After 3 months of steady steps higher by major global equity indices, January witnessed the return of 2-way movement: something most market participants forget about and get complacent. But volatility never fails to make an appearance and does so by latching onto any viable reason. The reason this time was a valid health scare coming out of China. Currently, the markets are still digesting the news, the short and long terms effects of which are still unknown. This uncertainty has caused MSCI Asia Pacific indices to fall as much as when the US announced trade tariffs. US and EU indices too have retreated, but long term momentum is still positive for these. At the beginning of January Asia Pac Equities showed the highest rank in relative momentum hence we hold sizeable allocations to it, in addition to US, EU and Tech equity indices. Gold too displays very firm positive momentum, hence the shiny asset too holds a sizeable allocation in our portfolio.

Overall performance for the month has been steady at 0.67%, but decent early month gains have been wiped out by the virus induced volatility. If our equity ETF positions start showing sustained negative momentum readings in February, their allocations will be cut and replaced by short and medium-term US treasury ETFs as per our Risk-Off overlay routine. It’s times like these that our Risk-Off Overlay comes in handy and prevents possible drawdowns if equity assets decide to take a deep dive. It’s common knowledge that most developed equity markets are not cheap, with the US markets being rather expensive in valuation. While valuations are not a proven market timing strategy, they do predict longer-term returns to be on the lower side. “Buy and Hold” in times like these could attract portfolio volatility indeed.

Momentum Scores and Ranks for Feb 2020

This is the scene at the end of Jan 2020. EMs have broken down in both their short and long term trend. Investment Grade Credit is once again the leader in the short race. In the long race/relay (long term momentum) we see Gold and Technology equities still holding the fort.


NYFANG Daily price chart with 250 Day Momentum and 30 Day Realized Vol. Source: Bloomberg

In the case of Technology Equities, the Coronavirus may or may not create a serious dent in earnings after all; but it’s still too early to tell. There are longer-term headwinds for this sector namely regulations which may be downright “unfriendly” to shareholders, which in turn could force structural changes for the industry. Also, valuations are really expensive! Alas, a trend follower’s routine is to suck it up and hold on. Above we look at the NYSE FANG Index (Equal Weighted Facebook, Apple, Amazon, Netflix, Alphabet). This is a subset of the tech sector but the stocks are honestly flag bearers for their Index’s 2+ Z score run over the past few years.


LQD ETF Daily price chart with 250 Day Momentum and 30 Day Realized Vol. Source: Bloomberg

The expanded valuation argument holds even more weight for Corporate Bonds: iBoxx USD Liquid Investment Grade Index realized Vol has been subdued all of last year, even lower than US 10 year treasuries more recently. Momentum is strong for February hence we have allocated the big 25% seat in our portfolio to LQD. Spreads are at or near all-time tight levels these days – but the uptrend here goes on unabated. For Now.


GLD ETF Weekly price chart with 250 Day Momentum and 30 Day Realized Vol. Source: Bloomberg

Gold is receiving a lot of attention these days from all corners of the media. The long term weekly chart seems like a sleeping giant stirring to life. Given the fundamental outlook of interest rates and vintage of the current equity bull market in the US, our favourite shiny metal retains and reserves a 10% spot in our portfolio.

Happy Investing
PA Fund Team