Market Neutral of Index Unaware-What does it mean?

We are not piling into the market saying yes or no.

We take it step by step as stock picks emerge.

It doesn’t matter where the market goes it matters where your stocks go.

We can choose to take a view on the market, which can be tricky, or we can choose not to worry about the index and take each stock on its merits. Bottom up, market neutral or index unaware are the terms we use to describe this approach.

It means we analyse a stock itself and the analysis presents us with opportunities based on   the merits of the price action presented to us and nothing else. It makes a degree of sense as it is stocks we trade so it is stocks we should analyse. The top / down approach will cause you to miss some great trending opportunities during bearish times and that’s a choice a top / down analyst makes. It’s like averaging or low conviction.

The benefit of high conviction stock specific analysis is we don’t have to take a view on the market. Stocks can trend all on their own and those that do, present us with unique opportunities and save us from the awful decision of, do I buy stocks or not based on market (ASX/200) direction.

Recently the market has been weak and, yes, opportunities have been sparse. However Stocks like CPU WHC NHC have lucratively moved against the market trend and over recent weeks we have seen more breakouts occur despite the nervous environment. Perhaps the market is about to turn back up, there are certainly more opportunities emerging.

The benefit of this approach is that we don’t have to make that decision. In fact, we can ignore then index and go about our business of analysis of specific stocks for new trends. All stocks don’t rise or fall at the same time. There are always some stocks running against the tide. Something to tide you over when the general market is weak and cash rates are low!

That’s our style and it explains the market neutral/index unaware style.  What does happen during market bottoms is slowly stocks begin to breakout and once a ground swell of stocks do this then investors ‘feel’ the market is turning as these breakouts cause the index to start rising and then at some stage the top/downers will decide yes, the market is going up. We don’t have to make that decision, nor do we really care where the index is going. A trend is trend.

If the index is going up it simply means, there are probably going to be more up trending opportunities than if the index (ASX/200) is going down and that’s a pretty fair statement. But it’s about your strategy and style and I’m not about to make a judgement on the pros and cons of either. I go about my business of doing what I do unemotionally and that’s how you follow a strategy, with belief, conviction and a fair dose of money management. No wondering just stock specific analysis and right now the breakouts are becoming more frequent.

Focusing too heavily on the macro headlines and headwinds and tarring everything with the same brush ignores an environment that is ripe for Stock Picking and active management.

  • Jun Bei Lu Portfolio Manager at Tribeca Alpha Plus Fund

The sentiment overlay often cast clouds of negativity over green shoots of recovery. In next week’s newsletter (30/11/22) we ask is that bearish negativism casting a cloud over the consumer discretionary stocks!