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March, 2013: Equity indexes continue the move into more conservative sectors

Equity indexes continue the move into more conservative sectors, as they remain allocated to "risk off" biased holdings such as consumer staples, utilities and dividend payers. Our bond indexes have rotated back from inverse or short positions, but remain very defensive in short maturities and cash.  The currency index now favors the US dollar. strong dollar is also a sign of "risk off" bias.

Metals/commodities remain short gold and long cotton. The short gold position is in line with the currency index now favoring the dollar. Mike Chapman, Provident's Co-CIO comments, "I like the cotton trade, the weekly chart has consolidated and looks poised for a breakout to the upside."

Continuing the conservative theme, our Global Macro Index allocated 40% to cash and our Global Tactical Index is representative of the move into conservative equity plays with 20% exposure each to consumer staples, utilities, dividend payers and healthcare.

The views and strategies described herein are for illustrative purposes only and may not be suitable for all investors. The information is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as investment advice or a recommendation for any specific PCM or other strategy, product or service. Investors should consult their financial advisor prior to making an investment decision. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.

This material contains the current opinions of the author(s) but not necessarily those of PCM and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.  No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission.  Provident Capital Management, Inc, PCM and Absolute Return Index are trademarks or registered trademarks of Provident Capital Management, Inc., in the United States.©2013, PCM.

About "PCM Quant Coalescence"

Welcome to Provident's bi monthly "Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to "unite for a common end" with our clients and partners; keeping you updated on our thoughts and perspectives.

As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment.

Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach.  Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass.

We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind.  Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective.

We hope this has been helpful and informative!

January, 2012: Global Tactical has moved into all in U.S. Sectors.

Mid-month rebalance for Absolute Indexes. January 2012

Global Tactical has moved into all in U.S. Sectors. Decisively bullish on the domestic equity side.

Commodities are still 100% in what we classify as cash (SHY) as defensive positioning according to our quantitative rules.

Bonds are split evenly between the extreme short end of the yield curve (our cash equivalent) and high yield bonds indicating bend to risk on. I think what is more telling is it is out of long term government bonds (TLT)

International is 75% cash and 25% in Mexico. Definitely little appetite for international equities.

Global Tactical Index (XLB, XLF, XLI, XLV, XLY)

Absolute Commodity Index (SHY)

Absolute Bond Index (JNK, SHY)

Absolute International Index (EWW, SHY)

Global Macro Indexes provides an indication of market strength, weakness or even neutral allocation which may provide one with some insight from a global / macro level. Although the PCM Global Marco Index rebalances monthly we ran it after the close on January 15th. Allocations would be the following if it were a rebalance day for the PCM Global Macro Index:

Long commodities (GSG), High Yield Bonds (JNK) and S&P500 (SPY) are bullish. The inclusion of China (FXI) is interesting. Australian Dollar (FXA), China and the S&P 500 are all .75 correlated to one another and fairly bullish allocation.

The comments and discussion here do not represent financial advise what so ever. This information is provided for educational purposes only. Investing is risky and one may lose money, a lot if it if they are not careful. Please read further disclosures on this site. A link is provided at the bottom of every page.

December

International equities are being favored over US Equities. Further, the U.S. sector and industry strategies are defensive; favoring staples, health care, and consumer discretionary. Funds are flowing into bonds in general and emerging bonds are the strongest bond class. For the second month in a row the Euro is the strongest currency. An interesting spread in our Equity Income Index shows short US real-estate and long international real estate.

The underlying theme is an interesting "risk off" rotation. Normally, the "risk off" trade results in a higher dollar and lower exposure to equities. The "risk off" trade in the current "fiscal cliff" continues to show a flight not only to bonds, but also to markets outside of the U.S. (specifically foreign markets that trade in the Euro or the Swiss Franc) and to the Eurodollar (as opposed to the U.S. Dollar as we would expect). After further research, our understanding of this rotation was validated by the fact that the correlation between the Eurodollar and the US Equity markets is breaking down, at least in the short term. Generally, when the Eurodollar pair goes up, so does the US market and vice verse. Yesterday, as a perfect example, after the European markets closed at 11:00 am EST, the US markets fell as the Eurodollar pair continued to climb.

Why is all of this interesting? It is interesting, because the goal of our quant models is to follow the money. The models are not only picking up a "risk off" bias, but they are picking up an alternate trend in the course of "risk off" being:

Long Euro

Long equities that trade in the Euro

Long bonds and more specifically bonds that are not US dollar denominated 

Short US real estate and long international real estate

In short, our model indexes are suggesting to be defensive and don't be in the US Dollar.  It will be interesting to see how this plays out in the coming month of "fiscal cliff" negotiations.

About "PCM Quant Coalescence"

Welcome to Provident's bi monthly "Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to "unite for a common end" with our clients and partners; keeping you updated on our thoughts and perspectives. 

As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment.

Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach.  Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass.

We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind.  Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective.

We hope this has been helpful and informative!

Mid-December, 2012

Equity fund flows continue to move international, specifically to the emerging markets (think BRIC's). We are starting to see some strength in the US industrial sector as well. Bond flows are to shorter maturities, and an outright short allocation in our quantitative fixed income index. We are also seeing flows into high yield corporate paper, both in US and International. (High yield corporates are closely correlated to equities.) Currency flow continues to the Euro and to the Euro correlated Swiss Franc.

In our last update, we noted that "following the money" resulted in allocations into the Euro and Euro denominated markets. This trend continues with an additional expansion into Australian and Asian equities. The current holding in the Euro continues doing well. The relative weakness in the US dollar and the addition of a short position in US Treasuries in our model indexes appears to be validated by the most recent 10 year treasury auction on 12/12/12.

According to zerohedge.com, "What truly set aside this reopening was that the Directs, continuing on yesterday's surge, took down a massive 42.7% of the auction: only the second highest since the July 45.4%. The flipside of course is that Indirects were left holding 24.2%, or the lowest Indirect takedown since April 2009." This was followed by a report on 12/17/12 that "today's 2 Year auction was remarkable for one more thing: the Indirect Takedown of 17.7% was the smallest such award on record, which in turn confirms that last week's trend of collapsing Indirect interest is persisting."

What does this mean? "Indirect takedown" refers to the treasury auction bids that are submitted by investors including foreign central banks. An indirect takedown above 40% would suggest "the debt support needed to keep funding the deficit is in place and that the buyers will see this as a sign to keep its focus on the long side," according to Kevin Giddis, managing director of fixed income for Morgan Keegan & Co.

Time will tell if this is a signal that foreign countries are becoming cautious about buying US debt.

Of further noteworthiness, as Michael Chapman pointed out at the annual client appreciation luncheons on December 11th and 13th, each time the Federal Reserve announces a new round of Quantitative Easing, the upward move in equities has been less and less. Alas, on December 12th, the equity and bond markets both closed down for the first time on a day that the Federal Reserve announced Quantitative Easing.

About "PCM Quant Coalescence"

Welcome to Provident's bi monthly "Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to "unite for a common end" with our clients and partners; keeping you updated on our thoughts and perspectives.

As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment.

Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach. Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass.

We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind. Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective.

We hope this has been helpful and informative!

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