It’s time again for an update on our Rules Based Strategy trading. This strategy we’ve employed since 2016 allows our team and investors to make trading decisions based on hard data rather than the emotion seen in a news cycle. We are reporting today that the data is now telling us we need to move from a “Target” mode into a “Conservative” mode.
First, a very accurate indicator of future market activity is Crude Oil pricing. Crude oil gives us a 10-year leading indication of what the stock market is likely to do. 10 years ago, in June 2008, oil prices were making a top above $140/barrel, which turned out to be an exhaustive blow off top. A steep collapse ensued, taking oil prices down to below $40 in January 2009. Fast forward to now, and we are seeing a similar trend.
For this next point it is important to remember that the way the economy performs is not always a direct correlation with how the market performs. This is especially true when you observe the Unemployment Rate versus S&P 500 performance. Historically, when Unemployment Rates are high, the S&P 500 has performed well, and when Unemployment is low, the S&P has seen lower returns.
As the jobs numbers were announced Friday, June 1 at 3.8%, the data would tell us that conservative preparations should be made. We understand this may seem contrary to conventional wisdom, but consider this: when our economy seems bleak, market expectations are also low. So, if the market sees the slightest improvement in a bleak time, that improvement reverberates. However, if expectations are high due to a strong economy, a strong market may not be able to create those same returns due to the increased expectations. Think of it this way, a single lit candle in a dark room can have a greater impact than a spotlight on a sunny day! Also, the trends in performance speak for themselves.
There are a number of other factors that have led us to adjust into a “Conservative” mode such as:
- Widening credit spreads.
- Credit volatility in Europe.
- Historic June performance
This data and other factors combined with the way our Rules Based Strategy is built require the move to a “Conservative” mode. The good news if you are in a Sound Financial Rules Based plan is there is nothing you need to do. These adjustments are automatically made when the data shows it is necessary. If you have questions about our Rules Based Strategy or recent trades, please don’t hesitate to contact us today.
Investment Advisory Services offered through Sound Financial Strategies Group, Inc. (“SFSG”), a Registered Investment Adviser. Certain representatives of SFSG are also Registered Representatives offering securities through APW Capital, Inc., Member FINRA/SIPC, 100 Enterprise Drive, Suite 504, Rockaway, NJ 07866 (800)637-3211. SFSG and APW Capital are separate and unrelated companies.
The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by APW Capital.
Neither diversification nor asset allocation can ensure a profit or protect against a loss. Past performance is not indicative of future results.
Posted on Fri, June 8, 2018
by Sound Financial