Stadion Money Management - Going the Distance

Markets Can’t be Predicted

hmacmillan — Tue, 15 May 2012 14:36:22 +0000

At Stadion we do not forecast or make predictions, nor do we believe that anyone can consistently predict the markets direction. The brightest minds on Wall Street can, and do, get it wrong. The latest is J.P. Morgan announcing a $2 billion trading loss. JPM CEO, Jamie Dimon, told investors last week (as quoted in the Wall Street Journal) that the trades relating to the loss were “flawed, complex, poorly reviewed, poorly executed and poorly monitored.” Other than that…

Even if an investor’s prediction/forecast is correct the execution can be faulty or the market reaction may not be as predicted. It looks as though JPM had both wrong in this case.

No system or strategy is right all the time. In all of our strategies at Stadion, we strive to remove emotion from the decision making process by reacting to the price action of the market by employing a disciplined, objective and systematic process.

John Wiens, CFA
Vice President of Portfolio Management

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

With so many mixed signals, how do you invest?

bthompson — Thu, 10 May 2012 13:37:35 +0000

Over the last month the domestic equity markets have essentially gone nowhere. We have seen some positive price movement with the S&P 500 gaining over 4% from April 23^rd through May 1^st, but since that brief market peak we have seen the market steadily decline to a 5% drawdown during the past 7 trading sessions. However, that doesn’t tell the whole story. The equity markets have actually been somewhat resilient. An example of this is evident in the past two trading session where market prices plummeted early in the day only to rebound later in the day to close in only slightly negative territory. There are many reasons this might occur, but mixed worldwide economic events could certainly be a major factor. Threats of Greece departing from the Eurozone can be viewed as good or bad. Increased Eurozone anxiety is being balanced with positive domestic economic news such as US Job openings in March reaching their highest levels in 4 years according to the US Labor Department. Moody’s is scheduled to downgrade the credit ratings of BNP Paribas, Deutsche Bank and other major financial institutions sometime this month. According to Bloomberg, Industry experts feel that this could threaten economic growth as it drives up bank’ funding costs and forces them to cap lending. This is coming on the heels of a very favorable earnings reporting season here in the US, and the belief by some economists that the Fed’s low-rate policy will help drive economic growth in the near future. With so many mixed signals there is not much conviction from the bulls or the bears. So how do you position your investment portfolio during times like this?

At Stadion, we take comfort in knowing that all of our investment strategies are designed to help navigate uncertain market environments. None rely on trying to guess at what the market will do. Each has a risk control component consistent with our philosophy of protecting investors serious money. Stadion’s suite of uncorrelated, defensive, non-traditional products all reflect that philosophy. Stadion’s tactical strategies, foreign or domestic, have a tactical goal of reacting to the market’s movements once a clear trend direction (up or down) is determined with a risk management overlay designed to protect that serious money during negative market climates. Stadion’s new Trilogy strategy is designed so that one or more of its three components may benefit whether the market goes up, goes down, or moves sideways, with a goal of producing absolute returns with low volatility.

(Click image to enlarge)

Brad Thompson, CFA, Chief Investment Officer

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 prices. It is not possible to invest directly in indexes which are unmanaged and do not incur fees and charges. Past performance is no guarantee of future results. Investments are subject to risk and any of Stadion’s investment strategies may lose money. Any references to specific securities or market indexes are not intended as specific investment advice and should not be relied on for making investment decisions.

Is economic data pointing towards market correction?

jmaudlin — Tue, 08 May 2012 19:30:40 +0000

Recently, there has been much talk of an economic recovery being a main driver of potential market strength. While this may be the case, recent economic releases may be pointing to a potential bout of market weakness. Below is a chart of the Citigroup Economic Surprise Index (CESI) overlaid against a 60-day lagged S&P 500 index (SPX). The CESI has proved to be a reliable indicator in forecasting market strength or weakness over the past 2 years. A recent decline in the CESI, driven by the number of negative surprises we have seen in economic releases, indicates we could be due for a sizable correction — potentially in excess of 10% – in the S&P over the next couple of months.

While we at Stadion do not forecast where we think the market will head but rather react to what the market is doing in the here-and-now, our tactical approach and ability to move our portfolio to a 100% defensive positioning can bring comfort to clients knowing we are able to sidestep the potential downside volatility such data is indicating could be imminent.

- Clayton Fresk, CFA

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

The Citigroup Economic Surprise Index tracks weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). The index is calculated daily in a rolling three-month window. 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 prices. S&P price return data is used. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges.

Why is Discipline so Important to Investing?

bthompson — Wed, 04 Apr 2012 13:35:11 +0000

At any given point, financial markets are subject to political, economic, monetary, and psychological uncertainties that can distract investors. For example, the same kind of debt problems that plagued Europe in 2011 continue to distract market participants and potential participants in 2012. Concerns over growth in the Emerging Markets and now the U.S. are gaining attention. In the not-too-distant future Spain, Portugal, and Italy may force investors to confront the same sovereign problems presented by Greece. At some point, investor’s attention will also be directed toward the potential fiscal time bomb ticking in Washington. On December 31 the payroll tax holiday ends, the temporary Bush tax cuts expire, and unemployment benefits will be severely curtailed. On top of that, the 1.2 trillion in automatic spending cuts from last year’s failed debt-ceiling negotiations will kick-in. All this can only be avoided if Congress takes quick action (and that is indeed a big “if”).

In spite of all of these concerns, the market managed to climb a wall of worry to a 13.44% gain, on a total return basis, in the first quarter of 2012. Why? Because there have also been many encouraging developments entering 2012. Equity valuations were attractive, job and manufacturing growth were improving, corporations were flush with cash, interest rates were low and investors were under invested in equities; and many of these conditions are still apparent. However, the uncertainties outlined above caused many investors to miss out on the best first quarter performance for the S&P 500 since 1998.

An investor cannot wait for a “green light” to indicate it is safe to invest before making investment decisions; such signals are rarely evident until they appear in the rear-view mirror. There will always be yellow and red lights flashing to distract an investor, possibly preventing them from achieving long term financial goals. Avoiding emotion is key, no matter what the near-term direction of the market. A disciplined plan based on science and rules can help filter out the background noise of global news and politics, making it easier to overcome distractions. At Stadion we don’t pretend to predict the future. Rather, we focus on what we can control, which is how we respond to changing market conditions. We do not waste effort and time on distractions that are beyond our control. For almost two decades our core beliefs have kept us focused on Stadion’s disciplined and objective approach to dealing with market uncertainties in our efforts to provide above average long term returns with less volatility for our clients.

John Wiens, CFA, VP Portfolio Management

Can the Rally in Equities Continue?

bthompson — Thu, 29 Mar 2012 18:55:51 +0000

The strong rally we have seen develop in global equities in 2012 has stemmed from three developments:

A significant infusion of liquidity by the European Central Bank resulting in a stabilization of sovereign debt-related issues in Europe
The gradual healing of the U.S. labor market
An intermediate term shift in FED policy from being reactive to being proactive.

Given these developments, recent gains appear justified; particularly as equity valuations were relatively low when the rally began. As stocks still appear reasonably priced, especially relative to bonds, there still may be room for the rally to extend. However, there are some hurdles that need to be cleared for that to happen.

The US market has reached a historically important price level with the S&P currently trading around the 1,400 level. Since March 13th, the market has traded within a fairly tight band around this 1,400 psychological barrier (see the chart below). Technical levels such as this often times act as resistance points for the markets as some participants take profits off the table, others sell just to break-even, and buyers hesitate to see if growth expectations are correctly priced in their view. Fundamentally, future gains and a breakout above the 1,400 level will likely depend on an improving global economy – and could be accompanied by greater volatility. The comforting thing about the Stadion strategy is if the trend continues we are positioned to participate. However, if the 1,400 level proves to be too high of a hurdle, and the market reverses course, Stadion’s sell criteria are designed to move us to a more defensive posture until a new trend develops.

Brad Thompson, CFA,Chief Investment Officer

Will the Current Uptrend Continue?

jmaudlin — Wed, 07 Mar 2012 18:17:02 +0000

Over the last couple of months we have seen a welcome change in the market’s behavior. For a trend-following strategist like Stadion, 2011 was a brutal year—with wild sideways trading ranges that resulted in numerous ‘whipsaw’ trades as Stadion’s model reacted to several periods of intense price swings. But so far in 2012—as if a switch has been flipped—the perilous trading range has given way to a fairly steady uptrend for the first time in almost a year.

What has precipitated reduced volatility and upward price action? We can start with the (so far) successful Long-Term Refinancing Operations (LTRO) launched by the European Central Bank (ECB), akin to the US Fed. LTRO means that European Banks can now pledge collateral to the ECB in exchange for liquidity or funding. How they use this new found cash is up to each institution. But the effect has been to ease the financial system stresses in the Eurozone that plagued them throughout 2011. Whether this is a good long term solution remains to be seen, but the markets seem to have welcomed it with higher equity prices and lower volatility.

Domestic economic indicators have also improved marginally with employment and manufacturing feeding the recent 2012 rally. Institutional and large investors seem to be factoring in a possible continuation of improving economics which in turn appears to be leading to higher equity prices. On top of this, US corporations have hoards of cash and are seeing continued improvement in their bottom lines.

Over the past couple of months, Stadion’s tactical portfolios have participated in this upward price trend. As price-followers and market breadth devotees, you would expect our investment models to quickly pick up this trend and you’d be right. But we are starting to see the potential for the equity rally to wane. Not only is headline risk re-emerging in Europe in the form of serious “Greek default” discussions, but here in the US we are seeing a rally that is more and more fueled by top market cap stocks like Apple. Making up over 15% of the Nasdaq 100, the seemingly never-ending ascent of Apple can mask a lot of internal market problems. Many of the market breadth measures we follow seem close to signaling a higher risk environment. For the rally to continue, we will need to see market participants flocking back to all stocks along the risk spectrum, not just those with high market caps.

As of this writing, we may be at a critical juncture in the current rally. With breadth waning and prices meeting resistance, the bulls’ conviction may be tested. Ideally we could see the “buy the dip” crowd step in to reinforce this rally. Either way, our investment model is designed to react to prevailing conditions. We’ll keep you posted on whether this time means continuing to ride the rally, or moving to the sidelines as our model reacts to increasing risks and our sell discipline takes over.

-Will McGough, CFA

Vice President, Portfolio Management

A Little Resistance

Danny Mack — Fri, 17 Feb 2012 15:45:08 +0000

Stadion’s investment strategy is built on a foundation of trend following and technical analysis. While we do not use chart analysis in our decisions to be invested or not, it is a useful tool we employ in our portfolio management process. The chart below shows the S&P 500 from 12/31/2010 through 2/16/2012. The red box outlines an area of resistance established early in 2011 and retested several times throughout the first half of the year. As you can see, we are once again within this resistance band. Typically at these areas, prices may have a difficult time “breaking through” this band to the upside. It is normal to see increased volatility or even a decline in prices as the market tests this level of resistance.

Should the market break through this resistance level, we could see the market rally up to the next level of resistance: the 1400-1415 range for the S&P. If this happens, it would be the first time the S&P 500 has reached the 1400 level since June 2008.

But let’s not get ahead of ourselves! We cannot predict how the market will react to this resistance. As the chart shows, this level was tested several times in 2011 and the market failed to break through each time. This resistance level is very strong. Therefore we will continue to manage our portfolios with our model driven sell criteria in place. Should prices continue higher we will be well positioned for the rally. However, if prices begin to wane, our sell criteria will tell us the proper time to take risk off the table, and to begin to move to more defensive allocations to protect our clients assets.

By Danny Mack – Senior Analyst, Portfolio Management

Breaking Out of Consolidation…?

bthompson — Thu, 02 Feb 2012 22:15:37 +0000

On October 21st of 2011, we observed here that range bound volatile equity markets don’t last forever. At that time, we were smack in the middle of a range bound, highly volatile market environment. In the chart of the S&P 500 below, we have highlighted in red the large (greater than 5%) price swings that occurred between February 2011 and December 2011; including 22 swings in both directions with an average duration of just 10 days. The greatest amount of volatility occurred between mid August and early October. During this time period, there were 10 of these price swings with the average duration being a mere 4 days each. This is a classic example of a range bound volatile market.

At that time, many people in our industry were speculating that this type of volatility is the new normal. Of course that line of thinking completely ignores the fact that volatility is mean reverting. “Mean reverting” means that volatility levels will rise above or fall below the average but will eventually revert back to that average.

With 2011 in the past, it seems like someone turned off the volatility switch at the beginning of the new year. As a result, we currently see a very nice trend developing out of 2011′s range bound market. Large price volatility has abated for now. (In fact, we have had 22 trading days thus far in 2012 and have yet to experience a single price reversal in excess of 5%.) Of course we don’t know how long this current trend will last, but we also know it won’t last forever. That is why we have a system that is designed to react to the ever changing market environment.

Click to enlarge

Brad Thompson, CFA, Chief Investment Officer

Interesting Chart Pattern – Revisited

jmaudlin — Mon, 23 Jan 2012 21:02:50 +0000

Back in December we blogged about an interesting “coiling” chart pattern of subsequent higher lows and lower highs developing in the S&P 500 (as shown by the ETF ‘SPY’). Historically, when these patterns take place over several months they tend toward a pronounced upward or downward move as the market, or coil, tightens. A coiling market can breakout in either direction and in this case we are seeing the market break upward, as shown in the chart below.

Click Image to Enlarge

With 2011 now in the rearview mirror, the first couple weeks of 2012 have brought a nice, steady march upwards in a breakout from 2011’s pattern of consolidation. It appears that headline risk, which so dominated 2011, is currently being shrugged off by the forward-looking machine that is the stock market. News, like the downgrade of several European sovereign nations’ debts by the S&P, that would have sent shockwaves and imminent downside price action in 2011 has resulted in higher price action as we move into 2012.

As trend followers, our model recognized this positive price action, with confirming breadth and improving sentiment, and appropriately signaled to add equity allocations to our portfolios. So far so good. Nevertheless, as confident as we would like to be, headline risk still looms. As always, our goal is to read and react, not predict. However, to finally see a possible trend developing is good news for a trend-following model like ours.

Brad A. Thompson, CFA,
Chief Investment Officer

SPY is the market symbol for units issued by SPDR S&P 500 ETF Trust, a Unit Investment Trust. SPY seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index. SPY is a managed fund that incurs fees and charges. 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 prices. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. Past performance is no guarantee of future results. Investments are subject to risk and any of Stadion’s investment strategies may lose money. Any references to specific securities or market indexes are not intended as specific investment advice and should not be relied on for making investment decisions.

The Importance of Breadth

Danny Mack — Fri, 20 Jan 2012 20:52:32 +0000

The market action today is a great reason why we at Stadion stress the importance of market breadth. As of 2:30pm (as shown in the chart below), the Nasdaq Composite and S&P 500 indices are both down about 30 bps, while the Dow Jones Industrial Average is up more than 40 bps. Why? Because the Dow Jones Industrial Average is a price weighted index and the highest priced stock, IBM, is up more than 400 bps. This buoys the index into a gain, while the majority of the index is negative: 17 stocks in the Dow down and only 11 up. Investors who might check the market during the day would think that it is a good day for stocks, simply because this well known index is positive. But this discounts the fact that most securities in this index are actually down. This is why we look at market breadth to help us determine the riskiness of the investment environment. Price action does not necessarily tell the whole story!

By Danny Mack – Senior Analyst, Portfolio Management

The Dow Jones Industrial Average is a “price weighted index” which represents the average value of 30 large, industrial stocks. The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks listed on the exchange. 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 prices. It is not possible to invest directly in indexes which are unmanaged and do not incur fees and charges. Past performance is no guarantee of future results. Investments are subject to risk and any of Stadion’s investment strategies may lose money.