Far From Over

Volatility Is Just Getting Started

The markets had another week of high volatility in both Treasuries and utilities, a signal that risk assets could be positioned well in the near-term, but at heightened downside risk over the longer-term. There will be a lot of short-term noise this week with respect to what’s going on in the geopolitical arena, but it shouldn’t take away from the fact that macro conditions continue to deteriorate and the U.S. economy’s vulnerability to recession remains high.

How To Interpret the Signals: Within each strategy, there is a risk-on and risk-off investment recommendation, with the risk-off option being the more conservative of the two. When a particular signal indicates that investors should be risk-off, for example, subscribers should consider investing in the risk-off option and avoiding the risk-on option. The opposite, therefore, would be true when the signal flips to risk-on. In each strategy, you’d always be invested in one option or the other.

Here’s how to read the scorecard for each strategy:

Some of the strategies will be more aggressive than others. The “Leverage For The Long Run” strategy, for example, uses the S&P 500 and 2x-leveraged S&P 500. The more conservative “Lumber/Gold Bond” strategy, however, uses intermediate-term Treasuries and the S&P 500. In every case, a risk-off signal indicates that you should be invested in the more conservative of the two options, while a risk-on signal indicates you should be invested in the more aggressive one.

SHORT-TERM SIGNAL: UTILITIES/S&P 500 RATIO

Target Investor: Short-term traders with a higher risk tolerance interested in using an equity momentum strategy to anticipate changes in market risk tolerance.

Current Indicator: Risk-On

Strategy: Beta Rotation - Example: Invest in S&P 500 (SPY) over Utilities (XLU)

SHORT-TERM SIGNAL: LONG DURATION/INTERMEDIATE DURATION TREASURIES RATIO

Target Investor: Short-term traders with a higher risk tolerance who want to use the activity in the U.S. Treasury market to judge overall risk levels.

Current Indicator: Risk-On

Strategy: Tactical Risk Rotation - Example: Invest in S&P 500 (SPY) over Long-Duration Treasuries (VLGSX)

INTERMEDIATE-TERM SIGNAL: LUMBER/GOLD RATIO

Target Investor: Short- and long-term investors willing to trade more frequently using the classic cyclical vs. defensive asset comparison.