Sundial Market Outlook & Commentary - DEC 2023

Welcome to another edition of the Sundial Standpoint. Our periodic commentary is broken into 3 sections: Market Commentary, Strategy Commentary, and Charts & Tables that we found worthy of sharing.
Sundial Market Outlook & Commentary - DEC 2023


Summary of our views is as follows:

• While the rate of inflation is clearly declining, we continue to doubt it will return to the very low levels targeted by the Federal Reserve anytime soon. The inputs that kept inflation so low for so long (cheap labor; cheap goods; cheap energy as an input to manufacturing) have all changed.

• We caution using a lens from the 2000 – 2021 period as a mechanism to evaluate investments today. The potential for persistently higher price of money, the desire to shrink the Federal balance sheet, and global protectionism are all reasons why we view the current investing landscape is quite different than the past 2 decades.

• From 1968‐82 the equity market experienced multiple violent rallies and subsequent selloffs, and 70% of purchasing power was lost to inflation. We could see a mini period that is similar ‐> choppy equity and bond markets with multiple large rallies and declines and an erosion of purchasing power from elevated inflation. Portfolios should have exposure to real assets and other strategies that can perform in this type of environment.

• The risk of a credit crunch remains. Investors are no longer willing to accept zero interest from bank deposits and have been reallocating capital into money market funds or other short duration investments. Regional banks have historically been the major providers of CRE, C&I and personal loans. Regional bank business uncertainty could result in tighter lending standards or even an unwillingness to extend credit.

• Demand for downside protection in the US equity markets remains anemic. Put option skew remains low, and strategies that sell volatility are in high demand. Additionally, 0 DTE options are now roughly 40% of volume. Don’t underestimate the potential for a violent downside repricing in equity indices if the volatility sellers are caught offsides.

The equity and bond markets have had a remarkable positive run over the past 6 weeks. Justification for the moves have included constructive US growth and inflation data, declining oil prices, significant amounts of money poured into equities., and a Fed that appears to have pivoted accommodative as evidenced by their 50 bps decline in their federal funds rate forecast for 2024 (SEP tables below).

Two of our core portfolio construction principles are Equity valuations are not a good timing tool. They are driven by excess liquidity and also Trends are Powerful. Both of these principles are front of mind here.

We are staunch proponents of trend following, and from a trend following prospective, the prospects for a sustained upside breakout in multiple equity indices looks promising. The S&P 500 is essentially a trend following index due to its market cap weighting scheme, and after going nowhere for 2 years, it looks poised to break out to the upside. A new all‐time high (ATH) would mean that everybody who is long is making money; everybody who is short is losing money.

The past 2 years have been painful for equity bulls, as the market has been non‐trending.  The average stock in the S&P 500 is very close to unchanged since January 1, 2022. The average stock in the S&P 500 (including dividends) has been so weak, that keeping your money in T‐Bills (i.e. ETFs such as USFR) would have outperformed. However, breakouts, and particularly breakouts that are sustained, can be powerful. Breakouts to the upside also tend to be in conjunction with lofty equity valuations (i.e. the S&P 500 P/E now is 26 relative to the long‐term average of 22). We are intently watching for a breakout to new all‐time highs that doesn’t subsequently fail back below.

Fundamentally we are less optimistic.

• Inflation readings have declined but it is important to remember that inflation measures are a “rate of change”, and that rate is still positive. Prices have not declined – they simply are rising at a slower pace. This is painful for consumers, particularly as wages generally have not kept pace.

• We suspect the primary reason why recession has been avoided thus far has been the massive Government spending. Deficit spending continues to climb, and that money comes back into the economy. Demand for fiscal restraint into an election year could become a headwind. If you haven’t read Soft Currency Economics, we strongly suggest you put it at the top of your reading list.

• While the Fed’s base case has shifted to rate cuts in 2024, the market is pricing in a much more significant decline in the target rate than the Fed. The risk of a market disappointment is elevated.

• History indicates that equity prices run up into the first interest rate cut, and then decline as weaker economic prospects (i.e. recession) becomes the primary focus.

Additionally, we are thinking a lot about the potential negative impacts of zero day to expiration (0 DTE) options. On Wednesday, 12/20/23, the S&P 500 went from +0.22% on the day to ‐1.39% by end of day, on no news. It was simply driven down on the purchase of zero day to expiration put options, which caused more than $7bn of S&P 500 selling into the end of the day. This was an indication of the types of moves that could transpire from 0 DTE put buyers in size.

0 DTE options are now approaching 40% of the total options volume. The only real way to hedge 0 DTE risk is to use 0 DTE options. 0 DTE deltas change very fast (highly positive gamma), and thus simple underlying delta hedges are inadequate. This lack of other effective hedges could act as a local accelerant to price moves in either direction. More importantly, 0 DTE options are margined daily like all options are. Since there is no intraday margin calculation, it is almost impossible to determine if an entity has taken on excessive risk which has resulted in catastrophic losses, until it is too late.

We believe it is possible for the S&P 500 to experience a move to the initial circuit breaker trigger (Level 1 is ‐7%) on material negative news combined with aggressive 0 DTE put purchases.

In summary, we are riding our modest long equity exposures here, but are mindful of a potential nasty pullback that may simply be driven by market microstructure (0 DTE and short volatility positioning). This again is a reason why we favor tactical equity strategies over passive long positions, as the tactical strategies are more nimble and can truncate losses in extreme moves to lower prices.

Monthly Podcast Recommendation:

The Investment Strategy to Build Generational Wealth (featuring Morgan Housel)‐investment‐strategy‐to‐build‐generational‐wealth‐ft‐morgan‐housel/

There are some great sound bites in this podcast including:

The goal is to be financially unbreakable, not to generate the biggest returns in a year.

Being financially unbreakable allows an investor to stick around long enough for the compounding to work wonders.

Most investors chase the biggest returns that can be achieved right now, but that's not what matters. What matters is what are the best returns that can be sustained for the longest period of time.


As a reminder, our Sundial Dynamic All‐Weather Portfolios attempt to achieve positive returns regardless of the macroeconomic regime, such as positive or negative growth, or an inflationary or deflationary environment.

This is achieved through a few key principles:• Utilize multiple asset classes and strategies, beyond traditional equity and fixed income markets• Utilize both active (tactical) and passive (buy and hold) strategies• Recognize that some investments are stability seeking (short volatility bias) and others are instability or dislocation seeking (long volatility bias) and it is critical that a portfolio contains both.

The desired result is a portfolio of non‐correlated revenue streams, that exhibits attractive asymmetry through tactical allocations and return stacking, truncates the downside in adverse markets, and is fully offensive in constructive markets.

Tactical Equity Strategies:

Allocation: High end of the target range

Comment: Our momentum related tactical strategies have not generated any gains in 2023. They are also not far below their all‐time highs achieved in the end of 2021, meaning they avoided the large equity market drawdowns of 2022. We will continue to keep them in portfolios as they tend not to have large drawdowns when conditions are unfavorable, and this asymmetry of small losses and big gains is valuable. If equity markets do in fact break out to new highs, and the breakout is sustainable, history indicates that would be a very constructive environment for our tactical equity strategies.

Passive Equity Strategies:

Allocation: Low end of the target range

Comment: Our passive equity longs remain at the low end of our targeted range. These positions are mostly in ETFs and other diversified exposures. We have not tinkered with exposures much in all of 2023. We continue to believe overall equity exposure is best expressed as the combination of passive longs at the low end of the range plus tactical equity strategies at the high end of the range.

Yield Generating Strategies:

Allocation: High end of the target range.

Comment: A full allocation reflects both our defensive stance and the attractive opportunity set. There are so many strategies that can generate a high single digit and even mid to high double digit annual returns with modest risk. We continue to utilize mostly alternative yield generating investments that focus on private credit, bridge lending, commercial real estate deals, and tranched insurance risk related strategies.

Trend Following and Inflation Benefitting Strategies:Allocation: High end of the target rangeComment: Trend following strategies have suffered in November and December which is no surprise when you look at the sharp reversals in many markets. Despite the recent setback, we continue to believe the uncertain macro environment continues to be constructive for “dislocation seeking” trend following strategies. We were never believers in the stock and bond only portfolio, and we continue to hold the view that owning government bonds will not act as much of a portfolio hedge as long as inflation remains above target. Trend following strategies are a far better portfolio diversifier.

Long Volatility / Long Convexity Strategies:

Allocation: High end of the range

Comment: We continue to maintain maximum exposure to these strategies, and when we take on a new portfolio, this is also one of the first positions we initiate. The cost of tail protection (skew) remains extremely low, the potential for a left fat tail is elevated in our opinion, and we are strong proponents of this exposure in all portfolios.






Source: Danny Merkel Issue #148.

The rise in stocks since November 1 has mostly been driven by the rise in long‐dated bond prices (i.e. decline in yields). The bond move has mostly been driven by pricing in 5‐6 Fed rate cuts in '24 + term‐premium compression.


Source: Tier 1 Alpha



Source: Apollo

Source: Apollo

Source: Apollo

Source: Apollo

Source: Apollo


This commentary does not constitute an offer to sell any securities or the solicitation of an offer to purchase any securities nor does it constitute tax advice. This information is for informational purposes only and is confidential and may not be reproduced or transferred without the written consent of Sundial. Past performance is not indicative of future results. Statements and opinions in this publication are based on sources of information believed to be accurate and reliable, but we make no representations or guarantees as to the accuracy or completeness thereof. These materials are subject to a more complete description and do not contain all of the information necessary to make any investment decision, including, but not limited to, the risks, fees, and investment strategies of an investment.This correspondence may include forward‐looking statements. Forward‐looking statements are necessarily based upon speculation, expectations, estimates and assumptions that are inherently unreliable and subject to significant business, economic and competitive uncertainties, and contingencies. Forward‐looking statements are not a promise or guarantee of future events.Benchmarks and indices are presented herein for illustrative and comparative purposes only. Such benchmarks and indices are not available for direct investment, may be unmanaged, assume reinvestment of income, do not reflect the impact of any trading commissions and costs, management or performance fees, and have limitations when used for comparison or other purposes because they, among other things, may have different strategies, volatility, credit, or other material characteristics (such as limitations on the number and types of securities or instruments) than the Firm. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index. We make no representations that any benchmark or index is an appropriate measure for comparison. The S&P 500® Index is a stock market index from S&P Dow Jones Indices. It is a market capitalization weighted index of 500 of the largest U.S. companies, designed to measure broad U.S. equity performance.Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. There are no assurances that an investor’s return will match or exceed any specific benchmark.

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