Dear all,
US small-cap stocks are suffering their worst run of performance relative to large companies in more than 20 years, per FT.
Pls see the screenshot below.
This maybe already having an impact on a number of small/micro cap models in Portfolio123. We may need to switch and put more focus on European and (Asian/Emerging Markets) for those who are interested in the small cap/micro cap space.
Regards
James
My longest running small-cap models aren't showing under performance w/r/t large-cap. That shows the value of p123.
Walter,
Can you let us know what is the percentage % of your US small cap model vs US large caps?
Thanks.
Regards
James
Thanks Walter,
Great performance.
Do you also have a US mid or large cap model for comparison?
Regards
James
No mid-cap. My longest live running large-cap is also the model I like the least. It includes constructs that I wouldn't use today. Anyway ...
Walter,
The large cap model is not as bad as you described (although it underperform in a number of years).
At least, there is not a single down year.
Thanks again for showing the comparison.
Regards
James
Portfolio123 public portfolios Small Cap Focus & Small Cap Focus, Easy to follow are not having their best years indeed.
We had a meltup in 2023 Q4 when the market started expecting the Fed to cut rates in the future, but largely I've found it's been a pretty rough environment for microcaps in the last year or so. Seems the narrative is higher for longer rates will punish small caps because they're most vulnerable to external financing. Really a lot like the 2nd half of 2018 (go back and check the microcap models then), which was the last time the Fed was rising rates. It's funny though, because the last sustained time we had a higher rate environment was 2003-2006, which was a phenomenal time for microcaps. Ive found it useless to try to systematically try to account for these macro environments and their second order effects.
InmanRoshi,
So I get that you are pointing out that those regime quad 1,2,3,4 stuff doesnt really work in real life.
Regards
James
I've looked into the various quads and potential quantitative indicators. Bottom line, these are very tricky - they can work well for a given period (not unlike many factors), but crash and burn in others.
Verdad proposed an indicator based on the high yield spread. I tested it in P123 with mixed results:
I've never found market timing to work before now. But I'm now using a portfolio-based hedge (i.e. a hedge made up of terrible stocks: mine is made up of puts, but you could also use shorts), and these sorts of hedges have long periods of absolutely terrible performance (during frothy markets). So I've been playing around with various market timing methods for reducing/eliminating or increasing/doubling the hedge, and I've found one that seems to work. The signal is based on three main ideas, and one of them is, as Ryan mentioned, the high-yield spread. Look for periods when the spread is high but decreasing. Those are the periods you want to not hedge. I'm reluctant to divulge the other two ideas at the moment, but I don't think they're based on data-mining. They seem to make some real sense. But I'm not going to use them for long positions or even for adjusting leverage. Transaction costs would overwhelm the rather slim benefit of doing so.
Ryan,
Thanks for the link and it is a very detailed analysis.
However, I do not trade like the Medallion Fund and need a higher win rate than 51% (i.e. not keen on things that work sometimes and crash/burnt in other periods even in backtesting). I am not sure how the out-of-sample results will look like with a 1/3 sharpe haircut.
It maybe useful for other Portfolio123 members with a lower expected win rate.
Regards
James
