Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

3rd Quarter | 2021

Market insights and analysis

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Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

By Peter Mauthe

Today I’d like to discuss the concept of strategic diversification (investing in multiple investment strategies to diversify among asset classes, methodologies, and time frames) in the context of the current market environment.

Technically speaking, the recent volatility is part of a high-level consolidation (sideways) pattern. This is constructive and not surprising given the advance that preceded it. It is noteworthy that the short-term corrections in September and October have seen gold correct along with stocks, and bonds move sideways to slightly down. Cash (money funds) always have a stable, slightly positive return, which is why they are a fallback defensive position within the application of strategic diversification.

These short-term periods when asset classes have a higher correlation illustrate why simple diversification among asset classes cannot manage all types of market risk. When markets become correlated, it helps to have dynamic, rules-based strategies that can use cash and inverse positions to provide a broader portfolio defense. That is our approach to strategic diversification in all of the portfolios we construct.

Let’s take a closer look at the correction that is underway in stocks now. The following graph is a weekly basis graph of the S&P 500. The red horizontal line represents the 200-day moving average, which is a widely followed technical tool. Note that during longer-term uptrends it is common for markets to revert to this longer-term moving average. When this coincides with an oversold condition, as indicated in the lower portion of the graph, a correction low often develops.

The current correction is entering an oversold condition, but the correction is not yet down to the 200-day moving average. Whether we get there is yet to be seen. Regardless, our strategies will continue to implement both their opportunistic and defensive rules as market conditions warrant.

The following graph is a daily basis graph of the S&P 500. Notice the support line labeled A. This has proven to be both a meaningful resistance line as well as a meaningful support line. At this time, it is also at approximately the same level as the 200-day moving average (green line in this graph).

Given that the influx of election and pandemic news is keeping investors on edge in the short term, seeing the present correction in stocks test this dual support level around 3,200 should not be a surprise to those of us who watch these levels. Note that the 21-day decline into point B ended at support line A but did not reach the 200-day moving average.

Also note that after the 21-day decline in September, the S&P 500 rallied for 19 days back to the prior high, and we have now been correcting for 16 days. In the intermediate-term and long-term strategies we deploy, these short-term moves are generally not exploitable—nor are they meaningful in the major market trends.

Enjoy the rest of your week and please make time to vote!



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