The month of June continued the correction that began in late May. In the early part of the month we began a slide that took the S&P 500 all the way to support at the 50 period moving average (around 1600). The market bounced here and traders sensed that we could again challenge the highs. However, instead of pushing back to the highs, we consolidated sideways into the middle of the month.
Then it happened! The release of the Federal Reserve minutes and a televised speech by Ben Bernanke, the Fed Chairman, led to a sell off in equities and bonds (and just about everything else for that matter).
Not only did the Federal Reserve minutes point to a significant dialogue on when the Fed might taper its Quantitative Easing (QE) program, but Mr. Bernanke had the audacity to state that the Fed could ease up on QE program if economic conditions warranted (sarcasm!!). He also added there was the possibility that QE could be curtailed as early as 2014.
Now the markets had become quite used to this whole QE thing! In fact, most traders were usually the first in line to get the latest news on this program in hope for more. Because as we all know from this AT&T commercial, We Want More! (See video: youtu.be/OnA3C9Af_oc)
So like undisciplined, heroine addicts after finding out their was no more drugs for their daily fix, the market reacted negatively selling off into the end of the third week on June on the thought that QE could be curtailed.
Although equities declined, the real damage was done in the fixed income markets where the 10 year treasury bond yield jumped to 2.6% from 2.14% at the beginning of the month, a 2.2% move. If you stack this on top of the 48 basis point move in 10 year yields in May, you have a pretty significant move (6.4% loss) for the 10 year bonds and a significant loss for those who thought bonds were a safe choice.
Finally, came the last week of June and traders rallied equities and bonds in hope of lessening the damage and improving their quarterly performance. The final damage is below. It was much worse before this end of quarter rally!
Stock-Signal.com performance was a mixed bag for June. We were long (on a buy signal) most of the month in both the Nasdaq and S&P 500 before getting an end of month sell signal in the former index. These indexes therefore reflect the loss of the underlying indexes for June.
We had early June sell signals for both the EAFE and High Yield indexes and profited nicely from declines in these markets. The net result for our Equal Weight Sample Portfolio was a small gain for the month of 72 basis points (versus a loss of 1.5% for the S&P 500 index).
We got kicked around in both the Commodities and U.S. Dollar indexes as volatility put us on the wrong side of market action. Remember these signal strategies need a strong trend to make money. Extreme short-term volatility up and down are the enemy of trend following strategies.
However, we cleaned up on our sell signals for the Gold index. This allowed our sample Global Opportunities Portfolio to post a respectable gain of 89 basis points.
Overall, our signals and sample portfolios did what is expected of them when things get dicey, protect and preserve capital. If these markets continue to decline during the traditionally tough summer months, expect us to gain more relative performance on the broader market averages and to get more sell signals.
Here is the summary of the Stock-Signal.com signal performances by index. Please remember this is proforma and past performance is not indicative of future returns.
MARKET FORECAST - JULY
So what will the market throw at us in July? That really is the million dollar question!
When we take a look at longer term charts it is quite obvious to us that summer could again be a tough time for the equity markets. Given rising bond yields, it could also be a tough time for fixed income instruments.
Our guess is that the markets are soft into late July. We then think we could rally in August and the first part of September. Thereafter, my guess is we have another very tough September and 1st half of October. Cue the tape of past summers for a replay!
So strap on your helmet these markets could get interesting!