In last month’s review of the Rotational system, I wrote
The current trends are consistent with the theme of a U.S.-led “economic slowdown” with high inflation, and the “recession trade” has been in effect for a few months so far. The changes in momentum are suggestive, to me, that the “recession trade” has played itself out, and will start to unwind soon.
Indeed, it seems that is happening.
Bonds, as an asset class on average, have maintained some momentum, but there is a significant churning going on. The largest negative changes in momentum have occurred in Treasuries, indicating that the flight to quality/fear of risk has been waning. If you review my personal trade notes from March, I had considered a discretionary long on high-yield corporates (HYG) to be a potential winner, and that looks like it was a good idea.
Momentum is still clearly on the side of the commodities markets, but the negative change in momentum for this class is the largest of any class. Only commodities and foreign currencies have dropped momentum this month. Inside the commodities complex, precious metals and agriculturals have dropped the most in momentum (although momentum is still positive, just much weaker); energy is still strong and strengthening.
Currencies competing against the dollar are the other class that dropped momentum, although as a whole they still have positive momentum on my timeframe – just not nearly as much. The two biggest changes in momentum occurred in the Mexican Peso and the DBV “carry trade” tracker. This is significant! Strength in the Peso implies that Mexico’s biggest trading partner (the United States) is expected to continue consumption and importation of goods, meaning it’s a vote of confidence for the U.S. economy. When the “carry trade” makes a significant bottom, such as the one on Monday March 17, it clearly implies the flight from risk is over and that a pursuit of yield may soon return. If you review my personal trade notes from March, I had considered discretionary longs on the Mexican Peso (FXM) and Australian Dollar (FXA) to be potential winners, and the Peso idea would have worked out nicely.
Of the asset classes with significant increases in momentum, the foreign stock markets are the second strongest gainers, and actually switched from negative to positive momentum in aggregate. Brazil is getting all the press, but China, Hong Kong, and Korea seem to have bottomed, and U.S. trading partners like Mexico, Canada, and Taiwan are strong (see currency notes for implications). If emerging market stocks are bottoming, it represents (again!) an end to the flight from risk and a renewed pursuit of yield.
In the month since my last review, every single domestic industry tracked, except for two, has gained in momentum. The two non-gainers? Gold miners and health care providers. The biggest gainers are energy, materials, construction, transports, internet, networking, and semiconductors. Many of these classes don’t have positive momentum (yet), but that they are showing momentum gains implies (again!) that market participants are betting on the worst being over. Significantly, gold miners and health care providers, the momentum losers, are those that one would expect to be winners in an inflationary economic downturn, so their loss is the “economy’s” gain.
REITs are the biggest gainers in terms of momentum, although as a class they still show negative momentum overall in my timeframe. The biggest gainers in REITs are the retail and industrial/office classes, which (yet again!) shows the confidence that “big money” has in the worst being behind us.
It appears that the “Recession Trade” is OVER.
[To view the tables and see the Rotational Portfolio results and allocations, read more…]
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3 Comments
I think we have a commodities bubble now, when prices increase 20%-30% every 6 months, you know dump monies are piling on.
I can’t see the recession trade gently winding down unless you assume that there has NOT been a commodities bubble. I happen to think it is a bubble and have not seen a blow off top yet; panic has not set in. My guess is you will see the momentum shift back again. The dollar is a bit different, perhaps not a bubble there so much as a realistic reaction to our economic situation. Then again, Iran now refuses to trade oil in dollars. Most major stock averages seem to me to be slamming into resistance. I expect we have not yet seen final bottoms.
Lebanon is making a US or US backed attack on Iran ever more probable and the Shrub has little to lose; as he said around my parts at a recent fund-raiser (and this didn’t go public) he doesn’t care what people think of his presidency after hes out “because I’ll be dead”. Scary times we live in!
Yeah, I tend to be short.
It’s more about what you’re long or short, than it is about whether you’re long or short.