“It is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.”

– Macbeth, Act V, Scene V, William Shakespeare

We took the week off to enjoy the 4th of July holiday and to build our next portfolio tool (which we will explain at the end of the post). While we did so, the markets staged a bit of a bounce. In fact even a laggard like the Spanish ETF (EWP) was up 12% for the week, perhaps foreshadowing the result of the World Cup.

However, if you check your statements, you will realize that very little has happened since the end of April. There has been plenty of volatility, but precious little direction. In some of our portfolios, cash is starting to show up in the top ranked asset classes. This is not a good market for making bold bets or gaming the latest datapoints on US unemployment.

For equity investors, the main indices are telling a pretty drab story.

Sector Ticker Since 4/30
MSCI All World ACWI -8.11%
S&P 500 SPY -8.70%
EuroStoxx 50 FEZ -5.85%
EAFE EFA -7.99%
Japan EWJ -7.60%
Asia ex-Japan EPP -9.30%
Latin America 40 ILF -4.55%

Fixed income did better as investors place their bets firmly on slower global growth.

Sector Ticker Since 4/30
Aggregate Bonds AGG +2.68%
10-20 US Treasury TLH +6.16%
Investment Grade LQD +1.86%
High Yield Bonds HYG -0.96%
Emerging Markets EMB +1.69%

And commodities, except for Gold, which trades on the same “Fear Factor” as US Treasuries, confirm the negative economic outlook. The weak base metal ETF is a concurrent indicator that weakness in China is not a fluke.

Sector Ticker Since 4/30
Gold GLD +2.60%
Diversified DBC -10.07%
Base Metal DBB -12.73%
Agriculture DBA -1.45%
Australian Dollar FXA -4.54%

Unfortunately both the system and common sense suggest that nothing significant is likely to change in the coming few weeks. Since you will not get rewarded for exposing yourself to excess volatility, the best bet is to keep money in low volatility assets until a clear direction emerges. Even a long short portfolio within a single market is unlikely to lead to pleasant results as the whipsaw effect takes its toll. A prime example is our Taiwan Long Short Portfolio which has taken whipsaw losses in an effectively directionless market. Our Asian Index Long Short Portfolio has done a bit better primarily on the back of the China Short call.

New Portfolio Tool

New Portfolio Tool

After much wrestling with the code, we are ready to test our Portfolio Selector. This will allow you to experiment with the core functionality of the IRP system. A number of our users have asked for something more interactive than the portfolios we present here. In order to work the major bugs out, we would like to ask for volunteers to test the application so that we can launch it to all our registered users by the end of this week as a beta. If you are interested, send us an email.


Filed under: CommodityDeveloped MarketsETFInvestment ProductMarket CommentMarket Psychology

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