Welcome to our active management update on the market

We are now in the period generally considered the “summer doldrums,” which can result from investors being focused more on their family vacations than their investment portfolios. Summer markets do not always need to be avoided, however. Just look at 2016 when the market stairstepped higher all year, including through the summer.

Here are a few important items to keep in mind as the summer months come and go:

  • The economic backdrop remains very strong, with corporate earnings growing strongly and unemployment under 4%.
  • The uptrend that started in 2016 continues, even though we have gone through a sharp correction with a spike in volatility.
  • The S&P 500 moved up last week to its highest level (“A” in the following graph) since March, as small-cap stocks and the NASDAQ 100 moved to new all-time highs.
  • The MACD indicator recently broke out above its downtrend line (“B” in the following graph), which is a very good sign that the S&P 500’s rising price pattern has staying power.
  • The Stochastic RSI indicator (“C” in the following graph) just edged into overbought territory. This type of reading can be an opportunity for mean-reverting strategies, but it is also a sign that the recent advance in stocks has fairly strong support. This supports evidence pointing to higher prices in the weeks ahead.

The bottom line is interest rates are rising as the result of a strong economy. Even though the Fed is raising interest rates, it remains in an accommodative mode, which is supporting both the economy and stock prices. Rising interest rates are also supporting the U.S. dollar—a topic for another time.

S&P 500 Large Cap Index chart

Four months ago, volatility was on everyone’s mind, but I have heard little about it lately. Volatility, as measured by the CBOE Volatility Index (VIX), is now at 12.1. This is below the 12-month average (13.3), 36-month average (14.6), and 20-year average (around 20). This simply means that markets do not perceive a great deal of risk-inspired volatility in the near future.

In the following graph, the shaded green line at approximately 45 represents a level that the VIX has reached in recent years only at the peak of selling associated with market sell-off lows. If the recent excursion to such levels stays true to form, then what we recently experienced was nothing more than a sharp correction, which has completed its peak in selling. And, if that is the case, we have also likely seen the low of the correction.

Volatility Index Chart

Let’s put that in the context of our actively managed strategies. If all one did was pay attention to the positions that the various strategies took as the market sold off, one would conclude that the sell-off was just a short-term correction that was long overdue and is now behind us. That was evident in the actions of our strategies. For example:

  • Our long-term strategies (such as Classic) that remained fully invested during the correction.
  • Our intermediate-term strategies (such as Volatility Adjusted NASDAQ and Market Leaders) that adjusted long exposure, including reducing leverage, but maintained long exposure.
  • Strategies that tend to adjust positions on a short-term basis (such as mean-reversion strategies and Fusion) that adjusted positions as warranted on a daily or weekly basis.

All of the actions taken and not taken by these strategies make perfect sense given the type of market correction that occurred. Also, all of the respective portfolio changes took place according to the established rules of each strategy and without the biased involvement of (or interference of) an investment committee. Also worth noting is that the actions taken by the various strategies emphasize the importance of considering time frames when constructing a strategically diversified portfolio.

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