As Federal Reserve watchers hint at the tapering of quantitative easing starting as early as this summer, U. S. treasuries have sold off enough in the first half of May to wipe out any gains seen since the beginning of the year. Conversely, others believe an increase in QE is on the horizon, as inflation data on Thursday showed pricing pressures had fallen to their lowest level in two years. Consequently, bonds are in a trading range; albeit a trading range that appears to be on the verge of increasing volatility. This price action was evidenced in our PCM Absolute Bond Index, as it has been whipsawed over the last two reallocations; that being early and mid-May. Specifically, this is evident in the mid-May allocation shift from long 20 year treasuries to short 20 year treasuries. Time will tell if this is our first hint at an end to the 30 year bull run in U. S. Treasuries.

On the equity side, there is a definite and continued movement from conservative U.S. equities to the more traditional sectors one would expect to see in a bull market. This started two weeks ago when we noted the strong early May movement into the consumer discretionary sector. We are now seeing our PCM Global Tactical validate this bullish price action by also moving into traditional bull market sectors, such as the industrials and financials. Our quantitative analysis was further supported by the same suggested reallocations for our U. S. Sector Index and our U. S. Industries Index, although those models reallocate at the beginning of each month. One last indicator of the continued commitment to an aggressive “risk off” environment was notable in the sharp selloff in utilities in the last two weeks after a strong run since the start of the year. For now, it appears the bulls continue to be validated.

By: Melissa Wieder, CFP®, Director Institutional Services

Collaborative insight provided by Co-CIO’s Michael Chapman and Todd Wood.

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 evironment. 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.

Joomla SEF URLs by Artio