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Monday, June 26, 2017

Market Update - June 26, 2017

Markets have been gyrating sideways with an upward-tilt over the past few weeks. Since the start of January, we have seen a rotation from Tech stocks to Industrials and as a result DJIA has reached all-time highs, while NASDAQ remains below its May highs. 

Stock Market Turn
We have discussed the possibility of a July top in the equity markets on multiple occasions on Twitter: @survive_thrive, and the July turn window being in close proximity to Q2 earnings season, supports that observation.


However, we don’t think that it will be the start of a major new down trend. Rather market could go sideways to down for few months, but will likely see a resurgence towards the end of the year because of following two reasons:
  1. Bond Yield Dynamics
  2. US Dollar Dynamics
Yield Curve:
So far we have not seen an inverted yield curve i.e. near-term rates being higher than the longer-term rates. In a normal world, longer-term rates are higher because long-term (30 years) lenders expect more interest than short-term (2 year) lenders, as they take more risk.


However, when yield curve flips it suggests that there is something fundamentally different in the overall interest rate structure. And when this happens, we typically see a recession. In fact, all of the recessions since 1950s have been accompanied by the inverted yield curve phenomenon. Therefore, we should keep an eye out for it.

At this point, the yield curve is flattening but is not inverted. Following two charts show this change. 

Yield curve in April 2013 was very steep (above), while now its getting flat (bottom).


It might take another 2-3 Federal Reserves’ rate hikes to trigger the flip. This goes along nicely with the concept of continuation of stock market rally for the time being.

US Dollar
There are interesting developments happening in the US Dollar index and commodities markets especially Gold. Although Gold prices have been in a holding pattern for last 2 years, China and Russia have started dealing in Gold-Yuan for oil trade, rather than US Dollars. At the same time, cryptocurrencies like Bitcoin and Ethereum are becoming popular. All of these developments suggest that US Dollar has some really strong head winds.

When you combine this with US Dollar's price structure, we see that Dollar will be under significant pressure over next several years. We will discuss the US Dollar's price structure in another post. 

Most recent rally in US Dollar lasted for ~10 years (since 2007), and could lead to significant devaluation. If the US Dollar declines due to underlying changes in global economic structure, it would send Gold significantly higher. And many other opportunities will arise due to this development

Investment Decision
These two are big themes that we see in today’s market. While we are currently positioned to take advantage of these big moves, we will keep an eye out for any emerging opportunities. 

Everyone should evaluate their investment process on two fundamental investing questions:
  1. Will they be ready when the current trend changes in the stock market? 
  2. If yes, will they have the mental stamina to go against the herd and make a buy/sell decision before it's too late? 
  3. Am I positioned to take advantage of what market is offering today and could offer in the near future?

We can help you answer above questions and recommend a strategy that can work over time and in different markets. Feel free to contact us with any investment questions on twitter or via e-mail.

Our proprietary strategies are based around above two fundamental questions with the goal of providing absolute returns in any market condition. As a result, we are positioned to take advantage of big market themes while managing risk to limit potential losses. These strategies are open for investment. Please feel free to contact via 

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