SA: Creating Alpha In Up and Down Markets

Bill Gunderson headline on Seeking Alpha: Creating Alpha In Both Up And Down Markets

* A forty-year cycle of falling interest rates ended in February 2021.

* This was a game-changer for long-duration stocks and bonds.

* What to do when almost all bond funds and stocks sectors head south?

* There’s an underfollowed asset class that’s doing quite well right now.…

Now for the real carnage: Cathie Wood’s ARKK ETF is now down 77% from its February 2021 all-time high of $159.70! It closed at $36.99 on Tuesday of this week. The downfall of the ARK family of funds began when interest rates began to break out in February of 2021. That was the warning sign to flee stocks like Teladoc (TDOC), Upwork (UPWK), Roku (ROKU), Zoom (ZM), Peloton (PTON), etc., etc., etc.

In our Jan. 11, 2022 article, “The Real Reason That ARKK Continues To Sink” we outlined the relationship between interest rates and multiples (PE ratios) and long-duration stocks vs. short-duration stocks. Then we followed up three days later on the Inverse ARKK ETF, SARK. SARK has soared since then while ARKK as continued to get pummeled.

Can you start to see the opportunity for some extreme alpha in a down market? Obviously, picking on some of the most vulnerable areas of the market can be quite profitable during a downtrend in an individual stock, sector, or index. When ARKK goes down 50% and SARK goes up 50%, how much alpha is created?

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I was lucky enough to learn about inverse funds back in 2002 when a wholesaler from Profunds visited my RIA office. I started using them in managing variable annuities at first, then began expanding them to my fee-based money management practice.

There also has been a great expansion in the choices that I have today as a professional money manager vs. what was available back then. They have also grown in size and become much more liquid.

I currently own 12 different inverse ETFs amongst the six different portfolios that I manage. I continue to pick on the most vulnerable areas of a market that has almost zero catalysts to look forward to.

These ETFs should continue to do well in a down market that has the Fed on the warpath, out-of-control inflation, and earnings that have now peaked after a 12-year growth cycle.