The Sleep Well Portfolio at a Glance
Overbought and Mob Momentum

SPY (Large Caps)

  • In the week of FTX collapsing the stock market has hit relative new highs. The Dow is now testing its august highs and the SPX is significantly off the lows posted during the previous CPI print. With the move into the Dow, it is clear that the machine is desiring safety. We will follow the signals for now with our foot ready to hit the brakes hard. Risk is elevated with the Vix still solidly above 20. When Crypto goes bust and it is no longer safe to trade in and out of that asset what is the next closest asset? Yep stocks. With this and the fact that we have great QOQ GDP it’s a clear risk-on move in equities this week with some overbought signals flashing some short-term downside risk.


  • One Month Risk Calculation – Risk Decreasing


TLT (Bonds)

  • The market is signaling that the fight with inflation is over and that we are all good now, but are we? Zooming out we can see that we have 7.7% inflation YOY, that puts us at the 90th percentile in CPI going all the way back to 1949 in the US. We have a long way to go before we get inflation under control. Bonds might be cooling off from there over reaction to the Fed’s comments during the last meeting but are still almost a full 100 basis points away from out projected targets for med next year. This is a small taste of what the end of the bear market will look like but we are not there yet.


  • One Month Risk Calculation – Risk unchanged



GLD (Consumer Goods Inflation)

  • As we stated last week we love gold in the late stages of the recession. We almost had a positive allocation last week but just missed it. Now we must buy at a higher price. We did however miss out on the -18% downturn in gold during the demand destruction phase. We do have some short-term risks of a pullback but now is the time that Gold can take off in a meaningful way if the Fed does truly make the mistake of easing. If the Fed slows down it significantly increases the risk of the dollar devaluing, inflation becoming entrenched, and inevitably causing hyperinflation. During this stage of the recession we will now be using GLD as our hedge to equity exposures.


One Month Risk Calculation – Risk Decreasing


UUP (US Dollar Relative Deflation)

  • As with any debasement of a currency, the value of it slides vs other more stable currencies. This is a pure mean reversion of what we have seen all year long in currency markets. As we stated in GLD, the market is now pricing in a high risk of a Fed policy mistake of easing too much

  • One Month Risk Calculation – Risk Increasing



IWM (Small Caps)

  • We had a nice move in IWM over the last week in the SWP. With much of this short-term push to the upside exhausted there is some risk of a pullback. We now have hopium fully priced in and now would need to see some follow-through. If there is no follow through there will likely be a large selloff and a continuation of the bear market to new lows. This is the likely path over the coming months but we will short term be pulled into the buying stampede.

  • One Month Risk Calculation – Risk unchanged


EEM (Emerging Markets/ Relative Inflation)

  • When the Dollar tanks we get EEM going straight up. It has been a long time since we have seen this type of move in EEM. As we scale out of the dollar EEM will get more bullish. The thing that we really need is global growth to accelerate. So far that is not what the signals are. Right now we are sitting at growth falling YOY and global growth entering the later stages of this recession.

  • One Month Risk Calculation – Risk Decreasing


Drivers for Current Portfolio Allocation

Bear market rallies are defined by a counter-trend move inside of the overall contracting economic environment. That is what we are in right now. As far as the eye can see we have a global contraction of growth. When we have growth slowing and layoffs beginning with a Fed that is still in its tightening phase it creates a deeper contraction of markets.

For now, we will respect the signals of massive risk-on buying across all risk assets and bonds, but with a very quick trigger to risk off and hedge aggressively.

Gold is the favored asset over the dollar for risk-off hedging. While bonds are acting more bullish, they carry significantly more risk over gold as inflation remains this high historically.

When bond yields drop leverage goes up in the market. As bond yields rise leverage will drop. This is the cycle of inflationary bear markets. Hold on to your shirt we have a long way to go before we get to the end of this economic contraction.

May you ADAPT to markets and Sleep Well,

SWP Team