Let’s talk about the “boring” part of your bubble portfolio: the stability slice. It’s the one that keeps you sane while the rest of your portfolio is out there doing keg stands with meme stocks.
Over the past (almost 5) years, our Basic Economic Cycle (BEC) indicator has quietly crushed it. Below, you’ll see performance results for a simplified version of what we use. It trades the plain old QQQ (in green), without leverage. It’s simple, retirement-account friendly, and beats the market year after year, like a Volvo that somehow wins drag races.
We can show you these results because they don’t yet correspond to anything we offer.
In fact, it outperforms the standard QQQ by about 3.6% annually. That might not sound like much... until you see the side-by-side:
If you started with $25k and added $5k annually over 30 years, you’d more than double your returns compared to just holding the Qs. I know, boring isn’t sexy. But doubling your money kind of is.
And for those of you who enjoy a little spice, just using UPRO (the 3x version of the S&P 500) this year with this strategy would have returned 18%+ already. But UPRO is like riding a mechanical bull, thrilling, yes, but not recommended for your retirement account.
Let’s walk through how we construct the version of the BEC we like. The accounts we manage use something even better, with automated execution. But here’s the core logic behind the performance you’re seeing.
The Core Insight: Fast vs. Slow Data
All economic data lives on a spectrum:
- High confidence, but slow (like unemployment)
- Fast, but flaky (like Twitter sentiment or your uncle’s Facebook posts)
If your time horizon is long enough, you can lean on slow data. But to smooth out the ride (and outperform), you’ve got to sprinkle in some fast data. How do you do that responsibly?
Our solution has been to incorporate “betting market” data.
The Michigan Sentiment Index, for example, is both fast moving and a robust collection of what people say. But what people do is often at odds with what they say. So, we want to look at data where market participants are forced to do something. Specifically, where they have to place their money on one side or the other of an event.
For our simplified BEC, we combine slow data with fast betting market data and scale things from 1 to 5. Here’s the checklist.
The BEC 1-5 Score
Each of these adds or subtracts a point on a simple 1–5 scale. If you’re a math nerd, yes, you can z-score this stuff. But for everyone else: keep it discrete and keep it moving. As a note, we start out with a score of 1 and add from there.
1. Sahm Rule
We begin with the Sahm Rule. It measures the rate of change on unemployment data (blue line in the chart below). Every time it has ticked above 0.5 since 1954, a recession has followed … except for the most recent reading, which was distorted by COVID effects.
If under 0.5 → Add 1 point.
2. SMA 200 Rule
If the S&P 500 is above its 200-day moving average, that’s a thumbs-up from the market gods.
If above → Add 1 point.
3. The Heat Rule
Third, you’ll notice that I’ve flagged times when the SPY declined rather precipitously after having reached various levels above the SMA 200. Let’s call this The Heat Rule.
Wherever the S&P 500 closes, such that it would need to decline more than 10% to reach the SMA 200, subtract one point.
Add that point back when it would only decline 6% to reach the SMA 200.
Goldilocks likes her rallies medium-rare.
4 & 5. VIX Term Structure
Finally, we’ll look at just an aspect of the VIX Term Structure. This thing is complicated, but it represents, roughly, how options buyers think the market will perform through various months. We’ll confine our analysis to just one of the months (usually the green box).
First, check if the expiration date (by hovering your cursor over that blue dot) is more than 2 days away. If it is, then use the green box, otherwise use the blue box for the following analysis.
Next, check if the relevant box (green or blue), at market open (9:30 am EST), is above 0%. If it is, then add one point. If it is also above 4%, then add another point.
Execution Idea: A Basic BEC Strategy
How do you use this thing? Here’s one possible idea. If your score is 4 or higher, go long with 50% in SPY and 50% in QQQ. If it's 3 or lower, maybe sit on your hands, or cash.
Again, what we manage for clients is more refined (and automated), but this gives you a functional approach to the “stability slice” of the Bubble Portfolio.
Next week, we’ll explore the “growth slice,” which is where things get a little wilder, and a little closer to the edge of the bubble.
Until then, remember: stable doesn't mean sleepy. Sometimes it just means smarter.
Happy Trading!
-Sebastian Purcell, PhD
Assisted by Nicole Zinuhova
P.S. If you found this helpful, you’ll probably also find the AOTB full course even more helpful.
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Disclaimers and Disclosures
This post is provided for educational and entertainment purposes only and should not be relied upon for business, investment, taxation, or legal advice. You should consult your own advisors for those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by 1.2 Capital Management. (An offering to invest in a 1.2 Capital Management fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation--all of which should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by 1.2 Capital Management, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
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