How to Fix Your “Lagnificent” Portfolio  | BY KEITH KAPLAN
CEO, TRADESMITH |
The first quarter of 2025 is in the books. And it’ll be one to remember. All told, it was the most painful quarter for stock-market investors since the spring of 2022. Back then, the S&P 500 fell more than 16% over the span of three months. This past quarter saw a drop of -4.37%. Taken from the highs, the S&P 500 was down about 9%. We’re going to talk about what’s driving this decline, the areas of the market that are working, and what you can do to reduce your risk in today’s issue. And this will be the first of quarterly looks at the market from a technical perspective which I’ll share right here in TradeSmith Daily. Emphasis on “technical” there. Here at TradeSmith, we’re all about the data. We believe that no matter what pops up in the headlines, the data should ultimately be our guide. Data makes it much easier to understand these behavior-driven trends. Our powerful volatility-based algorithms, our seasonality data, and all the other tools we have here at TradeSmith turn that data into insights far more valuable than any headline. It also means today we won’t be speculating about tariffs, or the economy, or what could happen next. (Not that there’s anything wrong with that – see Michael Salvatore’s Digest from earlier for more.) We’re going to take what’s in front of us and help you make the most of today so you can be best prepared no matter what happens. The Facts of Q1 2025 First, let’s get the numbers straight. Here’s a snapshot of the major benchmarks, their Q1 return, and their Health status: 
Notably, not a single U.S. market benchmark is in the Green Zone in 2025. In fact, the S&P 400 mid-caps and S&P 600 small caps have been trading in the Red Zone for weeks. Now, here’s each major market sector ranked by first-quarter performance: 
Energy is the best performing sector of the year, with its gain eclipsing the losses in every major group but small caps. Healthcare also delivered strong returns despite being the only sector in the Red Zone. The gain so far this year has it knocking on the door of a new Entry Signal. And finally, we saw a strong flight to safety with Consumer Defensive, Real Estate, and Utilities stocks also putting up solid quarterly returns. But let’s talk about the elephant in the room… You’re probably seeing those benchmark numbers above and saying “boy, I WISH that was all the pain I’m feeling!” And don’t worry, you’re not alone. If you’re anything like most investors, who have piled into large-cap technology stocks over the past couple of years… this quarter was much more painful for you than the numbers above suggest. Large-cap technology companies got absolutely smoked. That’s the core fact of this market carnage. The benchmarks are all down and into correction territory. However, the majority of stocks within those benchmarks aren’t feeling nearly as much pain lately. The reason things are so bad is because of the “Magnificent 7.” A great way to see this is through the Invesco S&P 500 Equal Weight ETF (RSP). So far this year, the equal-weighted S&P 500 is down just -0.96%. It had already peaked way back on November 29, and it’s down about -7.6% from there: 
Another way to gauge the real impact is through the percentage of S&P 500 stocks that are above their 50-day moving average (blue line below). This market-breadth indicator is actually up this year despite the S&P itself (red line) being down: 
As for how many stocks are in the TradeSmith Red Zone, that percentage has grown quite a bit over the last three months. But it’s still not a majority, and more than a third of the S&P 500 is still in the Green Zone: 
To me, this is a stark sign of how concentrated the large-cap tech trade has become. When you look at Q1 returns of the Magnificent 7 stocks and their health trends, the problem comes into focus… Nobody feels so Magnificent about those 7 anymore: 
They may carry a magnificent weighting in both the S&P 500 and the Nasdaq 100, but their average loss is -15.48%. That’s more than 3x the loss of the S&P and 2x the loss of the Nasdaq 100. So, not only are these companies dragging the benchmarks down, but lots of investors own these companies directly, as well as in ETFs or mutual funds. You can’t blame them, because the Magnificent 7 have been incredible performers of this bull market. But that’s changing – quickly – leaving them feeling the pain in multiple places across their retirement accounts and more active portfolios. So, that’s where we are now. Q1 sent stocks tumbling, with certain risk-off sectors outperforming. The Magnificent 7 is leading the decline. But, on the whole, the components of the market are in a healthy state. How to Fix a Lagging Portfolio The big question is, what did this quarter teach us? And how can we adapt for the quarter ahead? One word comes to mind: diversification. If you primarily owned large-cap technology stocks, especially the Lagnificent 7, you underperformed a falling market. You never want to do that. But if you were well-diversified into lots of different sectors, you probably aren’t feeling as much pain. Depending on how your portfolio is structured, you might not be feeling any pain at all. TradeSmith subscribers have lots of ways to easily de-risk their portfolios. But my favorite, and probably the simplest, is the Risk Rebalancer. This simple tool looks at your current portfolio holdings and determines your risk per position by calculating the number of shares you own and each stock’s Volatility Quotient. Using our powerful algorithms, it will then automatically recommend reducing certain positions and adding the resulting cash to other positions in order to reduce your risk. I created a quick portfolio comprised of the Magnificent 7 and a few of the best-performing sectors of 2025, assuming all assets were bought on Jan. 1, 2025. Let’s imagine this hypothetical investor is heavily weighted toward the Mag 7 (rather than the best performing sectors) by a factor of three. For every $1 in the working sectors, represented by the top five best performing sector ETFs of Q1 2025, we have $3 in the Mag 7. Let’s run the Risk Rebalancer and see what it has to say about the portfolio’s composition… Right now, the portfolio is 31.81% in High Risk assets, 54.5% in Medium Risk assets, and 13.69% in Low Risk assets, as you see in the top allocation bar: 
The rebalance will make it so we’re holding a lot less of the High Risk, a bit less of the Medium Risk assets. and a lot more Low Risk assets, balancing out the entire risk profile. We can also see that the rebalanced portfolio will reduce the overall Portfolio Volatility Quotient (PVQ) from 21.81% down to 15.63%. The lower the number, the less volatile the portfolio. 
And here is the Risk Rebalancer’s guidance on specific stock holdings I should either reduce or increase so I can achieve the above result: 
Of course, your portfolio probably looks a lot different from this simple example. But it shows just how few steps you can take in TradeSmith to better diversify what you already have – without having to add any cash or even buy any new stocks. You can buy new stocks, of course… and that’s what we’ll talk about next week, with the Pure Quant portfolio builder. All the best, 
Keith Kaplan
CEO, TradeSmith P.S. I recently started posting on X, @KeithTradeSmith, and I'd love for you to follow along and join the conversation. I'll be sharing some stock ideas, new screens and strategies we're testing out, and some of my own principles for investing that I've developed over the years. It's completely free for you to access and always will be! Look forward to seeing you there. | 
Tidak ada komentar:
Posting Komentar