Weekly Commentary, 8/10/15 - 8/14/15
After a week marked by wide swings in volatility, U.S. stocks, as measured by the S&P 500 Index, closed the week up about 0.50%. Stocks closed sharply higher on Monday, boosted by a fall in oil prices and increased M&A activity. Tuesday’s trading session erased most of Monday’s gains after China’s central bank devalued its tightly controlled currency. With the Yuan’s biggest one-day loss in two decades, the world’s second largest economy continues to sputter. China’s devaluation of the Yuan sparked a chain reaction across global markets, weighing on equities, emerging markets, and commodities while giving bonds a boost. China allowed the Yuan to weaken further Wednesday, although they intervened near the close of trading to prevent the currency from tumbling too far. The market traded down almost 2% on Wednesday, but closed unchanged on the day.
The market drifted slightly higher over the balance of the week as investors tried to digest the global implications of a weaker Chinese currency. There seem to be two driving themes around the move in the Yuan: 1) fear that the devaluation will spiral into a foreign exchange war as nations fight for a competitive advantage via weaker currencies leading to deflation; and 2) what does the devaluation imply about the health of the Chinese economy?
Despite the Dow Jones Industrials closing the week up 100 points, the short and long term trend is down. The highly discussed “death cross” occurred on Tuesday when the index’s 50-day moving average crossed below its 200-day moving average. While this signal is frequently sighted at the end of a bull market, it is no guarantee the bull market won’t move higher.
Despite everything that has happened over the past few months, the market has barely moved. On a week-to-date, month-to-date, quarter-to-date and year-to-date basis, the S&P 500 Index has barely moved 1% in either direction. According to the Wall Street Journal, the 6.7% trading range on the Dow Industrial Average’s 2015 closing high and low is the narrowest range at this point of the year in the index’s history.
As we have been writing, the market is trapped in a six month range. At Stadion, we do not predict the market. We measure risk levels in the markets and react to changes. The foundation of the market based on technical indicators is clearly weak. The Federal Reserve is preparing to increase rates for the first time in nine years and global macro concerns appear to be increasing. Will one of these themes, or an exogenous event, push the market to new highs or will prices correct to converge with the weak market internals? Whatever the outcome, we will react appropriately as our models indicate with the goal of protecting client portfolios if the market breaks downward or seeking to participate in market gains.
The Stadion Managed Account Risk objectives are managed using a “core/satellite” approach. The core positions will comprise 40-60% of the portfolio and be invested in equity, fixed income and money market instruments with the strategic allocation becoming more risk adverse as the risk tolerance of each fund changes. In allocating the Fund’s satellite assets – the remaining 40-60% of each portfolio – Stadion uses a proprietary, rules-based technical equity model. The model determines a weighted average score for “market risk” based on a combination of technical market measures. Stadion seeks to evaluate the risk levels for different markets and market sectors. Stadion then seeks to participate in markets and market sectors with low risk scores and seeks to divest investments in markets and market sectors with high risk scores. Based on the weak foundation of the market internals we remain in our most defensive positions per risk objective.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.