Investors are learning to love boring.As I explained yesterday in my comment explaining why investors shouldn't ignore the yield curve, I'm preparing for a second half global 'synchronized' economic downturn, and as such I'm recommending investors to trim risk in their portfolio by investing at least 50% in US long bonds (TLT) and overweighting consumer staples (XLP) and interest-rate sensitive sectors like utilities (XLU), telecoms (IYZ) and REITs (IYR) and underweighting cyclical sectors like energy (XLE), financials (XLF), metals and mining (XME), industrials (XLI) and emerging market shares (EEM).
From trade tensions and missiles to election meddling and economic misses, a world awash in uncertainty is playing out in dizzying financial markets. For emerging-market and European equity investors unable to stomach tumultuous high fliers, sticking with the least-sexy stocks is paying off by the most in two years.
The strategy is one well observed by academics and often practiced by quants: Low volatility -- sorting stocks based on the magnitude of price swings -- tends to beat the market over time. The factor’s performance in the U.S. has lagged lately, but calm stocks elsewhere have picked up the slack (click on image).
That outperformance has caught the attention of a quantitative program at Gradient Investments LLC that powers one of its popular portfolios. This week, the $2 billion money manager pulled its funds from the PowerShares S&P Emerging Markets Momentum ETF and moved them into the low-volatility equivalent. That resulted in a record inflow of more than $420 million for the PowerShares S&P Emerging Markets Low Volatility ETF, according to data compiled by Bloomberg.
“Our strategy is quantitative, measuring momentum over different periods of time which is all proprietary,” said Mariann Montagne, a portfolio manager at Gradient Investments. “That computation put us into low vol.”
As nerves around the technology industry battered companies in China, emerging market low-volatility funds have benefited from being underweight the sector. A tilt away from Russian stocks also aided the funds after fresh sanctions against the country prompted a selloff.
Likewise, the iShares MSCI Min Vol Emerging Markets ETF has outperformed the plain vanilla emerging-markets ETF by 4.3 percentage points over the past 30 days, the largest spread over such a stretch since February 2016. So far this week, min vol has gained 2.3 percent versus 2.1 percent for the broader market.
In Europe, the risk-on rally over the past two years has depressed prices of low-volatility shares to the cheapest in a decade compared to their high-volatility counterparts, according to equity strategists at UBS Group AG headed by Karen Olney. Since low volatility is a key criteria for defining quality, and economic data keeps surprising to the downside, the stocks look like an attractive buy, they said.
Over the past month, the iShares MSCI Eurozone ETF has fallen 0.4 percent, compared to a 0.2 percent gain for the iShares MSCI Min Vol Europe ETF.
American low-volatility funds haven’t been so lucky. The strategies have binged on bond proxies like utility and consumer-staple companies -- a losing bet as the Federal Reserve charts its path to higher interest rates.
“Most low vol utilized an overweight in interest-sensitive sectors, which therefore may not do as needed, when needed,” said James Pillow, managing director at Moors & Cabot Inc. “Instead, it may exacerbate their downside momentum if interest rates continue to trend upward.”
My macro thinking guides my overall risk-taking recommendations and right now, I would be extremely careful despite the huge volatility. Since the beginning of the year, I've been warning you to prepare for more volatility and a return to stability.
You'll also recall when I covered PSP's change of power back in early February, I told PSP's new CEO, Neil Cunningham, to put 50% of his money in US long bonds (TLT) and another 50% in the S&P 500 low vol ETF (SPLV) and just relax and sleep well at night.
I have no idea how well Neil is sleeping these days but I still stick to that recommendation despite the fact that US low vol stocks haven't performed as well because people got all flustered about the bond teddy bear market.
It never ceases to amaze me how many people still don't understand the inflation disconnect or that core inflation is a lagging indicator which will continue to rise while headline inflation is acting more as a leading indicator now and is set to decline.
What about missile strikes in Syria, trade wars with China, Russia, Iran, Saudi Arabia, Israel and while we're at it, throw in Turkey and Greece?
What about it? Geopolitical tensions are nothing new, but if you ask me, this is just noise. I told you last week when I covered trade wars with China that Wall Street traders were going to ramp this market up going into earnings but then it's game over, sell in May and go away.
I'll cover earnings in more detail tomorrow and why you should ignore the good news but today I wanted to look into whether boring is the new beautiful.
It depends on whether you're a slow motion, boring, steady as she goes investor or a fast action, high octane, cocaine snorting trader looking for your next fix.
I don't snort "nose candy", never have, and refuse to put anything in my nose but tissue.
But I definitely track stocks from the bottom up, regularly looking at what top funds are buying and selling, and look at the YTD performance of stocks, the 12-month leaders, the 52-week highs and 52-week lows. I also like to track the most shorted stocks and highest yielding stocks in various exchanges and I have a list of stocks I track in over 100 industries/ themes to see what is moving in real time.
My watch list of closely followed stocks consists of over 250 stocks where I'm continuously adding and removing symbols based on opportunities that arise. This allows me to see action in real-time, and to really understand what's moving and why.
For example, while everyone was busy tracking Facebook (FB) recently, clinging to every word Mark Zuckerberg was saying, I was busy looking at shares of Aveo (AVEO), Tandem Diabetes (TNDM), Spectrum Pharmaceuticals (SPPI), Acadia Pharmaceuticals (ACAD), Geron Corporation (GERN), Bellicum Pharmaceuticals (BLCM), Sarepta Therapeutics (SRPT) and Intrexon (XON)
Some of these stocks, like Sarepta Therapeutics (SRPT) and Intrexon (XON), are beautiful from a swing trading perspective (click on images below):
Every single day, I'm tracking stocks from many sectors but mostly biotech because those are the ones that swing big both ways and are great for short-term day trades or even longer-term weekly swing trades
Some days I call my friend Fred Lecoq who actively trades to ask him his opinion. Truth be told, I already know his opinion before asking but like to chat with him on stocks and markets. He also gives me great ideas. This week he gave me two gene editing stocks to track, CRISPR Therapeutics (CRSP) and Editas Medicine (EDIT), both of which have done very well (click on images):
I try to post some ideas on my Stocktwits page but truth is I can't post everything I'm looking at throughout the trading session, it's simply impossible, nor do I want people to trade what I'm trading or think trading stocks is easy (it isn't, far from it, the bulk of people lose their shirt trading stocks!).
But looking at stocks from the bottom up and closely tracking which funds have positions in which company allows me to take risks when they arise, like pouncing on Acadia Pharmaceuticals (ACAD) as the stock got slammed this week for a nice short-term trade (click on image):
Looking at action in many stocks across all sectors also allows me to gauge risk-taking appetite. For example, have a look at the top performers on my watchlist on Thursday (click on image):
As you can see, when I look under the cover, these markets are anything but boring! Speculative trading activity is alive and well, which is why I call these markets, the "Boom Boom" markets.
You can make some great returns in the Boom Boom markets if you know where to look at how to trade properly, but you can also get killed.
In fact, the irony is even though the party is coming to an end, this is the time when you can trade and make a real killing, right before it's lights out.
But my fear is that a lot of the super smart "quant" traders who recently had a piece of humble pie when quant strategies temporarily crashed are so mesmerized by these markets, buying every dip, that they have no idea what lies ahead. David Rosenberg is right, a lot of these young traders have never seen a bear market.
Well my dear young testosterone filled quant traders, while you're listening to Justin Bieber, Shawn Mendes and other pop artists which are the flavor of the day, back in 1987, the year of the crash, there was a one-hit wonder called Paul Lekakis who sang a popular song that motivated me to write this comment.
The song exemplified the swinging eighties and reminds me of what my friend's father -- God rest his soul -- use to warn us about: "In life, watch where you put your signature and your penis."
In these Boom Boom markets, watch where you allocate your risk and be very nimble and humble or you'll lose your nuts very quickly. When the music stops, it won't be fun.
How do I know? When I was a measly economist at the National Bank of Canada back in the height of the tech bubble back in 2000, I was working on the fifth floor at the Sun Life building in Montreal right next to young stock traders who were making a killing on tech stocks, partying up on St-Laurent street every night, champagne and caviar, driving fancy cars, most living way beyond their means.
There was an older trader back then who used to warn the young bucks to stop wasting their money on frivolous things and save for a rainy day. I remember him screaming one day: "You're all going to be fired, save because the storm will hit you all hard!" But nobody heeded his warning, they thought the party would last forever.
Then came the tech crash and a long and painful bear market. That's when everyone stopped reading stock reports from gung-ho stock analysts who were prostituting themselves to companies they were covering and started reading our economic reports more closely (everyone listens to economists in a bear market, ignores them in a bull market).
Almost all these young brash traders lost their job. It was painful to watch but in many ways, foreseeable. I only know of one who survived and is still doing extremely well. He has remained very humble throughout these years despite garnering an unprecedented trading record, both in terms of longevity and consistent returns. And he likes hitting singles, trading boring stocks.
So enjoy the BOOM BOOM market while it lasts because when it turns to an OUCH OUCH market, it's going to be very painful. And unlike this cheesy clip from the 80s, that's no laughing matter!!