Buy The Death Cross

Death Cross

Last week the S&P 500 formed the dreaded death cross. A death cross forms when the 50-day moving average crosses below the 200-day moving average⁠ — signaling that recent price action has deteriorated over a period a little longer than two months.

Looking at a chart of the S&P 500, a death cross has occurred 3 times in the past 5 years. The most recent occurrence was on March 27th, 2020 ⁠— 4 days after the pandemic bottom.

Because moving averages are lagging indicators, death crosses have been historically closer to bottom signals rather than sell signals. To confirm this theory, I had my friends over at YCharts pull some historical data on all death cross occurrences since 1953.

Since the Global Financial Crisis in 2008, there has only been one period (in late 2015/early 2016) where there was a negative return 6 months after the death cross occurrence. It's also worth noting how there is an 80% win rate if you buy and hold for 3 years with an average return of 23.7%

Quite bullish indeed. So the next time someone tries to scare you with death cross talk just show them this table.

Buy the death cross, ignore the headlines.

2-Year Anniversary

Happy anniversary to those who celebrate. March 23rd was the 2-year anniversary of the pandemic bottom. How have stocks done since then? Despite a rough start for 2022, the major indices (sans old man Dow) have more than doubled since the crash lows.

According to data from Dow Jones Market Data, this was the best two-year rolling performance since 1937 for the S&P 500. The Dow’s performance since the bottom marks its best two-year rolling performance since 1987.

I'm sure none of us panic sold and we all bought the exact bottom, right?

Freedom

While the fighting continues between Ukraine and Russia, it's worth highlighting some positive news from an emerging market ETF that has recently reaped some of the benefits of the structure it has employed since launch.

Perth Tolle launched the Freedom 100 Emerging Market ETF (FRDM) in May of 2019 with the promise to keep the worst autocracies out of investor's emerging market exposures. Her ETF was the world’s first freedom-weighted emerging markets equity index strategy.

According to FactSet: FRDM tracks an index that incorporates third-party quantitative personal and economic freedom metrics as primary factors in its investment process. Emerging market countries that meet minimum market capitalizations are evaluated based on 76 variables including (1) civil freedom metrics covering terrorism, trafficking, torture, detainments, disappearances, and women’s rights (2) political freedom metrics covering rule of law, due process, freedom of speech, media, assembly, internet, and religion, and (3) economic freedom metrics covering tax rates, access to international trade, business regulations, soundness of monetary policy, and level of government interference in private market activity. Country selection and weights are based on a composite of the above factors. Companies with 20% or more state ownership are excluded. The top 10 largest, most liquid securities in each country, typically 100 securities in the portfolio, are market-cap-weighted within their country weights.

Due to this freedom weighting, FRDM is the only emerging market fund that has no exposure to Russia or China.

As noted by Eric Balchunas, the FRDM index appears to be picking up steam, reporting that it just had the best week of inflows ever.

It's also worth noting the relative performance between FRDM and iShares MSCI Emerging Markets ETF (EEM). While the divergence started widening last summer during China's crackdown on tech and education sectors, it really started picking up steam this year with the Russian invasion of Ukraine.

Here's a breakdown of the difference of the top 10 countries between FRDM and EEM.

Blunt Bottom

One of the most punished sectors in the market got a recent reprieve from the malicious selling — as the House of Representatives will soon be voting on federal legalization of marijuana in the United States.

As reported on by The Hill:

Legislation to legalize marijuana at the federal level will be teed up for a House floor vote as soon as next week. The House Rules Committee announced Thursday that it will hold a hearing regarding the bill on Monday, which is the final step before consideration on the floor. The bill, authored by House Judiciary Committee Chairman Jerry Nadler (D-N.Y.) and titled the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, would remove cannabis from the list of federal controlled substances and eliminate criminal penalties associated with the drug. It would also impose a federal tax on marijuana sales to fund programs to help communities negatively impacted by the war on drugs. The measure would further seek to establish a process to expunge previous marijuana-related convictions.

On the back of this news, marijuana related stocks had their best week in over a year. Many of them (including the names with more exposure to Canada) have been getting beyond destroyed as the group has essentially been left for dead.

Of these 5 marijuana-related ETFs, MSOS (purple line) was the first US-listed actively managed ETF to provide exposure solely to American cannabis and hemp companies, including multi-state operators (MSOs). Only 8 months after the launch of MSOS, a second ETF (MJUS) was launched to try and capture more exposure to the potential U.S. marijuana market.

Below is a simple breakdown of some of the more popular marijuana ETFs and where their exposure lies. However, as you can see from the drawdown chart above, they really do move in tandem.

A report put out last year by Pew Research Center shows Americans have overwhelming bipartisan support for legalization. In fact, 91% of survey respondents say it should be legal medicinally, at a minimum.

Is it really a surprise that older folks and conservatives are the groups most opposed to legalization? Yet they have no issues guzzling down pharma pills with a Coke for every ailment. In my opinion, it's only a matter of time before becomes legalized at the federal level as support grows and the stigma against the drug continues to be challenged. One major impediment continues to be big pharma flexing their lobbying arm.

Here We Go Again

Everyone's favorite meme stocks GameStop (GME) and AMC Entertainment Holdings (AMC) are ramping again, up 67% and 28% on the week, respectively.

Last week on Tuesday, AMC announced they were buying a 22% stake in a gold mine for $28M. The Nevada mine, Hycroft, went public through a SPAC in 2020 after financial trouble and bankruptcy. Both stocks jumped on the news.

Then this week, activist investor and GameStop board chairman Ryan Cohen’s RC Ventures increased its stake in GameStop to 11.9%, according to a filing with the U.S. Securities and Exchange Commission. Cohen’s RC Ventures now owns 9.1 million shares of GameStop valued at around $86,075,649, according to the filing.

I've been openly bearish on both of these meme names for 2022. In fact, on the first day of the year, I predicted they would both be down more than 60% in 2022.

How close have I been so far? Very close.

Last week before the gold mine news, both stocks were down nearly 50% YTD. If only I had said 50% instead of 60%, damnit. Now, magically, GME is flat on the year. I guess we still have 9 months left for them to crash into the abyss again...

Until then, apes together strong.

That's all for this week. Thanks for subscribing and sharing.