Market Hotline

rss

Flexible Plan Investments


 

Quite a week we just had, regardless of asset class. By Wednesday the Dow had fallen 688 points by mid-day, thanks to a 480-point morning decline. The problem was a lack of liquidity—a buyer’s strike (no buyers in the market)—as we used to call it. In response, stocks fell, as did commodities (with the exception of gold) and yields plunged on bonds.

Then one of the Federal Reserve Board members said early Wednesday afternoon that with the weakness in Europe, maybe the Fed would put off raising rates. And the markets reversed on a dime and continued higher until the closing bell on FRIDAY. The stock market, while still down for the week by Friday’s close (except for the oft-maligned small caps, which closed higher) soared, with the Dow up over 300 points from Wednesday’s low point to its close that day and posted another 270-point gain on Friday.

But Wednesday is the day I want to focus on in today’s commentary. It was like Halloween had come early, the goblins were out, and the children were scared.

 

 Source: Bespoke Investments Group

Listen to the talking heads on CNBC and a few rep phone calls that day and you would have thought it was October 1987 all over again. But that was a 25% single-day decline. Here, we were talking about the stock averages adding a couple percent decline to a correction that since the market’s all-time high on September 18th was then down about 9.5% (inter-day high to inter-day low) on the S&P 500.

Although the S&P is now down only a bit over 6% since that high, and we have had three up days in a row, we still need to talk about last Wednesday and some “investor’s” reactions to it.

Wednesday, and in fact the stock market’s decline since mid-September, should not have been a surprise to anyone. Readers of this column know that we started the year by saying that the odds were that we would be having a 10% or greater correction this year. Our Political Seasonality Index published in January suggested that historically the best chance of that correction was in the September-October period. We pointed out weeks ago that October was the most volatile of months for stocks, and we’ve seen a big increase in both downside and upside volatility already this month.

As encouraging as the rebound has been since Wednesday, the historical tendencies suggest we could have another down wave before we leave October for good this year. Are we going to have more panic if we do?

I hope not. Because if “panic” means investors are going to abandon their position in stocks or exit long held strategies, then each investor has to ask himself or herself whether they are indeed an investor or are they a trader or, worse yet, have they decided that they can time the stock market all by themselves.

Regardless of what type of investor you are, investing is not consistent with panic. Whether you are a passive or an active investor, the tenets of both disciplines caution against selling when emotion is high and panic is present. Most superb investors invest when there is panic in the streets.

Now, you know I am no fan of passive investing—whether you call it asset allocation, diversification, or Modern Portfolio Theory. It always fails us when a truly bad correction or financial crisis descends upon us—think 2000 and 2007.

I’ve been managing money exclusively based on active investing principles since before I started Flexible Plan in 1981. Active investing and managers practicing active investing utilize technologies designed to recognize the shallow retracements from the “big one.” There’s no guarantee that they will always be right, but that is their goal.

One rule we’ve all learned the hard way is that the stock market can rally much longer than most of us think. Furthermore, we’ve learned that it is easy to get faked out by the market if you are looking for an exit.

Think about the last twelve months. We’ve had five instances when the S&P 500 quickly moved down 3 to 4% (that’s only 2% less than the current decline) and many investors insisted that they had to exit. They did not heed the advice to “buy the dips” (even if it would have been the first buy they were making since the 2007-2008 bear). Yet the S&P just rebounded and kept moving higher.

Now after a year of those shallow dips it is no surprise that many of us were calling for a 10%-or-greater decline. But so far there is little evidence that the “end is near.” In every one of those past less-than-5% declines, there was overseas news that was troubling, or rate hikes were on the horizon and there was an economic indicator or two that seemed to throw us off the track. Yet the S&P just rebounded and kept moving higher.

Is this time that different? Well, I submit, not yet. But if you are an active investor, you don’t care what I think. You are watching your indicators. If you have them and they tell you it is time to sell, then by all means sell.

However, if you have decided you cannot time the market, you don’t want to ride stocks all of the way down when the big one comes, and you’ve chosen to utilize an active investment manager that practices dynamic, risk-managed investing, don’t panic. You found an active manager and chose active strategies that have had a good track record of dealing with past negative market environments … and there have been a lot of them—especially in my 35 years of doing this.

Why would you give up on the strategy or the manager at the first 5%-plus decline in almost two years? Worse still, why would you choose to do so when you are caught up in fear—of the economy, higher rates, European recession or, yes, Ebola—when you know from past practices and deep in your heart of hearts that panic is not a good sell signal?

At the same time, as an active manager I know that just because many long-standing indicators are positive, it’s not a time to just sit and be a passive bull. Instead, after years of being exclusively an all-in or all-out market timer, I’ve learned that a better policy for most markets most of the time is to rotate or re-position as the market goes through its many stages before the big one appears likely.

Almost all of our strategies that are still invested have gone through that rotation since early September. In some cases it meant buying more cash and bonds, in others it meant selling out of leveraged positions, and in others it has meant switching to more defensive equities and alternatives. Heck, in FUSION it has meant taking all of these actions.

We do this because the numbers—the quantitative analysis—that are spit out of our computers throughout the day still are showing, for the most part ,that there could be further substantial gains on the horizon. And we can live with that, despite the talk of the economy, higher rates, European recession and, yes, Ebola, because we know those systems don’t stop analyzing once the trades are done each week. Many strategies are daily, but even those that aren’t have been designed to constantly take in new data, unemotionally analyze it, and change direction if the data, rather than a wave of panic, demands it.

Earlier I mentioned that there could easily be more selling before we move into the November/December rally mode. Our Political Seasonality Index suggests as much (bottoming on October 27), and when we look at the economic reports coming out that have not lived up to expectations of late (do you believe it, eight out of eight below the predictions on, not coincidentally, Wednesday?). And who knows what the November elections will bring?

At the same time, lower interest rates and gas prices are good for consumers. And the highest Consumer Confidence rating since the financial crisis ended (which was registered on Friday) tends to be good for future retail sales and home builders.

Much of the price action in the short term is going to be determined by earnings reports. We are starting into the heaviest two-week period for the third-quarter earnings and revenue statements. Twenty percent of the S&P 500 companies will report this week alone.

In this period of negativity, I would not be surprised to see the financial press focus on the few stocks coming in under analyst expectations—Netflix and IBM, for example. But as the chart below discloses, so far the reports have been on the whole very encouraging, with a very high rate of surprises to the upside not the downside. (Check out Apple tonight, for example.)

  Source: Bespoke Investments Group

If the earnings surprises continue to the upside, the next surprise could be a resumption of the rally that to date has propelled the S&P 500 about 80% higher (5,700 Dow points) since its October, 2011 low—that was the last time we had panic in the markets and learned the truth of who among us was truly an investor.

 

All the best,

Jerry

 

PS:

I’ll be away from my desk for a month with business and then travel for pleasure—a 45-year anniversary present for my wife and I. I’ve got a number of fine commentators filling in for me here for the next four weeks. And, as the 90 or so members of my staff know, I’ll be checking in daily.

 

 


3rd Quarter Statements

3rd quarter account summaries, OnTarget statements, and Quarterly President’s Letter are now available. Clients who have elected to receive electronic delivery of our correspondence can log in to ontargetinvesting.com to retrieve these quarterly reports. If you haven’t received your statement or need assistance, please contact Client Services at 800-347-3539 x 1.

 

Trust Company of America Annual Focus on the Future

This week Jerry Wagner and Executive VP Renee Toth will be traveling to Denver to attend TCA’s annual Focus on the Future.

This three-day meeting provides the forum for input on our clients’ behalf, as well as an opportunity to learn about new developments and innovation at TCA and to network with other advisors whose clients have benefited from using their services.


DOW ends wild week with 263 point advance

Even with Friday’s huge gain, the blue chips fell 0.99% across five days to 16,380.41. The week also saw retreats for the NASDAQ (0.42% to 4,258.44) and S&P 500 (1.02% to 1,886.76).4

% Change Y-T-D 1-Yr Chg 5-Yr Avg 10-Yr Avg
DJIA
-1.18
+6.56
+12.77

+6.45

NASDAQ
+1.96
+10.23
+19.49
+11.99
S&P 500
+2.08
+8.86
+14.69
+6.94
Real Yield 10/17 Rate 1-Yr Ago 5-Yrs Ago 10-Yrs Ago
10Yr TIPS Yd
0.30%
0.45%
1.45%
1.71%

  YTD returns
DJIA
-1.56%
NASDAQ
2.60%
S&P 500
2.40%

Sources: online.wsj.com, bigcharts.com, treasury.gov - 10/17/14 5,6,7,8
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.


Consumer sentiment: A pleasant surprise

Ebola fears and a choppy stock market haven’t quite rattled household optimism. At a reading of 86.4 (its highest in more than seven years), the University of Michigan’s initial October consumer sentiment index confounded analysts who expected a decrease from September’s final 84.6 mark. Consensus forecasts from MarketWatch and Briefing.com both predicted a retreat to 83.5. September’s 0.3% slip in retail sales remained a consumer question mark, especially after August’s 0.6% gain.1,2

 


U.S. industrial output rises 1.0%

September’s gain doubled the forecast from Briefing.com and more than made up for the 0.2% August dip. Elsewhere on the factory front, the September edition of the Producer Price Index retreated 0.1% with the core PPI being flat.3


Housing starts and building permits increase

The Census Bureau announced a 1.5% rise in building permits for September plus a 6.3% improvement in groundbreaking. The latter gain put the annualized rate for housing starts back above the 1 million level.1



Citations

1 - nasdaq.com/article/dollar-gains-ground-on-upbeat-consumer-sentiment-data-cm403255 [10/17/14]
2 - marketwatch.com/economy-politics/calendars/economic [10/17/14]
3 - briefing.com/investor/calendars/economic/2014/10/13-17 [10/17/14]
4 - markets.on.nytimes.com/research/markets/usmarkets/usmarkets.asp [10/17/14]
5 - markets.wsj.com/us [10/17/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F17%2F13&x=0&y=0 [10/17/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F17%2F13&x=0&y=0 [10/17/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F17%2F13&x=0&y=0 [10/17/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F16%2F09&x=0&y=0 [10/17/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F16%2F09&x=0&y=0 [10/17/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F16%2F09&x=0&y=0 [10/17/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F18%2F04&x=0&y=0 [10/17/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=10%2F18%2F04&x=0&y=0 [10/17/14]
6 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=10%2F18%2F04&x=0&y=0 [10/17/14]
7 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [10/17/14]
8 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [10/17/14]

 


Last week’s column noted the economic weakness starting to show up in the Eurozone. This has had a reactionary effect here in the United States.

“Fed officials said over the weekend that the threat from an international slowdown may lead to rate increases being delayed. The remarks highlighted mounting concern over the improving U.S. economy’s ability to withstand foreign weakness and a strengthening dollar … The dollar declined amid bets the Fed will keep interest rates lower for longer.”
- Bloomberg 10/13/14

This dollar drop, due to the potential of the Fed easing up on raising interest rates, has led to a reversal in gold prices. As this daily chart shows, an early break up in gold dollar prices has occurred.


Source: The S&P GSCI® Gold Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future.

This has also occurred after prices tested gold’s production price level for a third time at the start of October.


Over the last week, the gold spot price rose 1.24% despite that the US Dollar further weakened from its four-year high. The Gold Bullion Strategy Fund (QGLDX) gained 1.40% for the week. The difference was mostly due to QGLDX’s early close at 1:30PM (rather than 4:00PM). The prices of short-duration fixed income ETF holdings were flat, on average, over last week, while the COMEX gold futures contracts added 1.42%.


 


Total Return

Fund (Inception) Symbol Qtr Ending 9/30/14 YTD Ending 9/30/14 1 Year Ending 9/30/14 Since Inception Ending (9/30/14)* Annual Expense Ratio
The Gold Bullion Strategy Fund (7/5/13) QGLDX (9.06%) (0.58%) (10.13%) (2.91%) 1.66%
Quantified Managed Bond Fund (8/9/13) QBDSX (1.66%)
2.02%
2.07% 1.63% 1.68%
Quantified All-Cap Equity Fund (8/9/13) QACFX (4.12%)
(4.49%)
1.18% (0.03%) 1.51%
Quantified Market Leaders Fund (8/9/13) QMLFX (6.04%)
(0.86%) 6.08% 4.75% 1.71%
Quantified Alternative Investment Fund (8/9/13) QALTX (2.20%) 0.85% 8.49% 8.05% 2.20%

*Annualized

As of the most recent prospectus, the expense ratios for the Gold Bullion Strategy Fund are as follows: Investors’ Class (No Load), 1.66%; Class A, 1.66%; Class C, 2.41%. The maximum sales charge imposed on Class A share purchases (as percentage of offering price) is 5.75%. An additional 2% redemption fee applies to all share classes, including Investors’ Class, when shares are redeemed within 7 days of purchase.

The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. For current performance, please call 1-855-647-8268.

Risks associated with the Quantified Funds include active frequent trading risk, aggressive investment techniques, small and mid-cap companies risk, counter party risk, depository receipt risk, derivatives risk, equity securities risk, foreign securities risk, holding cash risk, limited history of operations risk, lower quality debt securities risk, non-diversification risk, investing in other investment companies (including ETFs) risk, shorting risk, asset backed securities risk, commodity risk, credit risk, interest risk, prepayment risk, and mortgage backed securities risk. For detailed information relating to these risks, please see prospectus. 

The principal risks of investing in The Gold Bullion Strategy Fund are Risks of the Sub-advisor’s Investment Strategy, Risks of Aggressive Investment Techniques, High Portfolio Turnover, Risk of Investing in Derivatives, Risks of Investing in ETFs, Risks of Investing in Other Investment Companies, Leverage Risk, Taxation Risk, Concentration Risk, Gold Risk, Wholly-owned Corporation Risk, Risk of Non-Diversification and interest rate risk. “Gold Risk” includes volatility, price fluctuations over short periods, risks associated with global monetary, economic, social and political conditions and developments, currency devaluation and revaluation and restrictions, trading and transactional restrictions. 

An investor should consider the investment objectives, risks, charges and expenses of each Quantified Fund and The Gold Bullion Strategy Fund before investing. This and other information can be found in the Funds’ prospectus, which can be obtained by calling 1-855-647-8268. The prospectus should be read carefully prior to investing in The Quantified Funds or The Gold Bullion Strategy Fund. 


There is no guarantee that any of the Quantified Funds or The Gold Bullion Strategy Fund will achieve their investment objectives.

For more information on the Quantified Funds, sub-advised by Flexible Plan Investments, Ltd., please review the prospectus and fund performance.

Current or historical holdings of the funds
 

 


US equity markets were down last week. The NASDAQ Composite lost 0.42%, the S&P 500 was down 1.02%, and the Dow Jones Industrial Average recorded a weekly loss of 0.99%. Seven of the ten S&P industrial sectors were down for the week. The move downward was led by Health Care (-2.85%), Consumer Staples (-2.25%), Financials (-1.13%), and Energy (-1.11%). Except for the Quantified Managed Bond Fund (QBDSX, 0.40%) and the Quantified All-Cap Equity Fund (QACFX, 0.00%), the Quantified Funds were down. The largest loss was in the Quantified Market Leaders Fund (QMLFX, -1.98%), followed by the Quantified Alternative Investment Fund (QALTX, -0.39%).

The Quantified All-Cap Equity Fund (QACFX) made some changes last week, shifting its weightings in four leading stock baskets, which were over 55% of the portfolio’s composition: “Ultimate Dividend Portfolio” (38%), “All-Cap Quality Acceleration” (8%), “All-Cap Upside” (8%), and “International Payout” (3%). Among domestic sector distributions, Consumer Staples and Financials led with portfolio allocations of 12% and 25%, respectively. The largest stock holdings in the All-Cap portfolio were in the common stock of McDonald’s Corp. (MCD, 3.91%) and the common stock of ProAssurance Corp. (PRA, 3.91%).

The cash level within the All-Cap Fund increased to 18.38% last week. The Fund’s daily pattern trading of S&P 500 futures started the week 6% long, changed to 12% long on Monday’s close, and 20% long on Thursday’s close to begin this week. Our TVA-based futures hedge started the week 15% short, changed to 30% short on Monday’s close, 20% short on Tuesday’s close, 7% short on Wednesday’s close, and 10% short on Thursday’s close to begin this week.

The Market Environment Indicator (MEI) remained bullish last week. On Friday, equity asset class allocations changed to the following: Large-Cap Growth (19.2%), Large-Cap Value (5.4%), Mid-Cap Growth (9.6%), and Mid-Cap Value (1.8%). 

Total sector ETF weightings were reduced from 37.5% the prior week to 14.6% at the end of last week. Distribution of sector holdings and weights were as follows: Electronics (0.35%), Health Care (13%), and Technology (1.25%). As a result, the Fund ended the week with a 49% allocation to cash. The individual ETF positions with the leading portfolio weightings were the Ultra Mid-Cap 400 ProShares ETF (MVV, 6.0%), the Ultra QQQ ProShares ETF (QLD, 6.0%), the Ultra S&P 500 ProShares ETF (SSO, 6.0%), and the Direxion Daily Health Care Bull 3X ETF (CURE, 3.45%).

Within the Quantified Alternative Investment Fund (QALTX), the Long/Short Market Neutral Alternative sub-portfolio increased allocation to the Hundredfold Select Alternative Svc Fund (SFHYX, 1.80%) and to the Driehaus Active Income Fund (LCMAX, 1.50%).

Among the largest ETF positions there were a few changes: allocations to the Schwab Dow Jones US Select REIT ETF (SCHH, 2.21%) and the Guggenheim S&P Equal Weight Health Care ETF (RYH, 2.16%) increased, while allocations to the Market Vectors Nuclear ETF (NLR, 4.21%) and the Wisdom Tree Managed Futures Strategy ETF (WDTI, 1.18%) decreased.

The cash level within the Fund increased to 38.5% last week. The daily pattern trading of S&P 500 Index futures with 10% fund capital allocation started the week 3% long, changed to 6% long on Monday’s close, and 10% long on Thursday’s close to begin this week. The 7.5% capital allocation of the volatility-based systematic trading of NASDAQ 100 Index futures started the week 7.5% long and changed to 4.5% long on Monday’s close, remaining there to begin this week.

The Quantified Managed Bond Fund’s (QBDSX) two leading broad-bond index ETF holdings, the iShares S&P National Muni Bond ETF (MUB, 0.27%) and the iShares Barclay’s Aggregate Bond ETF (AGG, 0.48%), were up for the week.

The 10-year US Treasury yield decreased to 2.19% for the week. The Fund increased weighting in the iShares Barclay’s Aggregate Bond ETF (AGG) from 9.04% to 10.72%, while decreasing allocation in the iShares S&P National Muni Bond ETF (MUB) from 11.34% to 10.98%. Cash increased to 15.68%.

The 10% active portfolio exposure to 30-Year US Treasury Bond futures in the Fund started the week long, changed to short on Tuesday’s close, neutral on Thursday’s close, and long on Friday’s close to begin this week. The position gained around 0.95%.



Total Return

Fund (Inception) Symbol Qtr Ending 9/30/14 YTD Ending 9/30/14 1 Year Ending 9/30/14 Since Inception Ending (9/30/14)* Annual Expense Ratio
The Gold Bullion Strategy Fund (7/5/13) QGLDX (9.06%) (0.58%) (10.13%) (2.91%) 1.66%
Quantified Managed Bond Fund (8/9/13) QBDSX (1.66%)
2.02%
2.07% 1.63% 1.68%
Quantified All-Cap Equity Fund (8/9/13) QACFX (4.12%)
(4.49%)
1.18% (0.03%) 1.51%
Quantified Market Leaders Fund (8/9/13) QMLFX (6.04%)
(0.86%) 6.08% 4.75% 1.71%
Quantified Alternative Investment Fund (8/9/13) QALTX (2.20%) 0.85% 8.49% 8.05% 2.20%

*Annualized

As of the most recent prospectus, the expense ratios for the Gold Bullion Strategy Fund are as follows: Investors’ Class (No Load), 1.66%; Class A, 1.66%; Class C, 2.41%. The maximum sales charge imposed on Class A share purchases (as percentage of offering price) is 5.75%. An additional 2% redemption fee applies to all share classes, including Investors’ Class, when shares are redeemed within 7 days of purchase.

The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. For current performance, please call 1-855-647-8268.

Risks associated with the Quantified Funds include active frequent trading risk, aggressive investment techniques, small and mid-cap companies risk, counter party risk, depository receipt risk, derivatives risk, equity securities risk, foreign securities risk, holding cash risk, limited history of operations risk, lower quality debt securities risk, non-diversification risk, investing in other investment companies (including ETFs) risk, shorting risk, asset backed securities risk, commodity risk, credit risk, interest risk, prepayment risk, and mortgage backed securities risk. For detailed information relating to these risks, please see prospectus. 

The principal risks of investing in The Gold Bullion Strategy Fund are Risks of the Sub-advisor’s Investment Strategy, Risks of Aggressive Investment Techniques, High Portfolio Turnover, Risk of Investing in Derivatives, Risks of Investing in ETFs, Risks of Investing in Other Investment Companies, Leverage Risk, Taxation Risk, Concentration Risk, Gold Risk, Wholly-owned Corporation Risk, Risk of Non-Diversification and interest rate risk. “Gold Risk” includes volatility, price fluctuations over short periods, risks associated with global monetary, economic, social and political conditions and developments, currency devaluation and revaluation and restrictions, trading and transactional restrictions. 

An investor should consider the investment objectives, risks, charges and expenses of each Quantified Fund and The Gold Bullion Strategy Fund before investing. This and other information can be found in the Funds’ prospectus, which can be obtained by calling 1-855-647-8268. The prospectus should be read carefully prior to investing in The Quantified Funds or The Gold Bullion Strategy Fund. 


There is no guarantee that any of the Quantified Funds or The Gold Bullion Strategy Fund will achieve their investment objectives.

For more information on the Quantified Funds, sub-advised by Flexible Plan Investments, Ltd., please review the prospectus and fund performance.

Current or historical holdings of the funds

 


Subscribe
Disclosures

To our readers
Everything in the newsletter pertains to strategies available on our Strategic Solutions platform at Trust Company of America. The same strategies are implemented on many other products: mutual funds, variable annuity, variable life and retirement platforms. Therefore, we expect the strategic discussion may be of interest to you. Note, however, that since these products have their own subaccount and fund universes and different internal expenses, the results and trading of the same strategy on other platforms may differ substantially from those described herein.

Managed Retirement Plan Participants:
Most of you are managed using Lifetime Evolution and our sub-advised funds, so those topics will be most applicable to your account. But, more and more of you are in plans using Market Leaders. If so, that newsletter section may interest you