June, 2014: What happened to going away in May?
As I write this, the market appears to be preparing to close at a new high for the 8th out of the last 9 trading days. So much for the old adage "Sell in May and go away!" Our indexes have participated in this recent rally, as a number have hit all time highs through the end of May including, but not limited to PCM Absolute U.S. Sectors, PCM U.S. Industries, Alpha One, Emerging Market Equity and even on the bond side PCM Absolute Bonds, which is up an impressive 9% for the trailing 12 months through May 31st, 2014. PCM Total Return, Stable Growth Plus and the Diamond/Ruby strategy all contain some of these indexes as part of their multi asset, multi directional allocation. Although we are happy to see these indexes participate on the upside, we continue to be more encouraged in knowing that when this bull market finally runs out of steam, our clients will be well positioned to have the opportunity for positive returns in what could be an ugly bear market. (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)
Speaking of bull markets running out of steam, we have followed the correlation between the increase in the Fed's balance sheet and the level of the S&P 500 for several years now. As of today, according to an article on zerohedge.com, "The S&P 500's recent exuberance has priced in the total expansion of the Fed's balance sheet to the end of the taper (in October)." Quoting further, "The S&P is actually around 20-25 points rich to the current levels of the Fed's balance sheet." We highly recommend reading the entire article, as well as John Hussman's most recent weekly commentary, Market Peaks are a Process, where he states, "From a valuation standpoint, we estimate that the S&P 500 Index would have to fall to the 1000 level to bring prospective 10-year nominal total returns toward their historical norm of about 10% annually." As of this writing, the S&P 500 is just below 1950.
The June reallocation saw U.S. equities make their way back into The PCM Global Tactical Index with exposure to energy and consumer staples, with the remaining 60% exposure seeing equal weighting to Mexico, Singapore and emerging market bonds. It was a head scratcher to see Mexico show up as part of the allocation. That "following of the money" was validated in our quant analysis just today when the Mexican Central Bank cut interest rates in a highly unexpected move, which has Mexican markets up strong. The Alpha One Index remained in U.S. preferred equities, as it has been for the majority of 2014; continuing to see both capital appreciation, as well as a 6.5% dividend yield. The PCM Commodities Index moved out of a 100% allocation to cash equivalents and is now allocated 50% to oil and 50% to cocoa. The PCM U.S. Industries Index and the PCM Absolute U.S. Sectors both hit another all time high at the end of May. The PCM U.S. Industries now holds 25% in each of REITS, transports, consumer staples and industrial materials. The PCM Absolute U.S. Sectors is 33% weighted in each of materials, consumer staples and technology, coming out of energy and utilities. It is interesting to note that research shows that energy, healthcare, industrials, and technology are generally the sectors that lead as bull markets approach a top. All of these sectors have been a strong theme in our indexes since the beginning of the year at various times.
On the bond side, May was a very strong month, seeing returns well over 2% for the month including dividends on bond ETF's. The 10-year treasury continues to hover around a 2.5% yield, after getting comfortable at the 3% level at the end of 2013. The PCM US Bond Index allocations continue unchanged with 25% in each of TIPS, investment grade corporates, 20+ year U.S. Treasuries and 7-10 year treasuries. The PCM Absolute Bond Index also continued unchanged with a 50% exposure to 20+ year U.S. Treasuries and 50% to emerging market bonds.
PCM has again been recognized for performance by Informa Investment Solutions; this time for the 1st quarter of 2014, as well as 1-year trailing performance and 3-year trailing performance. The PCM Absolute Bond strategy and the PCM Absolute Commodity strategy both won a "Top Gun" award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond also winning the "Top Gun" award for 3-year trailing performance. The PCM Alpha 1 strategy was awarded the "Top Gun" performance award for the 1st quarter of 2014. We are very pleased to see these particular multi directional strategies being recognized, as the PCM Absolute Bond and PCM Alpha 1 are particularly timely for where we are in the current market cycle.
To view Morningstar Fact sheets of all of our index models, please visit our website at www.pcminvestment.com under the "indexes" tab.
By: Melissa Wieder, CFP®, Director Institutional Services
Collaborative insight provided by CIO Michael Chapman
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.