It was another awful week for the stock market. All of the stock market indexes fell over 5%. Both the fourth quarter-to-date and December-to-date numbers are the worst in at least a generation.
Despite the Federal Reserve hike in interest rates, apparently nobody has told the bond markets. Rates have continued to fall and bonds have rallied to the extent that they are now outperforming stocks for 2018.
Of course, this all reflects a flight-to-quality in the face of the stock market’s weakness. As a result, gold is also one of the few investments showing a profit for this quarter. As the sub-adviser of the only gold mutual fund in the U.S. that seeks to track the daily price of the precious metal, it does help to know that we were able to make this available to not only our clients, but to other mutual fund investors.
It does appear that the decline in stocks reflects a combination of causes. The aggressive rate actions of the Federal Reserve in the face of an obvious slowing in the economy from the first half of the year tops the list, but the rarified air at the new highs of September causing overbought technical readings, the uncertainty bred by the trade talks, and government shutdown certainly have contributed as well.
Historically, though, the economy remains strong despite its moderation in 2018’s second half. U.S. Global Investors summarizes the strengths and weaknesses below in its weekly markets note:
Source: U.S. Global Investors
Technically, stocks are now even more oversold than they were overbought in September. Every indicator of the stock market’s overly pessimistic movement is now screaming for a bounce higher. Sentiment indicators are strongly suggesting the same. And, of course, seasonality remains positive.
Still, our strategies continue to be in a maximum defensive posture. Self-adjusting Trend Following, Volatility Adjusted NASDAQ, and FUSION are all actually short the market profiting from the downturn and have been in that position for more than a week. Others have moved to their maximum bond or money market exposure.
The lone exception has been Classic. It has received a sell signal on its principal indicator but decades of research have caused the strategy in this situation to refrain from selling until rates cease their fall or an oversold bounce occurs. At the same time, those who have switched to our QFC version of the Classic strategy have seen a substantial reduction of their equity exposure through the methodology’s investment in our sub-advised Quantified Funds.
Recall that the QFC versions of our strategies have two levels of risk management: the strategies’ internal risk management indicators and the many risk management methodologies employed by the Quantified Funds sub-advised by us that we invest in to implement the strategy. At the same time, they give clients a substantial reduction in the fees charged for the strategies. That’s why we say, “The QFC strategies provide two levels of risk management for one low price.”
As always, results for individual strategies are included in the weekly strategy portion of this newsletter. Holdings of our sub-advised Quantified Funds can be found in the pull-down menu in the upper left-hand corner of the Home page.
Our staff of nearly 120 FPI personnel joins with me in wishing you a happy holiday season. Thank you for trusting us with your investment management for another year!
All the best,
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