US equity markets have been struggling since the beginning of the year and the S&P 500 Index has not made any progress.
Some pundits have been calling a top. For sure, there is mixed action, but some areas of the markets are in trending mode – up and down.
That, in my opinion is why the Technical Swing portfolio has been outperforming the S&P 500 Index, net of fees, through February 28.
The other reason in my view is an increased level of market volatility. Technical Swing tends to perform better when market swings get wider.
But while the S&P is struggling, other indices are showing strength and have taken over leadership.
Interestingly, the small cap index Russell 2000 has been the better performing vehicle.
So are US equities turning south? It obviously depends on which index you look at.
Dollar strength will take a toll on the earnings of multinational companies, which usually can be found in a large cap index such as the S&P 500.
In that sense, small cap relative strength doesn’t come as a big surprise.
Various themes developed in recent months: US dollar strength, China deceleration and crude oil weakness allowed to trade on both sides – long and short.
The strength of the greenback can be partly attributed to recent weakness in the Euro.
A weak currency is what export-oriented countries, such as Germany, like. Speaking of which: the German stock market is the winner of the year so far. As of March 23, the DAX has gained over 20% in 2015 alone.
Currency hedging is important because otherwise the lower Euro would eat away equity returns.
Currently the largest position in the portfolio is another short: SPDR Gold Shares (GLD), which gets pressured by the strong dollar and higher US bond yields.
This trade has a lot going for it in my opinion. Besides the challenging macro environment, technicals and seasonality are negative for the metal in my view.
The argument that gold should be owned as an inflation hedge is true in general. But right now, there simply is no inflation.
Currently, its trend is down so shorting is an attractive option. Technically, gold is in a very critical position at important support around $1,200.
Failure to keep support could trigger many stops and drive down price rapidly. I wouldn’t be surprised to see a 3 digit price tag this year should the Fed start to increase rates in my opinion.
Another active theme has been the weakness in crude oil, which I postulate has been declining due to weak international demand, strong US supply (fracking) and OPEC’s reluctance in cutting production rates.
The price of coal is correlated to crude’s value. Airlines benefit from lower oil prices.
Overall, the Technical Swing portfolio is still long in various equity positions, based on strong technicals of the individual stocks.
In my opinion, should the market experience a major correction in the magnitude of 10-20 percent in the coming months, I am prepared to close positions that hit stop loss limits I have established.
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The investments discussed are held in client accounts as of March 24, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
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