This Week in the Market

With Scott McCaghren and Tony LaPorta

The audio portion of this week’s commentary yields some very interesting observations for both the short-term and intermediate term conditions that relate to the overall marketplace. The first very obvious observation lies in the recent performance regarding the major indices. The S&P 500, DJIA and NASDAQ have all traded to record levels; while the Russell has significantly outperformed (previous exposure that we shed in our latest re-balance). This points toward some significant discrepancies from a traditional mode of gauging the marketplace as a whole:

  • Russell 2000 is used by many as an indication of how the U.S. economy is performing on a broad spectrum which brings us to discrepancy #1: Economic data points towards a very strong economy with few projections of that slowing.

  • The Federal Reserve has more than hinted at cutting interest rates soon, after 18 months of implementing a series of rate hikes which brings us to discrepancy #2: With unemployment at all-time lows and equity markets at all-time highs, how would one justify an interest rate cut (the lack of inflation reasoning logically seems to be nothing more than a curtain hiding something bigger)

  • The treasury markets have traditionally been known to be a forward-looking signal for the equity markets which brings us to discrepancy #3: First, one must forget about the traditional inverse correlation of the bond market vs. the equity markets (currently it simply doesn’t exist); treasuries have begun what appears to be a potential erosion while equities are trading at record levels. 

Discrepancy #3 seems to have the most unique observation associated with it. If we look back at the debacle that unfolded in the equity markets during October through December of last year, we will find that the treasury markets began eroding six weeks prior. This has happened on numerous occasions in the past that would point toward one potential outcome: future erosion in the equity markets. Couple that with seasonal tendencies of weak equity prices in August through October, one could make a multi-faceted argument as to why we should anticipate a weaker equity environment in the near future.

The point of including that observation into this particular commentary is to address the current hedge that is in place. The hedge provided great value during the sell-off in May and we believe could provide even more value should the equities follow suit again in the coming weeks/months. Fundamental and technical analysis both show why it is prudent to maintain this positioning for the next six to eight weeks. We have a strategy in place that allows the portfolios to continue moderate upside potential while also guarding against a similar downside potential that we endured over 5 times in the last four years. “Making money is the easy part, keeping it is the game”- TLP

As always, we continue to monitor all equity, treasury, commodity and currency conditions in order to efficiently deploy capital as well as protect invested assets.

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