Navigating Murky Waters: How Mega-Cap Tech Earnings Mask Underlying Market Uncertainties

Sell in May?

Summary

• Mega-cap tech earnings last week may have given investors a sense of optimism, but several corners of the market are suggesting otherwise.

• Small-caps underperformed again.

• Low volatility has been beating high beta since February.

There are no changes to the signals this week, which continue to indicate that conditions still aren’t terribly positive. Mega-cap tech earnings last week may have given investors a sense of optimism, but several corners of the market are suggesting otherwise. Small-caps underperformed again. Low volatility has been beating high beta since February. Long-term Treasuries have had a good couple of weeks. Risk asset prices still don’t seem to want to broadly move higher here even though the data still looks pretty good.

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-Off

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

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-Off

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

INTERMEDIATE-TERM SIGNAL: LUMBER/GOLD RATIO