The Bottom Line

Currencies- King Dollar

Let’s start with the one asset category that doesn’t need much updating from our past notes, King Dollar.  As you will see by the chart provided there isn’t much for us to add as King Dollar is holding the support lines we have previously outlined for our readers.

The bottom line, based on various technical and fundamental reasons, we continue to believe we will see further strength in the US Dollar compared to other major global currencies.  Our models continue to hold their maximum exposure to dollar strength and as long as our trend lines continue to hold we will continue with that exposure.

The Metals - Gold

The longer you watch markets,  you may find that you are able to see patterns that sometimes provide you setups for when to buy or add to a position as well as to sell or reduce a position.

One of the patterns we have come to appreciate more than Cupid's arrows are known as a triangle or pennant pattern.  You may be able to see an example of this below in a long-term chart of GLD. 

Here is what we can appreciate most about triangle or pennant patterns:  these patterns are a result of a market digesting a previous move by essentially trading sideways over a period of time.  Which means these patterns are corrective in nature and when that corrective pattern ends there is a good chance the bottled up energy will start a new trend that may carry forward for multiple months.  Typically the direction of this new trend will be in the direction that the triangle breaks (either down or up) which can give an investor a tell to what direction the next multi-month trend may be in.

As of today's writing, this particular pattern is starting to look like the odds are in the favor of a breakout higher.  If this were to occur and the breakout is sustained above the red resistance line for more than a week then that would be the type of tell we would be looking for as a reason to add more metals to a portfolio if an investor can withstand the risk associated.

After almost 2 years of waiting, metal investors may start to see a trend they can lean into that may add some extra alpha or growth potential to their portfolio allocation.  Stay tuned as the next few weeks of follow-through will be key to this thesis.

Want to find out if Gold and Currencies are right for your portfolio?  Contact us here.

Interest Rates - Up Down All Around as The Yield Curves Flattens then Steepens

Interest rates have not only been a hot topic over the past few months, but they have also been acting up like a bad Valentine's date after too much red wine causing conservative investment allocations to wake up with some feelings of hangover and regret.

As a result of having larger exposure to interest rate sensitive investments, conservative and in some cases moderate diversification models may find themselves on struggle street if there is a prolonged period of time when interest rates rise and stock markets decline.  

When this happens a 60/40 portfolio essentially has nowhere to hide and usually gets bent over a barrel and shown the 50 states during such time periods.  And yes, rates have risen over the past few months causing a lot of back pain to conservative and moderate investors with a 60/40 portfolio mix (we see you Edward Jones clients) or target-date funds with higher allocations to interest-rate sensitive investments like treasuries and real estate.

Here in this 1-year chart of the Ten Year US Treasury rate, you can see how rates have risen since August 2021.  

The bottom line is that interest rates have continued to fluctuate within the expected range, albeit we are currently at the high end of that range.  We believe based on what we are seeing within the yield curve that interest rate markets will continue to trade in a range with the high end being near 2.25% on the 10yr Treasury and 1.25% on the low end until the U.S. economy provides more evidence that it is growing at a pace equal to or better than prior to Covid.

What does this mean for investments that are interest-rate sensitive?

Let’s use a longer-term chart of TLT as an example to show how rising interest rates may have an effect on certain holdings inside a portfolio that are considered interest-rate sensitive.  Keep in mind that as Interest rates rise a rate-sensitive investment like treasury bonds and possibly traded real estate investments will have a tendency to move in the opposite direction to the recent rate rise and move lower.

As you can see by the chart above, TLT has a similar triangle or pennant pattern like GLD does.  However, in the case of TLT, it is looking like rising rates are causing a breakdown out of this pattern.  If this breakdown is sustained it would be a significant tell that the intermediate and possibly longer-term trends for interest rates have changed from trending lower to trending sideways or even up.  And, if this is the case investors holding allocations in rate-sensitive investments may want to evaluate how this may affect their investment goals.  

In the near term, it looks as if rates may be reaching a point of pause and we are watching to see if there is a bounce back up for rate-sensitive investments in the near future.  Based on the looks of that bounce or retrace we should be able to better determine the longer-term intentions for the direction of interest rates so make sure to stay tuned as this will be key information for investors that are attempting to create a diversified portfolio that is considered to be conservative or moderate in risk tolerance.  Knowing your options will be key to optimizing your portfolio in such an environment.

Since January a falling stock market and rising rates have wreaked havoc on many investors' portfolios who thought they were well diversified.  

As we have preached many times, diversification is not the same as optimization so make sure to find out which of your investments may be more sensitive to rising rates and a falling stock market than others by contacting us for a free portfolio evaluation.

Equities - Just a flesh wound?

Since the start of the year, equity markets have been outlined in chalk and put in a body bag.  Who said, “stonks only go up”?

Here are the YTD stats as of Valentines Day 2022:

The SP500 is (-8.2%)

The Nasdaq is (-12.9%)

The Russell 2000 is (-10.4%)

A bond fund tracking 10-year treasury prices is (-4.3%)

Popular High Yield or Corporate Bond indexes are (-5%)

Pretty fugly, right?

Well if the patterns we are watching end up playing out in equity markets, those numbers may end up looking like rookie numbers for this league.

Let’s start with a 1-year chart of the SP500:

As you can see by this 1 yr chart of the SP500, the short-term trend line has been broken and so far the market has failed in its ability to get back above the trendline.  Creating a breakdown along with a bearish backtest from underneath which should be a big warning sign for any equity investors that may be new to this game as it shows the market has lost its ability to reclaim that shorter-term momentum.  

What happens next is very important in determining whether the January volatility is just a market correction or something bigger like a bear market that investors with certain time frames (ie: The Redzone) will want to avoid.  

In our opinion, the next significant sign to watch for is if we see another low in this pattern that creates a 5 wave decline from the January peak.  While we are not predicting such a move, if it were to occur it would be another added sign that the intermediate and possibly the longer-term trends in risk assets are changing from up to something else.  

It’s important to remember that approx 80% of investor losses happen during Bear Markets and recessions so if we can reduce or avoid exposure to Bear Markets we make the job of creating growth all that much easier.  Observing and acting in accordance with the signs the market is giving us is paramount in the process of managing risk during rough markets.

Speaking of tells and signs, here is one for investors to remain aware of. 

In the following chart, you will see a chart of the Large Caps vs the Small Caps and High Yield debt.  It is well known that when money managers are feeling frisky and risk is on, the higher alpha parts of the market like Small Caps and High Yield debt will tend to lead the market higher and when risk appetites change for the worst the Small Caps and High Yield debt will lead the market lower.  As you can see in the chart below, the last 6 weeks have exhibited this classic risk-off behavior.

Bottomline, since the turn of the year there have been multiple signs that risk appetites have changed in markets.  Whether this is a temporary change that creates a run of the mill correction with markets rebounding to new all time highs later in the year or if this is the start of a more extended Bear market is yet to be seen.  For these market observers we are placing the odds at 60/40 that risk assets have entered into an extended period of risk off behavior and our models have allocated accordingly.  The next 6-8 weeks may be very important in providing more information on the longer term trends on risk assets so make sure to stay tuned.