The MACD (Moving Average Convergence Divergence) Indicator is one of many tools in a market technician’s toolbox. The indicator takes two moving averages (usually the 12 period and the 26 period exponential moving averages) and converts them into a momentum oscillator by subtracting the longer period from the shorter period. There are a variety of ways to interpret the MACD indicator, but for right now we are focusing on signal crossovers. To do that we also create a 9 period exponential moving average of the MACD for use as a signal line.
The year has begun in roller coaster fashion, and our team has been busy reading and digesting the many 2015 outlooks that come across our desks. But reading is the easy part, and now it’s our turn to distill the many facets of our process into a workable thesis that allows us to generate attractive risk-adjusted returns in this maturing market cycle. As tactical managers, we’re well aware that forecasts are always fraught with risk, but we also realize that in order to look forward, we need to have views that set the tone for the portfolio in the coming year. Below is our best articulation of how we see the investing world shaping up over the next year or two. Our aim is to inform you of our views, and to explain how they affect current asset allocation decisions.
At this time of year, many families with college bound children are busy navigating the financial aid application process. A college education, long viewed as a pathway to the American Dream, remains a desirable goal for many, with some studies indicating as much as a 75% increase in earning power over the course of a career through the attainment of a degree. However, the soaring costs of higher education in recent decades have even middle-to-high income families wondering how best to fund this endeavor without jeopardizing their retirement or leaving their children saddled with huge debt. Finding the most efficient and beneficial path involves an understanding of both financial aid eligibility, as administered through the relevant government regulations and University policies, and the savings vehicles and strategies available to consumers.
The current bull market has been steaming ahead since the market bottomed in March 2009. Consumers of investment advice have noted that passive, buy and hold strategies have outperformed most active strategies over this time period, giving some the false impression that ‘risk management,’ in the context of tactically changing portfolio asset allocation to defend against bear markets, is a fools game.
Tax Loss Harvesting is a subject that usually comes to the minds of investors’ right before the end of the year when they start thinking about taxes. While that is fine, we like to be a bit more tactical in finding the right opportunities to harvest losses throughout the year. Investments can be volatile and it’s entirely possible that an opportunity to harvest losses may arise earlier, only to disappear before year-end. It is of course preferable to have a loss disappear because you’ve either made money or broken even. Nevertheless, there is some strategy involved in finding an asset with a short-term loss, selling that asset, and buying another in its place in order take advantage of the tax deferral. This strategy can work to your advantage, when used at the right time.
The U.S. jobs markets may still have some structural problems to work out, but cyclical trends in employment have been on an upward trajectory for most of this year. At Pinnacle we monitor a broad array of employment indicators that have been ticking in a positive direction; here are a few examples:
- Non-farm payrolls have been over 200,000 for nine straight months. The unemployment rate has decelerated to 5.8% and is clearly trending down.
- Unemployment Claims 4-Week Moving Average, one of our favorite leading indicators of the job market, has been persistently under the 300,000 level for many weeks.
- Surveys of jobs hard-to-get are falling while surveys of job openings are picking up.
- Employment components within small business and regional Federal Reserve surveys are trending up.
- The Employment Trends Index continues to move in a positive direction.
According to the National Association of Home Builders (NAHB):
The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.
Our proprietary work shows that the HMI Index is negatively correlated to changes in interest rates, with a lag of about one year. This means that when interest rates fall (or rise), the HMI index tends to move in the opposite direction a year later. The rationale behind this relationship is simple: lower interest rates make new homes more affordable, thus leading to a brighter outlook for housing, as measured by the HMI index. In turn, increases in the HMI index typically coincide with better performance for home builders stocks.
Earlier this year, we perceived significant risk inside the oil market: Large speculators had made extreme bullish bets in the futures market, and there was reduced demand from emerging markets. In response, we took half of our energy stock exposure and invested it in Master Limited Partnerships (MLPs). MLPs are natural resource activity companies, mostly involved in the distribution of oil or natural gas through pipelines. This side of the energy business is not directly tied to the price of oil, as oil needs to pass through pipes regardless of price. Additionally, oil supply in our country is skyrocketing and demand for the pipes is increasing. These two factors are major reasons why we were attracted to the investment, and why we remain constructive on the future of MLPs.
Renewed signs of economic weakness in Europe have spooked investors and led to a significant correction in European stocks. In particular, there has been a spate of disappointing economic releases from Germany with industrial production, exports, and business confidence all coming in below expectations. This is concerning because Germany has been the backbone of the overall recovery with better growth relative to other European countries.