Current Recommendations

Model / Changes / Holdings As of 2/12/18
Tactical Fixed Income
Sell SPDR Bloomberg Barclays Convertible Securities ETF (CWB)
Proceeds go to Cash (20%)
Holdings: SJNK, SRLN, HYD, FLOT, and Cash (20%)
-0.9% wk -1.7% ytd
Global Multi-Asset Income
Sell SPDR S&P Dividend ETF (SDY)
Sell PowerShares S&P 500 BuyWrite ETF (PBP)
Sell iShares Edge MSCI Min Vol USA ETF (USMV)
Sell iShares Core High Dividend ETF (HDV)
Proceeds go to Cash (80%)
DEM and Cash (80%)
-4.7% wk -5.1% ytd
Factor Rotation
Sell iShares Edge MSCI USA Momentum Factor ETF (MTUM)
Buy PowerShares S&P 500 Downside Hedged ETF (PHDG)
Holdings: FV, ALFA, and PHDG
-6.1% wk -3.0% ytd
Sector Rotation
Sell iShares Transportation Average ETF (IYT)
Sell SPDR S&P Oil & Gas Equipment & Services ETF (XES)
Buy First Trust Dow Jones Internet ETF (FDN)
Buy Consumer Discretionary Select Sector SPDR ETF (XLY)
Holdings: FDN, XLY, IYG, and FBT
-7.1% wk -9.0% ytd
International Rotation
Sell iShares MSCI Singapore Capped ETF (EWS)
Sell iShares MSCI Frontier 100 ETF (FM)
Proceeds go to Cash (40%)
Holdings: GREK, THD, EWI, and Cash (40%)
-4.3% wk -0.1% ytd

Note: New recommendations recorded at the closing price on the day recommendation is made. You may place trades as soon as you receive this update. 

Tail Wags the Dog

Markets continued their move downward with the continued threat of rising interest rates in the domestic and world markets. Unfortunately, there was no asset class that was safe from this sell-off other than the U.S. dollar, which typically does well in rising interest-rate markets.

Last week was a very interesting week in the domestic markets, which saw the halting and closure of some inverse VIX ETF products. I’ve been asked a few times what exactly happened, and the story is really that the product itself (XIV) was designed with the possibility that the product could completely fail in mind. We saw that scenario play out last week.

The domestic markets enjoyed unusually low volatility for an extended period of time, which led to many investors (both professional and retail) to seek out the inverse volatility trade. Typically, these trades do very well and post double-digit gains each year that the markets are stable. However, these strategies are “concave” in nature, meaning that when they turn south, they can do so violently and quickly. That’s exactly what happened last week. For a moment, the VIX had tripled intraday, causing the value of various inverse VIX products to fall precipitously.

Fund companies that had structured their inverse VIX products as exchange-traded notes (financially creative debt products, which trade similarly to an ETF) would be “on the hook” for additional losses in the event that the net asset value (NAV) of their fund goes negative (which can happen with the way these products are sometimes structured). As a fail-safe, Credit Suisse built into their prospectus that they would close the fund should it drop more than 80% in one day, which it did on Monday.

In this scenario, we found that, while the correction was a bit overdue (the market has been moving upward steadily for nearly two years without one), these creative VIX products, and investors attempting to dump a losing trade in them, further increased market volatility—so much so that volatility actually led market returns, rather than the traditional scenario of volatility being derivative of market price action.

While market fundamentals are still positive, a correction was a bit overdue, and I see no urgency in changing our positive outlook for the future. However, should you invest in financially creative products such as XIV, be sure that you understand the risk that you’re taking. It will be interesting to see what litigation comes out of last week’s market events, as its likely retail investors could not have been properly educated on the risks of XIV, and such a trade should be left to professionals who can execute it without an ETN, making the product a poor idea in the first place.

Tactical Fixed Income was down 0.9% for the week as the bond markets followed equities down once more. All but two positions were down for the week. High-yield munis and floating rate bonds managed gains of 0.39% and 0.04%, respectively, while convertible securities were a large drag on performance, down 3.72%.

Global Multi-Asset fell 4.7% for the week as markets continued to sell-off significantly. All positions were down for the week. High-dividend equities were down the most, falling 5.86% and 4.56%, depending on the fund manager. Income equities performed the best, down only 3.88% for the week. The strategy moved mostly (80%) to cash to wait out the rest of the market correction.

Factor Rotation was down 6.1% for the week. All positions were down, with alpha-producing strategies falling slightly more than the other positions, down 6.51%. Momentum stocks fell the least, down 4.55% for the week.

Sector Rotation was down 7.1% last week, making it the worst-performing strategy for the week once again, with all positions falling. Oil and gas equipment and services were down the most, falling a substantial 12.38%. The transportation average fell the least, down 5.04%.

International Rotation fell 4.3% for the week, with all positions falling. Greece stocks fell the most, dropping 6.79%. Thailand once again retained the most value, falling only 2.57% for the week. The strategy moved 40% to cash this week to wait out the rest of the market correction.


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