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It's All Relative

Another quick update for everyone.  We know you have very short term concerns so here are some comments regarding the market, performance and our plans in the very short term.


The Market

Yesterday saw a mini crash in the markets at the open.  This is no longer news as everyone heard about the 1,100 point drop in the Dow.  The silver lining to the day was that the market closed much higher than the intraday lows – down “only” 588 points.  Digesting a day like that is tough.  It’s hard to make sense of panic, frankly, but here’s what we derived.  The lows of yesterday AM will likely serve as an internal low for now meaning we could/ should see a healthy bounce for a few days from an extremely oversold condition.  From that point, we still expect to see the market CLOSE at the lows established yesterday just to wash out anyone who is still overinvested and hopeful.  Those levels are approximately 3-4% lower than where the market is trading today.  After all, the market is in the business of frustrating the maximum number of people possible and that would do it.  A complex, volatile bottoming process is necessary now before the market can start trending higher again and it would not surprise me to see that process drag on into October.   But, we are still in the camp that this is just another flash crash like 2010, 2011 and 2012 that will resolve to the upside unless the economy or earnings begin to show more signs of deterioration.   October looks to be the most likely place for the start of a nice year end rally so don’t give up on this bull market quite yet.  We’ll keep you in the loop as conditions unfold for better or for worse.


12 Month Performance Through Yesterday

At present our expectation is that the majority of the price damage for the markets and our equity strategies is behind us for this phase of the correction, perhaps even on a longer term basis.  With that assumption, we took a snapshot of our strategy performance relative to our equity benchmark, the MSCI World Stock Index over the last 12 months through yesterday.  We like to look critically at how well (or poorly) we have done in terms of mitigating losses at potential low points in the market (like yesterday).  The results are not positive in absolute terms but they are reasonable and even attractive on a relative basis again looking back over the last 12 months through yesterday.  These are unofficial numbers taken as a quick snapshot, but do represent strategy results net of all fees.  

Take a look:

Benchmark return – 12 months ending 8/24/2015        -10.78%

Tactical Equity (highest risk strategies)

New Power                                                           -5.97%

High Dividend                                                       -1.33%

Worldwide Sectors                                                -6.96%

Blended Asset (moderate risk strategies)

All Season                                                             -5.99%

Foundations                                                          -2.64%

Gain Keeper Annuity                                             -3.18%

Income Strategies (lowest risk strategies)

Freeway High Income                                           -0.64%

Retirement Income                                                -1.85%

As risk managers, we are doing our job at limiting downside losses to a recoverable and reasonable level.  This is a dynamic thing and daily grind.  We are looking forward to getting back in the green regardless; as no one likes to see red.


Our Plans

Depending on the strength of any rebound from these extremely oversold market conditions, assuming we get one, we are likely to do one more round of selling to bring our cash position up just a bit.  As I said on Monday, we are almost at our maximum defensive position now after selling many positions last week when they broke stops.  However, we still have a few laggards that appear to be lagging even on this bounce (today).  We are simply getting comfortable for the bottoming process of the next 30-60 days when volatility can still keep you up at night.  If the lows of yesterday are just the first step down in a longer bear market, we’ll continue to migrate completely out of the market for full bear market defense.  It’s just too early to make that call.

Today we are likely to sell our only ETF bond position (LQD) because the risk reward probabilities now strongly favor stocks over bonds.  In addition, interest sensitive stocks and fund (real estate, utilities and bonds) have held up well through this mess but are now likely to underperform.   

That it for this very quick and out of cycle update.  



Sam Jones