In these posts, we take our monthly fund factsheet commentary and extend on it with some thoughts and charts. Passive Allocator’s portfolio allocation depends purely on Momentum calculated in a quantitative/mechanical way, however prices always move due to some underlying cause. No one really knows the cause but it’s fun to guess!

Another steady month with a 0.5% gain. All our ETFs and their associated asset classes have been benign since last year’s volatility spike. There have been rallies in both Equities and Fixed income, something that benefits a mixed asset fund like ours. US equities have hit all time highs again, garnering decent positive momentum on the way up. Even European and UK blue chip indices sit on steady gains YTD. Volatility has been crushed across the board including commodities and fixed income. Are we back to the old economic regime of 2017? One where interest rates remain low while economic growth remains steady although modest – this does help asset prices in our favor. On the macro side there has been one interesting development: the US dollar currency has broken out to the upside. A stronger dollar is usually bad for emerging markets and commodities prices. All this could explain why the US equity space is still the best performer after all these years. Bit nervous about issues like Brexit and global trade frictions which are nowhere near resolved, couple that with such low volatility, and we have good reason to remain cautious on risk assets. Overall we are still overweight Fixed income as compared to our 60/40 benchmark, a factor we are comfortable with given the ongoing “pause” of the US central bank. Without taking the side of those market professionals who are forecasting a downright cut in interest rates, we feel at least a pause in the hiking cycle is healthy for our fixed income ETFs.

Passive Allocator Strategy momentum & Volatility score table for Apr 2019

US equities have outperformed this entire cycle, and continue to do so. We have added to SPY and QQQ ETFs in our portfolio this month albeit in very small increments. Having a reserve currency along with being the “world’s largest consumer” seems to be helping.

FTSE100, Eurosoxx50 and S&P500 5 year line chart synced at start.

The US dollar breakout is key for global macro players, however we believe it is key to pretty much the entire multi-asset space considering the current phase of the business cycle. A stronger US dollar can wreak havoc for emerging market assets – that’s a well known heuristic – however this time it would be intersting to see how the FED reacts. It could totally end its rate rising cycle for good and bring in rate cuts sooner than later.

The DXY dollar index daily candlestick chart with 200 day moving average.

Lastly we look at asset volatility as this month is once again seeing seriously low (read: complacent) levels across asset classes. Moreover in our favorite gauge the VIX index, speculative traders’ net short positions are at extremes once again as evidenced by latest COT (Commitment of Traders Report from the CFTC). COT reports are a blunt instrument but extreme readings can signal turning points. When everyone is shorting the VIX index, things get a bit risky for equities.

 VIX Futures Non-Commercial Net Total/Futures Only COT report at extreme lows signalling huge short VIX positions, overlayed with the SPX index line chart

Happy Investing,
Passive Allocator team