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The Range Breaks

Weekly Commentary, 8/17/15 - 8/21/15

Those of you who have been reading our weekly updates or blog posts know that we have been writing about the major U.S. equity indices being trapped in a range since March, and more recently about the lack of breadth supporting equity prices. Markets do not trade sideways forever and will eventually breakout one way or the other. Generally, the longer prices trade in a range, the more violent the breakout. Price and breadth (the market internals) cannot continually diverge and at some point they will converge with either price converging with breadth or breadth catching up with price. 

Last week’s trading activity answered the question with a major price break of the range to the downside.  According to Howard Silverblatt at S&P Dow Jones Indices, the S&P 500 Index closed on Friday at 1,970.89, off 3.19%, its worst day since the November 9, 2011 decline of 3.67%.  Within the S&P 500, 491 issues were down and 11 were up. For the week, the S&P 500 Index was off 5.77%, its worst week since a 6.54% decline in September 2011. On the week, 487 issues were down and 15 were up. The index was 7.51% off its May 21, 2015 closing high (2,130.72); the last correction ended in October 2011. The other major indices experienced similar declines. 

The tumult is the latest sign of the uncertainty rippling through the financial markets following China’s decision last week to devalue its currency, triggering the Yuan’s biggest one day fall in two decades. The Yuan devaluation intensified investor concerns that weakness in the world’s second largest economy will crimp demand for energy and raw materials. Some investors fear problems in China and other developing nations will spill over to the U.S. and Europe. 

U.S. crude oil prices fell to almost $40 a barrel, their lowest since the global financial crisis of 2009. Meanwhile, supplies rose in North America and the Middle East, filling stockpiles to record levels. Oil has lost a third of its value since June.  Additionally, the yield on the 10-year note fell from 2.19% to 2.05% last week. 

The commodity markets and international equity markets experienced more severe declines and many are in correction mode, a decline of 10% or more. Will the carnage end next week and the recovery process begin? At Stadion, we do not know the answer but we will adhere to our rules based and disciplined approach to managing money, which we believe is designed for periods of market stress like we are currently experiencing. 

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 the core component of our portfolios we decreased exposure to investment grade securities and increased our weighting to U.S. Treasuries.  In allocating the funds’ 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 and price 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. 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.

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Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.