How to Make Money at Neutral Volatility

Lately I have participated in several discussions about how to make money at “neutral vol,” or when Pinnacle portfolios are positioned to have roughly the same volatility as our benchmark portfolios. A good starting point for the conversation is to analyze the total equity positions we own in the portfolio versus the neutral allocation to equity in our benchmark portfolios. In Investment-Speak, changing the overall portfolio risk posture by underweighting risk assets is called a “beta trade.” We are reducing the portfolio allocation to market risk.

A Turning Point in the Market?

Inflection Point: (N) – Mathematics – A point on a curve at which the curvature changes from convex to concave or vice versa.

In describing our current thinking, I have to resort to an investment writing cliché where the financial markets are described as being “at an inflection point.” While the mathematical definition for an inflection point is presented above, in the business of investing inflection points occur where there is a change in the long-term trend or momentum of the financial markets, economy, or price of an individual security. Inflection points are critically important because if you recognize one and if you understand the significance of the change, then you can make a lot of money.

The Quantitative Picture Gets Brighter

Back in June our proprietary quantitative model gave us a warning signal by dipping below the neutral bracket into what we consider mildly bearish territory (see the red line in the chart). The fact that the external models we follow were also behaving similarly had us somewhat concerned. However, that turned out to be a brief signal, as the model quickly reversed course and crossed the neutral bracket in just a few weeks, landing in mildly bullish territory last week. The message was again confirmed by the external models, which all turned up over the past couple of weeks.

A Market Technician Looks at European Financials

If you could return to May 2012, would you invest your money in Europe or the United States? It may come as a surprise, but Europe is actually outpacing the S&P 500 with returns of 40% and 33% respectively. Headlines continue to beat the negative drum that ‘problems still loom in Europe;’ that may be true, but those problems also might be hiding the strong gains realized in those markets. The markets still look healthy from a technical perspective, and I’m particularly intrigued by the financial shares.

The Problem with Monthly Returns

I recently wrote about three “red flags” that I look for when evaluating portfolio manager returns. The third item – a firm dropping a specific time frame from its performance reports – is particularly relevant, because we’ve decided to make our own change to the time horizon for our performance numbers. Beginning next month, Pinnacle will no longer publish monthly portfolio returns.

How to Find a Good Investment Advisor

In these uncertain economic times, how do you find the right investment advisor for you? Ken Solow, a founding partner and Chief Investment Officer of Pinnacle Advisory Group, offers five excellent questions to ask your money manager to help you evaluate his or her investment skill, experience, and philosophy.

Emerging Markets Are Leading the Way Down

Markets are continuing to react and adjust, mostly in a negative manner, to the Federal Reserve’s announcement about their intention to wind down their quantitative easing program later this year. Volatility, as it is known to do, popped back up in fairly short order after a steady decline through the first five months of the year. The S&P 500 Index is now off by more than -5% from its high on May 21, and interest rates on the 10-Year U.S. Treasury are high by almost 1% from their low on May 2nd. While corrections and pullbacks are always unsettling, the moves so far in the U.S. have been fairly run of the mill. After all, the S&P is still up more than 10% on the year, and bonds, at 2.58%, are still at extraordinarily low levels.