Quantitative Insights

To understand the impact of catalytic narrative forces, we have to monitor the vital signs of the capital markets they affect. To analyze the big picture through the lenses of game theory and history, we must also examine the details through lenses like volatility, momentum, income, correlation and inflation. These are the indicators of systemic vitality and stress—the fine details we use to fine-tune our worldview. We hope they help you sharpen your understanding of the investable universe.

Author: Nathan J. Rowader
Date: April 27, 2017
Category: Quantitative Insights
Tags: volatility, commodities, sell-off, capital markets, metals

Our Observations: We think this is an important chart to observe during a sell-off, taking note of extreme levels of volatility as an indication that any sell-off might be reaching an extreme point. As of right now, we see that nearly every segment of the capital market is below the long-term volatility reading. Note that some of the metals are currently trading above their long-term volatility readings and have been experiencing a short-term sell-off. This could indicate that metals might be reaching a turning point.

Market volatility is an indicator of financial stress. Low or declining volatility environments may indicate favorable periods for equity investments, whereas rising volatility periods may favor sovereign debt and developed market currency exposure.

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Author: Nathan J. Rowader
Date: April 26, 2017
Category: Quantitative Insights
Tags: equity, interest rates, diversification, bull market, U.S. dollar, Treasury yield

Our Observations: Short-term correlations have been declining in nearly every segment of the market. This move is breaking up the somewhat lopsided market that had been driven by interest rates and inflation expectations and provides a potential opportunity for diversification. One of the more notable changes has been the decrease in correlations for U.S. bonds and the increase for Euro-denominated bonds. We think there is a diversification opportunity at the shorter end of the Treasury curve, which may provide some yield nearly equivalent to intermediate term Treasurys.

The correlation figure measures how each asset return moves in relationship to the broader basket of asset returns listed on the X axis. When correlations are high or rising, it may indicate that economic movements and sentiment are driving the majority of returns, which could potentially make security selection challenging.

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Momentum | April 25, 2017

Author: Nathan J. Rowader
Date: April 26, 2017
Category: Quantitative Insights
Tags: equity, market correction, long-term growth, bullish market, energy

Our Observations: Short-term momentum (22 days) in global equities continues to decline indicating a state of correction. However, with most markets returning between 0% and -5%, we conclude that the sell-off hasn’t yet reached a point of extreme and is likely ongoing. The overall trend of global equity markets is slightly muddied by the Marcon’s strong showing in the French election which should give European equities a short-term boost. It is important to note the strength of the energy sector as short-term momentum in crude oil exceeds long-term momentum (12 months), which is a signal of strength.

Momentum measures the rate of acceleration, either positive or negative, in a security’s price and may indicate which markets are positioned for gains or losses. Investing based on momentum entails establishing long positions in securities with positive recent returns and short positions in those with negative recent returns. Momentum in asset classes may illustrate the development of trends in the market.

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Income Report Card | April 24, 2017

Author: Nathan J. Rowader
Date: April 24, 2017
Category: Quantitative Insights
Tags: equity, fixed income, income, risk, correction, Treasurys, rates

Our Observations: The 10-year Treasury ended the week at 2.24%, slightly higher than this year’s low of 2.18%. At this point, we are unsure if a new pattern has taken shape or whether this is a reprieve from the range formed earlier this year. However, we think the lower rates and continued outperformance of lower volatility sectors still point toward a correction in stocks.

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Volatility | April 20, 2017

Author: Nathan J. Rowader
Date: April 20, 2017
Category: Quantitative Insights
Tags: equity, volatility, commodities, sell-off, sentiment

Our Observations: Nearly every market is experiencing short-term volatility (as measured by 22 days) below long term levels, but some volatilities are creeping slightly higher. We think these volatility levels may indicate an end to the sell-off. If short-term volatility levels were to exceed long term, this would likely indicate that sellers have become overly enthusiastic and could present a good entry point into the market.

Market volatility is an indicator of financial stress. Low or declining volatility environments may indicate favorable periods for equity investments, whereas rising volatility periods may favor sovereign debt and developed market currency exposure.

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Correlation | April 19, 2017

Author: Nathan J. Rowader
Date: April 19, 2017
Category: Quantitative Insights
Tags: equity, diversification, bull market, precious metals, currencies, U.S. dollar, sell-off

Our Observations: The price of the S&P 500 peaked on March 1st and has fallen nearly 3% while the U.S. Dollar has fallen 2% relative other major currencies. We believe this has created some unique inter-market changes, including a sharp rise in the short-term correlations (22-days) of gold and silver. Precious metals tend to be viewed as a diversifier and returns have been successful going into the recent sell-off, but we believe allocating to these assets now may not garner the same benefits.

The correlation figure measures how each asset return moves in relationship to the broader basket of asset returns listed on the X axis. When correlations are high or rising, it may indicate that economic movements and sentiment are driving the majority of returns, which could potentially make security selection challenging.

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Momentum | April 18, 2017

Author: Nathan J. Rowader
Date: April 18, 2017
Category: Quantitative Insights
Tags: equity, market correction, long-term growth, bullish market, energy

Our Observations: The global stock markets appear to have entered a correction with short-term momentum (returns over 22-day period) turning negative in the U.S. and Japan. The stronger European and Asian markets are also approaching negative territory in short-term momentum. Energy markets, however, appear to be bucking the short-term negative trend as crude oil has begun reverse its recent sell-off. Despite the weaker short-term picture, long-term momentum still favors stocks, energy, and metals. We think this is a good indication that we are likely experiencing a correction within a bull market.

Momentum measures the rate of acceleration, either positive or negative, in a security’s price and may indicate which markets are positioned for gains or losses. Investing based on momentum entails establishing long positions in securities with positive recent returns and short positions in those with negative recent returns. Momentum in asset classes may illustrate the development of trends in the market.

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Income Report Card | April 17, 2017

Author: Nathan J. Rowader
Date: April 17, 2017
Category: Quantitative Insights
Tags: equity, fixed income, income, risk, correction, bull market, Treasurys

Our Observations: The 10-year Treasury yield fell from 2.38% to 2.24% over the past week, breaking out of the trading range it has held all year. We believe this likely signals the beginning of a correction that should favor less risky assets such as Treasurys and cash over riskier credit and stocks. However, we’ve noticed most of the riskier assets have a positive sloping 200-day moving price average, which may indicate that this is a sell-off within an overall bull market.

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