here's how that top names cohort has done so far:

Where We Go From Here

In a narrowing market, security selection gets more difficult. As returns come in, our system adjusts the way it selects securities, so it will do that with the top names cohort above, as it has with each of the ones that finished, good or bad. The point of our hedged portfolios, though, is that when the securities our system picks go south, your downside is strictly limited. Your money lives to fight another day. Maybe your next aggressive portfolio will do as well as the one that was up 35.12% over six months. In any case, you will get another crack at it. 

If Fed Tightening Leads To A Bear Market

As TD Ameritrade lead anchor Oliver Renick suggested on Twitter on Wednesday, it's unlikely the Fed will be able to rein in inflation without causing a bear market. 

Of course, we don't know when that bear market would start. In light of that, the best approach if you're using the hedged portfolio method is to split your money into a few tranches, putting one to work now, another in a couple months, and so on. That way, when a bear market hits, your downside on your existing portfolios will be strictly limited; also, because our system's universe includes bearish ETFs, you will have a chance of making gains during the bear market with money you put to work during it.