IN 2023 INVESTORS SHOULD FOCUS MORE ON ALPHA AND LESS ON BETA

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By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

More On Alpha

Please click here for a chart of  Nasdaq 100 ETF (QQQ) compared to S&P 500 ETF (SPY) which represents the benchmark stock market index S&P 500 (SPX).

Note the following:

  • The chart shows that over the three-year period shown SPY has gained 18.38% and QQQ has gained 23.19%.
  • The chart shows that QQQ has outperformed SPY by less than 5% but at a cost of much higher volatility. 
  • The chart shows that at the beginning of 2022, QQQ had outperformed SPY by about 28%.  QQQ is heavily weighted in tech stocks compared to SPY.  Many investors’ portfolios are more like QQQ and less like SPY.
  • The take home lesson from the chart is that in 2023 investors should focus on getting the highest return with the lowest volatility.
  • Alpha is excess return relative to a benchmark.
  • Beta measures volatility relative to a benchmark index.
  • Investors are starting the year on an optimistic note by buying stocks.  However, in the early trade, the buying is mostly by the momo crowd and not by smart money.

PMI

Newly released Purchasing Managers Index (PMI) numbers across the globe are predicting economic contraction.  A PMI number of less than 50 is economic contraction.

  • China’s Manufacturing PMI came at 47.0 vs. 48.0 consensus.
  • China’s Non-Manufacturing PMI came at 41.6 vs. 46.0 consensus.
  • Eurozone’s Manufacturing PMI came at 47.8 vs. 47.8 consensus.
  • Germany’s Manufacturing PMI came at 47.1 vs. 47.4 consensus.
  • UK’s Manufacturing PMI came at 45.3 vs. 44.7 consensus.
  • India is a bright spot.  S&P Global Manufacturing PMI came at 57.8 vs. 54.3 consensus.
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Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade.  Smart money is 🔒 in the early trade.

Gold

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is range bound.

Markets

Our very, very short-term early stock market indicator is 🔒.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking down, and bonds ticking up.

The dollar is stronger.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1843, silver futures are at $24.55, and oil futures are at $79.89.

S&P 500 futures resistance levels are 3950, 4000 and 4200: support levels are 3860, 3770, and  3630.

DJIA futures are up 166 points.

Protection Bands And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

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You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

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This post was just published on ZYX Buy Change Alert.

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Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

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Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

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