Stay Nimble Out There: July Notes and Charts
MARKET RECAP & LOOKING FORWARD:
Through July 30th, the S&P was up 2.55% (total return) for the month. But with only 2 hours left on the last day of the month, and P&L all but in the books for many PMs and traders, the market started aggressively picking apart what Federal Reserve President Jerome Powell had to say, how he said it, and what he left unsaid at the scheduled FOMC Rate Decision and follow-up press conference. While the S&P 500 didn’t suffer significant losses that afternoon (-1.09% on the day), you could feel a change that may linger awhile. Volume picked up, and growth stocks and sectors were hammered.
Interest rates were indeed cut for the first time in 10 years, but by 25bps and not the 50bps that the market apparently wanted. But even if the 25bps was okay and not great, the commentary around the meeting was hazy enough to question or lose conviction in their ability to properly navigate the economy and how to articulate exactly what it’s doing and why. It was during the press conference, as it often is, that the more meaningful content was discussed (or left out) and dissected by market participants. Powell was confusing. I’m paraphrasing this here, but his message was as more or less as following: “this may not be the beginning of a lengthy cutting cycle, but don’t rule out more rate cuts, but also keep future rate hikes as a possibility.” It sure sounds like the Fed is winging it. I think that additional aggressive cuts are now being demanded by the market, and by the way, don’t be data dependent. Just cut more. The market may want something that the Fed doesn’t want to give. At least it seems that way. Although yields here in the U.S. are very, very low on absolute and historical basis, when compared to most other parts of the developed world, they are actually high. Maybe too high.
Last month I mentioned that the total amount of global, negative-yielding bonds was around $13 trillion. The updated total is now $14.52 trillion and makes up roughly 1/4 of all sovereign bonds. Credit might be priced to perfection. Although equities may not be priced to perfection (especially when bonds are yielding next to nothing), they aren’t inexpensive. And we are in the longest economic expansion in U.S. history.
Like my friend and founder of Hedge Fund Telemetry, Tom Thornton, wrote in a note last week to clients, “The power of the Tweet from President Trump is astounding.” This is just so true. There was a faster and more severe reaction to his China tariff Tweet than what the FOMC rate cute and press conference triggered (which was also fast), just the previous day. Trump + Tariff news = knee-jerking spikes and air pockets. Algo’s weight words and phrases from our President’s Twitter feed above all else. Twitter = instantaneous information utilized by the world’s most powerful people about topics that are market-moving. No news conference needed. No cameras necessary. Just an iPhone and the Twitter app. I started my freshman year of college 20 years ago (almost to the week), and the majority of students didn’t have a cell phone then, including myself. And when I got my first cell phone during my junior year, you could talk and text (and the texting component was still basic). “CHRIS, DON’T FORGET THE BEER.” Incredible changes to the ways we communicate today vs. then, and even vs. 4-5 years ago.
CHARTS & THEMES WORTH WATCHING
VIX Index: Time for Another Circle?
President Trump’s Tweets Trumps Anything Else
World’s Major Stock Exchanges: Still Having a Good Year (Price Returns Only. Total Returns are Higher)
Q2 Earnings Season is 70% Done…And Growth in Tech EPS & Revenue are both Negative
German Bund’s Entire Yield Curve Basically Negative
The Amount of Global Negative-Yielding Debt is Accelerating
30-Year Look at the 30-Year U.S. Treasury Bond
2-year/10-year U.S. Treasury Yield Curve: 2009-2019
3 month/10-year U.S. Treasury Yield Curve: 2009-2019
Bond Market: Cut, Cut, Cut
Economic Data from 8/2/19: Not Bad Enough? Little Bit O’ Wage Inflation
The S&P 500’s Triangle and Important 2950-2960 Range: Back Under
Transports Fundamentals: The Group Looks Inexpensive vs. Themselves on a Price-Earnings Measure: Cheap or a Value Trap?
Transports Technicals: It’s About That Time to Make a Move. Watch 10,200 on the Downside & I’d Hold Out Under There
Small-Caps are Relatively Cheap on a Price to Sales Measure
Gold Breaking Out of a Long-Term Rectangle?
Bitcoin (By Request): Technical Analysis is Working: 13k, 11k and 9k are Levels of Interest and Technical Significance
High Yield December-Uptrend Snapped (Using HYG ETF)
US Dollar / Japanese Yen Cross Looks Bearish for Risk Assets: Virtually at the lows and normally works against equities
Consumer Discretionary Sector ETF (Using XLY): Many Sector Charts Look Like This (Wait & See Recommended)
Japan’s Nikkei: Important Test of its Nearly 7-Year Uptrend is Close
China’s Hang Seng is Barely “Hanging In”
CURRENT MARKET DRIVERS WORTH WATCHING
Here are the key drivers that we see as most important in this market (in no particular order as they are all significant):
- U.S. – China Trade Talks: Will President Trump actually raise tariffs on September 1st (per his Tweet on August 1st)? How will markets react to an eventual trade deal with China? Will there ever be a deal? What’s priced in? Tariffs continue to crimp global growth. Everything else is speculative, in my opinion.
- Oil is Holding Steady over $50/bl: Higher oil prices with slower global growth isn’t a good combination, and that’s where we are today. Away from that, $50 remains a key level to hold for all markets, especially high yield.
- Earnings and Guidance: Lackluster revenue and forward guidance have been the themes thus far in 2019. Q2 earnings prints are more than 70% completed for S&P 500 companies. Although Q2 earnings growth has bounced back some (roughly 1% earnings growth), Q3 2019 and full-year estimates are coming down. Additionally, the Tech Sector has the second worst earnings growth of all the sectors and the fourth worst revenue growth so far.
- Interest rates and the Fed: While U.S. interest rates are very, very low, they are actually high vs. much of the developed world. Are they too high? Odd market to even have to ask that with the 30-year Treasury @ 2.38%. The Fed refused to end the economic cycle in 2016, and they seem adamant on trying to avoid it again now. The Powell put is newly formed – but its strength and reliability is TBD.
- Debt: Debt quality is deteriorating at the same time debt levels are very elevated. While there has been some deleveraging in households and the much of the banking sector since 2008, both corporate debt – away from financials – and debt to GDP are at nosebleed levels that can add fuel to the next bear market. The growth of the triple BBB corporate bond market is especially worrisome.
WENNCO STRATEGY INFORMATION
Wennco Downshift ETF Hedged Equity Strategy Update:
Since inception (7/1/18) through 7/31/19, Downshift ETF’s performance was 2.36% (net of Wennco fees only) vs. 12.00% for the S&P 500 Total Return Index, 8.11% for the Bloomberg Barclays U.S. Bond Aggregate Total Return Index, 4.26% for the BXM Index (CBOE S&P 500 BuyWrite/Covered Call Monthly Index), and -3.22% for the HFRX (Hedge Fund Research Equity Index).
During our first 13 months of Downshift ETF’s track record, the return profiles of our competitors’ hedged equity strategies have been all over the place. To illustrate the difference in how our hedged equity strategy hedges (or was hedged in times like Q4 2018) vs. our competition, I am going to compare our first 13 months to 2 competitors who, after our first full year + one month, arrived at a very close destination as we did (but they had larger drawdowns in Q4 2018 vs. ours):
GATEX (Gateway Fund) & SDRAX (Swan Defined Risk). Both are highly regarded and have smart and successful management teams (and these funds are both highly invested in, AUM-wise) hedged equity strategies. Over time, they have delivered good risk-adjusted returns and have a very low beta. Updated through July 31, these strategies have returned 2.08% & 1.43%, respectively, during the 13 months ended 7/31/19, vs. 2.36% for Downshift ETF. We managed to outperform both GATEX & SDRAX’s total return over the past 13 months while being more hedged. Q4 of last year was the difference and reason for this. Downshift was down -4.58% during Q4 2018. GATEX & SDRAX lost -7.50% & -10.30%, respectively, during Q4. (The S&P was -13.52% in Q4 2018). The COMPS for Q4 2018 were included on the previous note, which can be found here: June Notes and Charts
COMPS (6/30/18 – 7/31/19) for SPX (the S&P 500 Total Return Index), the BXM Index (CBOE S&P 500 BuyWrite/Covered Call Monthly Index), the HFRX (Hedge Fund Research Equity Index), the Bloomberg Barclays U.S. Aggregate Total Return Index, GATEX (Gateway Fund) & SDRAX (Swan Defined Risk):
Why Downshift? Owning uncorrelated return streams is important to preserving wealth, and especially makes sense in late in market cycles (like where we are today). Bonds have become less uncorrelated to equities, and investors need more reliable sources of protection in risk-off markets. Our strategy has two parts which are negatively correlated: long-dated and actively managed S&P put options and actively managed covered calls. Owning S&P 500 sector ETFs, along with uncorrelated return sources in an actively managed process, such as covered calls and S&P 500 put options, is a prudent way to grow assets over time. Downshift ETF seeks to minimize drawdowns and maximize compounding returns over the long term, and is a great strategy to stay invested in equities with less portfolio volatility.
I hope everyone has a great August. Stay nimble (and cool) out there.
CIO & Head Trader
Wennco Downshift Strategies