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Moving It Up A Gear
First up, thanks for reading Cestrian Tech Select here on Substack. We have a blast writing it and it’s great to see our reader count ramp up. If you’ve been enjoying the newsletter then please share it everywhere.
We’d like to tell you about where we’re heading with our work.
Our coverage started off a hundred years ago with tech, defense and space. A strange admixture but there you go. It gave us growth and value and a way to play markets be they risk-on or risk-off. This led over time to our interest in institutional sector rotation. This is the also-one-hundred-years-old notion that large investors make money according to the Wyckoff Cycle of accumulation, markup, distribution, and markdown. The idealized version of which assumes a single large and cautious investor - think huge insurance company with huge dollars to invest that does not like to trade fast and furious and does not very much like to use financial weapons of mass destruction. We can call it Boring Capital LLC. Here’s how Boring Capital LLC likes to make money in single stock names.
Accumulate. Meaning, build up a stake slowly over a period of months, even years sometimes, without buying so much that anyone notices. So, small bitesize purchases, usually on weak days, and breaking up orders to be executed in many different venues be they exchanges, dark pools, whatever.
Markup. Meaning, once a sufficient stake has been amassed, let momentum take hold in the stock - allow shorter timeframe buyers to push up price - that means levered hedge funds, retail, and so on - but keep a cool head and don’t chase. Boring Capital LLC doesn’t need to, because it already accumulated a position, and it can just jack up the mark-to-market valuation monthly as other more excitable investors push the price up.
Distribution. Once the stock has reached a suitable level, commence selling. Again, not in a way that disturbs the price. Small orders, filled in many locations. If the stock starts dropping? Maybe buy a little to keep the price up, then sell as it rises. Sneaky. Right?
Markdown. Having fully liquidated the position, those more excitable buyers may see the stock falling and then sell in a hurry, causing a drop in the price. Short sellers may jump on the momentum train and yea verily does the stock plummet. Again, Boring Capital LLC does not care, because its work here is done already.
This, it seems to us, is a rather cute way to make money and it’s a method we are embracing in staff personal accounts and indeed our real-time Growth Investor Pro service.
Here’s an example. This is $IWM, the Russell 2000 proxy ETF.
In the accumulation phase there is meaningful volume (look at the volume profile on the right hand side - that’s # of shares traded at any given price). During markup, limited volume. Distribution - volume ramps - again look at the bars on the right hand side. And then during markdown, low volume. Note how rangebound IWM is during the distribution phase. Nicely done, Boring Capital LLC!
Now, why am I reading this garbage, you may well ask. And the answer is, because we want you to start reading what will become our ‘master’ Substack which is a multisector letter called Cestrian ETF Select. It’s free. You can pay for the fancy version but that’s not important right now. We want you to sign up for the free version because that is where we will be charting the sector rotation that takes place in the market according to this accumulate, markup, distribute, markdown cycle. (It probably needs a better name btw. “Cestrian Sector Selector” appeals to us but probably nobody else).
Tech is but one of those sectors. As a reader of Cestrian Tech Select you get ideas from us in one sector. And much as we love that you’re a reader here, we have to say, if you only read this one of our letters, then you’re missing out. We believe that a multiple sector approach is a preferable route to investing nirvana. Because Boring Capital LLC does the same with sectors as they do with single stock names. And you can follow this through sector ETFs (hence the name of the letter!!).
That is the newsletter where we will be charting the sector rotation that leads us to find actionable long- and short- opportunities be the market going up or down. The situation year to date has been extreme, because one sector alone - energy - has hogged all the money all year. Energy is now in the markdown phase, for now (note we believe energy will soon return to accumulation), and we’ve been short $XLE and $USO in staff personal accounts in consequence. Other sectors are under accumulation at present - names you wouldn’t expect such as Consumer Discretionary ($XLY) - that includes names such as Tesla and Apple, expensive stuff that apparently nobody can afford because of Fedflation and all. These stocks have been hit hard - AAPL in the 130s, TSLA in the 600s, 700s - what a great time for Boring Capital LLC to be buying. Tech in the guise of $XLK is also under accumulation as, it seems, is high beta tech in the shape of everyone’s current least favorite fund, Cathy Woods’ $ARKK.
Here’s energy vs. tech vs. high beta tech vs. the market in the last week.
What you see there is capital flowing out of energy and into other areas of the market - tech is a beneficiary at the moment. Once you delve into single stock names you can see further evidence of this. A slew of enterprise software names - NOW, MDB, ZS and many many more have not made new lows in June even whilst the market did make those new lows. They look to be moving up as capital comes back into them.
Our point here is - looking at tech alone isn’t sufficient. We believe the fully informed investor looks multisector even if it’s only to better judge when to put money to work in tech or whatever your preferred sector might be.
So again - sign up for Cestrian ETF Select, for free. Just click HERE. And join us in our journey to make like Boring Capital LLC …. who it has to be said got so very huge by being … boringly predictable and just following their process day in day out, not getting stressed by short term market gyrations (because their work was done already) and instead looking at the horizon to work out what next.
Oh and one last thing … please share this note. Help other people to become Boring!
Cestrian Capital Research, Inc - 24 June 2022
DISCLOSURE: Cestrian Capital Research, Inc staff personal accounts hold long positions in, inter alia, $XLY, $ARKW, $MDB and $ZS; and short positions in, inter alia, $XLE and $USO.