2017 Investment Themes

There are many prominent investment themes for 2017. Investment themes help investors understand the broader investment landscape based on historical performance of different asset classes and their current catalysts. This analysis helps in properly positioning one's portfolio to take advantage of the winds of change.

US Stock Market

SP500 and DJIA have experienced an amazing 1 year rally. Since Feb 2016, markets are up ~30%. With such a sharp rally, it won't be wrong to expect a sideways/downward market correction. Since corrections can come in different forms, sideways correction with time will help in digesting last year's gains just like a sharp fall in prices.

Lofty price levels can be supported by equally good earning numbers, which can provide further fuel for the rally. However, with the uncertain political dynamics in the U.S. we should be prepared for any sudden decline in the US stock prices like 1987 market crash - not a certainty but a word of caution.

Note: Next earnings will be reported in mid-April 2017


Emerging Markets

On the other hand, emerging markets finished a 5 year long correction in 2016. As US markets rallied, emerging markets corrected from 2011 to 2015. Since bottoming in 2016, emerging markets have rallied and looks like they have formed an inverted head and shoulders pattern. Once they breakout, emerging markets could go up to there 2011 highs. Therefore, this is an area to keep in mind.

Precious Metals

Gold had been declining since 2013. It bottomed in early 2016 and then rallied sharply. However, since mid-2016, Gold has again experienced a major pullback. However, we think that this pullback is a buying opportunity and would result in higher prices. 

Following chart shows a potential inverted head and shoulders pattern being formed by gold. Once this pattern is complete, gold can make an advance towards all-time highs around 1900. However, the first target would be to reach July 2016 highs. Therefore, gold is an area which one should keep on his/her radar for investment opportunities.

Precious metals are also influenced by the US dollar. US dollar has rallied very significantly over the last two years or so. Therefore, as the US Dollar corrects, it will provide fuel for a rally in the precious metals complex.

Bonds

Bond have been in a long-term bull market. In fact, its one of the biggest bull markets in history of bond prices. However, the bond price cycles are turning and so are the prices. Now the question is whether the Bond Bull has ended or it still has some life left.

Bond prices started declining in mid 2016 and have reached a critical area. Prices should reverse to the upside soon or they will mark the end of the Bond bull, which can be disastrous for the debt-laden global economy. We will keep a tab on the Bond market to understand clues for the future of the US economy.

Investment Options

We are working very hard to make these strategies available for investors. If you are interested in investing, you can register below and we will send you update when the strategy is available for investments. Some of the key outputs from the data models used in this strategy are also available through subscription

January 2017 - Performance Review

January was an interesting month for the markets. In the beginning of the month, markets continued to go sideways, which they had been doing for past couple of weeks - since mid December 2016. Then came the earnings and market zoomed higher. Although this rally was not as significant as post election rally in 2016, it did bring back a lot of enthusiasm. The rally continued with President's oath taking. However, it experienced some difficulty towards the end, with the immigration executive order confusion and protests across the United States.

Following chart shows how SP500 performed in the first month of 2017:

To summarize January action, it was a volatile month. Volatility does not only impact our portfolio, it hampers our investment decisions, self-confidence and risk-taking abilities. In order to reduce the impact of volatility and realize long-term consistent results, UST team develop proprietary strategies based on our 8+ years of investing experience, as documented in this blog and other sources.

These strategies went live with real money at the start of 2016. Their 2016 performance has been documented here (link). Our team is currently working on more than 5 strategies. Two of these strategies have moved to production, two are in beta phase and others are in final development phases.  

Investment Strategies

Two strategies (one conservative and other aggressive) will be used for clients' investment needs. These strategies are customized to meet the performance and risk profile needs of investors. These strategies utilized strategic and tactical portfolio allocation techniques, along with proprietary market timing methods to generate Alpha with extremely low correlation with the benchmark SP500. Hence, have very high Sharpe Ratios.

Following chart shows January 2017 performance of Conservative and Aggressive strategies, directly taken from the brokerage account.

Conservative strategy performed 4.53% and Aggressive strategy gained 11.36%, while SP500 was up 1.90% in January.

Performance of these strategies is also tracked on OpenFolio to see daily changes. Following chart shows daily YTD performance for the Conservative Strategy:

Interested ? 

There are two ways to follow and invest in the strategy:

1. Utilize some of the offerings that UST offers (link). We will officially start sending our Market Classification Model updates in February 2017. And plan to add additional services in the next few months.

Overall, we will actively be working on this blog to ensure that all the services are streamlined. If you have any questions please feel free to comment or interact with the team via Twitter @survive_thrive. Please use the below sign-up button to register for free newsletter or other services:

US Stocks at Tipping Point

For readers who want to quickly read about the action plan in this environment, scroll down to the Next Steps section. For detailed understanding of current situation, please read through:

Background

Latest rally phase started in November 2016, around election time. Initially, it was regarded as a relief rally for Hillary could become president as FBI investigation had yielded no results. However, it quickly turned into Trump rally because of promises for stimulus and other pro-business policies.

The popular belief was that the new president will only implement pro-business policies like stimulus and tax cuts, while several other more aggressive policies will not be enacted. Fast forward to today, and the pro-business policies remain elusive while the aggressive policies are causing confusion and in return global equity markets are suffering.

Correction that was due

Blaming the market's decline on policies or some external factors is what TV commentators do. But there is another perspective to looking at this decline. And that is related to the fact that the markets have not experienced any substantial decline since last February (2016).

Following charts shows a nicely persistent rally that had endured over the last year in the face of all the uncertainty of 2016. Both SP500 and Nasdaq show a clear 5-wave rally pattern.

It is surreal to look back at the extremely dismal start of 2016, when people were talking about Oil crash and so many other variables. Even then the market managed to end up ~12% in 2016.

In such a volatile year, our proprietary strategy beat the market and the gained 12.2%. Most of the gains were long-term gains, thus minimizing tax impact (Detailed 2016 performance evaluation).

Therefore, one cannot judge the performance of the market just by looking at couple of months. But one thing is for sure, volatility will be high as overdue correction finally arrives.

No Buy signal, means continued decline

There are several other reasons to believe that recent decline is the start of something bigger:

1. No buy signal after 2 day decline
2. Extremely high valuations
3. Political uncertainty without any focus on economic stimulus programs
4. Hawkish Fed 
5. Fairly optimistic sentiment

In order for these stock market rally impediments to go away, market needs to consolidate recent gains. Right now there is no indication that this decline will be the start of a new bear market. However, if the government does not deliver on its pro-business policies, it could quickly turn into one.

Next Steps and Investing Strategies

1. Keep an eye on the Market Classification Model to understand if and when the stock market enters a Bear Market (MCM Details).
2. US markets are still in Bull phase and this could be a good buying opportunity, at lower levels
3. Gold and Bonds can be good alternatives, with careful review of the MCM
4. Develop an investment plan with your goals in mind and invest accordingly. For example, if you want good returns and have some extra cash, one can buy BitCoins

We will continue to explore 2017 strategic investing ideas on this blog. Forward looking investing helps you in keeping a level head while investing. For example, we mentioned that the market had not entered a bear market in Oct-Nov 2016 and added longs, and ended up benefitting from the latest rally. Analysis during election time:

• Post Election Investment World
• Reasons to be Bullish - From Twitter
• Elections and the Stock Market

Therefore, if your interested in free e-mail list or in paid services like Market Classification Model, please fill-out the form below.

Amazing 2016 for UST Proprietary Strategy!!

Happy New Year to all the readers. 2016 was an amazing year with our conservative strategy up 12.2% versus 11.96% of SP500 (with dividend). Snapshot below is taken from the brokerage account.

Introduction

We will start 2017 by reviewing 2016 performance. This review will cover every aspect of the performance, along with how the strategy performed in times of uncertainty and volatility. Each blog post will cover a different aspect of the performance review.

UST team has been developing repeatable, scalable and easily explainable proprietary investment strategies, along with built-in risk-management measures. In 2015, the strategy was developed and back tested. Last year, strategy was moved to production with real money. At the same time, we also developed 3 additional strategies, which will be discussed in future posts.

2016 - The Year of Volatility:

2016 was a very volatile year. It started with one of the worst starts of the year for the US stocks. Although market started a rally phase from Feb/March time frame, it remained on the edge due to following three major reasons:

1. US presidential election primaries
2. Fed's rate decision
3. Brexit 

Brexit was one of the biggest surprises of 2016. The night of Brexit vote, market dropped over 1000 points before starting another rally phase, which most of the market participants didn't see. This was followed by an unprecedented US presidential election, which took almost everyone by surprise. If some people got the election results right, their market positioning was wrong. In the end market ended with a ~12% gain from a ~5% loss at the start of the year.

Conservative Strategy Performance - 2016

Interesting aspect of this strategy is that the returns are uncorrelated with the market. 2016 Beta was -0.57, while 9 year back-testing showed a Beta of -0.08. Since the returns are totally independent of the market performance, we can say that these returns were Alpha.

Throughout this volatile year, our proprietary model kept us on the right side of the trade and kept on adjusting the holdings to dampen impact of volatility, while amplifying potential gains. Following is a snapshot from the brokerage account showing the monthly performance:

Following chart is from Openfolio, showing daily change of the same portfolio in 2016:

Overall gains were impacted by pre-election jitters and post-election bond rout. However, it gave the strategy an excellent buying opportunity, whose benefits we could reap in 2017. We also learned several very important lessons for the strategy, which has enabled us to improve the nimbleness of the model. Benefits of these additions are clearly visible in 2017's performance, which we will discuss in one of the next blog posts. 

Investment Options

We are working very hard to make these strategies available for investors. If you are interested in investing, you can register below and we will send you update when the strategy is available for investments. Some of the key outputs from the data models used in this strategy are also available through subscription

November Review and December Forecast

Over the last 2 weeks we have discussed Gold market and the Bond market, in terms of their structure and sentiment, to understand the next rally phase. Detailed analysis can be reviewed here:

• Bond Market Analysis
• Gold Analysis (Part 1 - Structure, Part 2 - Sentiment)

As we enter a new month, its critical to quickly review last month and then try to understand where things could go in the last month of 2016.

November 2016

Elections 

At the beginning of November, market experienced a sustained consecutive negative days. This negative behavior, not only tilted the sentiment to bearish and technical indicators to oversold, it also completed the correction pattern. This completion gave way to an amazing rally. We discussed the upcoming rally several times in following posts:

• Reasons to be Bullish - From Twitter

• Elections and the Stock Market

even though few people will remember this fact but the market started rallying even before the election on the news that FBI had dropped the investigation involving Hillary Clinton's e-mail. At that point, people attributed the rally to Mrs. Clinton's impending victory. However, as Mr. Trump won and the market continued its rally, it took many by surprise. 

This tells us that news/economic/political events don't matter. It's the reaction to these events that matter. And one of the best ways to gauge the reaction objectively is by looking at the price structure and sentiment indicators, along with forecasting strategies. 

Correlation with the US Dollar

Even more interesting is the fact that this rally has come in sync with rallying US Dollar. Typically, when US Dollar rallies, all asset classes are impacted. And if not directly impacted, they find it difficult to rally. But following chart shows the amazing correlation between US Dollar and the stock market:

Divergence with Advance Decline line

While this rally has made a lot of market commentators excited about the prospects of a major rally and 2017 with prospects of a major stimulus, this rally wasn't substantial enough to eliminate NYAD divergence.

Divergence in Advance Decline issues is critical for a sustained rally. This doesn't mean that this current rally cannot move much higher, it just means that the near-term rally could face challenges to continue in face of this divergence.

What's Next in December?

In summary, we have credible reasons to believe that the recent stock market rally is extended and we could see a market correction over the next 1-2 weeks (probably till next IPM turn window). While Stocks market corrects, asset reallocation can take place with money flowing into oversold sectors like Gold and Bonds.

Since US Dollar is also extended, a correction in the Dollar index will also support Gold rally. On the other hand, Fed FOMC meeting and an announcement to increase the short-term rates can also reduce some of the uncertainty from the Bond market, which could result in reprieve rally for Bonds.

Market might resume its uptrend in the 2nd half of December. However, the velocity of the ascent might not be as significant, as it has been in November.

Lastly, for Gold it is a do-or-die point. It needs to rally above 1205 in the next few weeks or it will likely enter another bear market.

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Bond Market Buy Signals

After experiencing a sharp decline in the last ~2 months, bond markets is now consolidating. In fact, today it managed to rally above a critical level. If bonds can hold near this level for the next few days, intermediate trend would turn up.

This decline has resulted in multiple bond indicators turning bullish i.e. sentiment turning so pessimistic that it is now bullish. Three widely followed sentiment indicator readings are given below:

1- Hulbert Sentiment Index:
The blue line below represents bond yields. Bond yields move in the opposite direction to the bond prices. Red line indicates the sentiment towards bonds. At this point, it appears that the sentiment is as negative as we have seen in ~2 years. Therefore, there is a good wall of worry to support a bond rally.

2- Bund Sentiment
Bunds are German bonds. Bunds were among the bonds that went into negative yield territory. While they were negative, everyone was bullish on the future of Bunds. However, very few realized that it was more close to the end of the Bunds rise. On the contrary, right now investors are very bearish on Bunds. This suggests that this a good time to increase exposure to bonds

3- Bond Sentiment NDR indicator
According to NDR services, bond sentiment is now extremely pessimistic, which supports the argument that the Bond decline is over-extended and we should anticipate a rise in Bond prices:

Bond Market Trend
While we are seeing some very pessimistic sentiment readings, these are coming at a time when the Bond market remains in a bull market according to our proprietary Market Classification Model. Therefore, the prudent trade right now would be to add or maintain longs in the bond market.

Keep in mind that bond market has been rallying for over 30 years, and yields have been declining for the same period. This trend will eventually come to an end. The question is whether it has already ended or will end with one for decline.

In either case, bond yields will not go up right away. They will go up if the economy continues to improve and Federal Reserves raises interest rates couple of times. Fed's changes to short-term interest rates does not directly impact the longer-term interest rates because those rates are driven by market expectation.

In the next blog post, we will discuss the bond market structure and both Bull and Bear scenarios. Poor bond market is in no one's favor and the central banks will try their utmost to ensure interest rate rise remains in control. From an investment perspective, we might see 1 or 2 more opportunities to fund big capital purchases at a lower interest rate.

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Gold Market Sentiment & Structure Confluence

In the last post we suggested that the trend in the Gold market is about to exhaust itself based on structural analysis (link). Since then the gold declined for a day and helped solidify the pattern, along with pessimism, necessary for a sustainable bounce.

Gold Sentiment
Gold sentiment has dipped to levels last seen near last year's lows. Following snap shots are from Daily Sentiment Index values on Nov 21.

Following chart shows longer-term DSI values (originally published by Taylor Dart). We can see that DSI is at lowest levels seen in last year.

Gold miners are also extremely oversold. They are at levels where we have seen major bounces in the past. This bounce can turn into major rally, dependent on internal market strength.

Hulbert index also shows that the sentiment is now negative 18%, which means that the average newsletter writer is now recommending shorting gold. Even though it is not at the lowest level, we have seen higher lows in the sentiment at the bottom. So it's possible that gold prices might bottom with a little elevated sentiment.

Market Classification Model
Along with all the positive developments on the sentiment front, the Market Classification Model remains in a bull market for Gold. As a result, we should not only expect a bounce but a resumption of the uptrend. This resumption could lead to acceleration to the upside. If the market completes the inverted head and shoulders pattern, we could easily see 1800 in 2017.

In the next blog post, we will discuss Fundamental reasons that could support this rise in Gold prices including asset rotation and Indian decision to restrict currency.

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